Question

IAS 7 - Consolidated Cash Flow Statement

The following are the consolidated financial statement from the records of MT Bhd (MTB) for 2011 incorporating its subsidiary JK Bhd (JKB).

Consolidated Statement of Comprehensive Income for the year ended 31 December 2011

	(RM)’000	(RM)’000
Sales		6,220
Cost of Goods Sold		(2,700)
Gross Profit		3,520
Less Expenses:
Depreciation	180
Insurance Expenses	24
Other Expenses	1,076
		(1,280)
Operating Income		2,240
Gain on sale of Plant		20
Total Comprehensive Income		2,260
Profit after tax attributable to:
Shareholders of MTB		2,160
Non-Controlling Interest		100
Total Comprehensive Income		2,260

Consolidated Statement of Financial Position as at 31 December 2011

	(RM)’000	(RM)’000
	2011	2010
Cash	1,680	150
Accounts Receivable	225	250
Inventories	285	205
Land	1,700	1,000
PPE	2,790	2,700
Accumulated Dep.	(790)	(680)
Goodwill	100	100
	5,990	3,725
Shareholders’ Fund:
Share Capital	2,400	2,400
Retained Earnings	2,590	750
	4,990	3,150
Non-Controlling Interest	220	150
Accounts Payable	260	175
Notes Payable	270	200
Asset Revaluation Reserve	250	50
	5,990	3,725

Additional Information:

1).     MTB had acquired 80% interest in JKB on 1 January 2001. On that date the shareholders’ funds of JKB totaled RM800K. Before the purchase, an item of long term asset which was undervalued by RM50K was subsequently revalued. MTB had paid RM830K for JKB shares. The payment consisted of 200K shares (RM1 par) and RM230K cash. The market value of MTB shares on the acquisition date was RM3 per share.

2).     There is no impairment of goodwill for the current year.

3).     During the year 2011, MTB paid RM320K dividend. JKB earned net income of RM500K and paid RM150K dividend.

4)      During the year an additional piece of land was purchased for RM500K. The existing land was revalued to RM1,200K.

5)      During the last quarter, a piece of machinery which had originally cost RM180K and had been depreciated RM70K was sold by MTB for RM130K. Another machine was immediately purchased for RM270K paying by a promissory note of RM70K and the balance by cash.

You are required to prepare:

a).     The worksheet for the preparation of a consolidated cash flow statement.

b).     The consolidated statement of cash flows for the year ended 31 December 2011.

Answer 1

Statement of Cash Flows Indirect Method for the Year Ending 31st December 2011
Cash Flow from Operating Activities
Consolidated Net Income (306,600 + 15,400)		322,000
Adjustments to Reconcile Net Income to Cash Provided by Operating Activities
Depreciation Expense (140,000 - 7,000)	133,000
Amortization of Database	7,000
Gain on Sale of Building	-28,000
Decrease in Accounts Receivable (210,000 - 196,000)	14,000
Increase in Inventory (476,000 - 280,000)	-196,000
Decrease in Accounts Payable (196,000 - 140,000)	-56,000	-126,000
Net Cash Provided by Operating Activities (A)		$196,000
Cash Flow from Investing Activities
Proceeds from Sale of Building (42,000 + 28,000)	70,000
Purchase of Equipment (140,000 - 7,000 + 966,000 - 854,000)	-245,000
Net Cash Used by Investing Activities (B)		-$175,000
Cash Flow from Financing Activities
Payment of Cash Dividends (140,000 + 20%*14,000)	-142,800
Issuance of Bonds (720,000 - 560,000)	160,000
Issuance of Common Stock (168,000 - 140,000 + 265,600 - 247,800)	45,800
Net Cash Provided by Financing Activities (C)		$63,000
Net Increase in Cash (A + B + C)		$84,000
Add Opening Balance of Cash (Jan 1st 2011)		$112,000
Closing Balance of Cash (Dec 31st 2011)		$196,000

_____________

Important Information:

1) Depreciaton and amortization expense ($140,000) will be reduced by the amount of amortization ($7,000) to arrive at the depreciation expense ($133,000).

2) Any increase in current assets (except cash) and decrease in current liabililties will be reduced from net income while calculating cash flow from operating activities. Similarly, any decrease in current assets and increase in current liabililties will be added to net income while calculating cash flow from operating activities.

3) Proceeds from sale of building will comprise of book value and gain on sale of building.

4) Purchase of equipment is arrived at by calculating the amount of gross value of building and equipment. To arrive at gross value, we add depreciation of $133,000 to the net value of buildings and equipment after adjustment of book value of building sold (966,000 - ($896,000 - $42,000)).

5) Payment of cash dividends will comprise of value of dividend as provided in the income statement ($140,000) + 20% of dividend paid by subsidary ($14,000*20% = $2,800) as 80% is held by the parent company only.

6) Issuance of common stock will comprise of difference between the value of common stock and additional paid-in capital of the 2 years.