Question

The statement of comprehensive income of kolad plc, a publicly listed company, is as follows:

Statement of comprehensive income for the year ended 31 March 2020

			£000
Revenue			33,600
Cost of sales			(22,500)
Gross profit			11,100
Distribution costs			(3,600)
Administrative expenses			(3,450)
Finance costs			(300)
Profit before tax			3,750
Income tax expense			(150)
Profit for the year			3,600
Gain on revaluation			250
Total comprehensive income			3,850

The following supporting information is available:

1. Depreciation of £965,000 was charged (to cost of sales) for property, plant and equipment in the year ended 31 March 2020. An item of plant with a carrying value of £750,000 was sold at a profit of £65,000 during the year.

2. The following extracts from the statements of financial position for the years ended 31 March 2020 and 31 March 2019 are relevant:

	2020	2019
	£000	£000
Inventory	4,350	4,050
Trade receivables	1,800	900
Trade payables	850	2,625
Current tax payable	825	1,800

YOU ARE REQUIRED TO:

1. Calculate the net cash flow from operating activities for kolad plc for the year to 31 March 2020 in accordance with IAS 7 Statement of cash flows using the indirect method.

2. Explain the characteristics of an item to be considered as a cash equivalent and give three examples of items that could be included as cash and cash equivalents in a statement of cash flows.

3. Profit is not a good indicator of performance as it can be changed to suit management’s needs.

Discuss whether, in your opinion, the statement of profit or loss or the statement of cash flows is a better indicator of a company’s performance.

Answer 1

a)

Kolad Plc Company
Statement of Cash Flows
For Year Ended March 31 2020
Particulars	Amount
Cash Flow from Operating Activities
Net Income	3750000
Add: Depreciation Expense	965000
Profit on disposal of equipment	-65000
Increase in Accounts Receivables	-900000
Increase in Inventory	-300000
Decrease in Accounts Payables	-1775000
Decrease in Current Tax Payable	-975000
Cash Provided by Operating Activities	700000

b)

Cash and cash equivalents refers to the line item on the balance sheet that reports the value of a company's assets that are cash or can be converted into cash immediately. Cash equivalents include bank accounts and marketable securities, which are debt securities with maturities of less than 90 days. However, oftentimes cash equivalents do not include equity or stock holdings because they can fluctuate in value.

Examples of cash equivalents include commercial paper, Treasury bills, and short-term government bonds with a maturity date of three months or less. Marketable securities and money market holdings are considered cash equivalents because they are liquid and not subject to material fluctuations in value.

c)

The cash flow statement and the income statement are integral parts of a corporate balance sheet. The cash flow statement or statement of cash flows measures the sources of a company's cash and its uses of cash over a specific time period. The income statement measures a company's financial performance, such as revenues, expenses, profits, or losses over a specific time period. This financial document is sometimes called a statement of financial performance. An income statement shows whether a company made a profit, and a cash flow statement shows whether a company generated cash. A cash flow statement shows the exact amount of a company's cash inflows and outflows, traditionally over a one-month period. It captures the current operating results and changes on the balance sheet, such as increases or decreases in accounts receivable or accounts payable, and does not include noncash accounting items such as depreciation and amortization. The cash flow generally comes from revenue received as a result of business activity, but it may be augmented by funds available as a result of the credit. A cash flow statement is used to determine the short-term viability and liquidity of a company, specifically how well it is positioned to pay its bills to vendors.