Question

The draft financial statements of Socket Limited for the year ended 31 December 2017 are as below:

Statement of profit or loss and other comprehensive income for the year ended 31 December 2017

	?	?	?	?	$m
Revenue	?	?	?	?	168,300
Cost of sales	?	?	?	?	-115,850
Gross profits	?	?	?	?	52,450
Administration expense	?	?	?	?	-2,750
Distribution expense	?	?	?	?	-1,200
Profits before tax	?	?	?	?	48,500
Taxation	?	?	?	?	-10,340
Profits for the year (Note 1)	?	?	?	?	38,160
Other comprehensive income	?	?	?	?	?
Revaluation of property (net of tax)	?	?	?	?	8,400
Total comprehensive income for the year	?	?	?	?	46,560

Statement of financial position as at 31 December 2017 (with comparative figures)

					2017	2016
					$m	$m
Non-current assets
Property, plant and equipment					198,250	125,040
Investment properties					5,000	4000
Intangibles assets					6,000	6500
Inventories					4,545	4900
Trade receivables (net)					7,410	8600
Short-term investments					500
Cash and bank					13,650	8000
Total assets					235,355	157040
Equity and liabilities
Share capital					54,500	42,800
Other reserves					12,700	4,300
Retained profits					57,300	22,900
Long term bank loans					82,500	62,500
Deferred tax liabilities					13,885	9,800
Trade payables					8,745	9,340
Other payables					1,100	800
Interest payables					2,900	3,000
Tax payables					1,725	1,100
Bank overdraft						500
Total equity and liabilities					235,355	157,040

The following information is available:

1 Profits for the year have been arrived at after charging (crediting):

					$m
Interest expense					5,650
Depreciation charge					6,300
Rental income received					20,000
Change in fair value of investment properties					-1,000
Loss on sale of property, plant and equipment					160
Impairment loss on intangible assets					500
Inventories written down					270
Decrease in provision for bad debts					-120

2 In September 2017, an equipment with a carrying amount of $480 million was sold for a loss of $160 million.

3 The short-term investments represented marketable securities purchased on 25 December 2017. They matured on 28 February 2018.

4. Socket made a rights issue in November 2017 generating additional share capital. There was no other issue of ordinary shares during the year

5. It is Socket Limited’s policy to perform an impairment loss test on its assets at year end. Impairment losses, if any, were written off immediately as expenses

Required:

Prepare the statement of cash flows for the year ended 31 Decemb er 2017, using the indirect method to determine the cash flows from operating activities, for Socket Limited in accordance with HKAS 7 Statement of cash flows.

Answer 1

Description	Amount	Comment
Net Income for the year before tax including revaluation income	56,900
Add: Non-Operating/Non-Cash expenses
Interest Expenses	5,650	Interest is a finance cost. Hence Non-Operating
Deprecation Charge	6,300	Deprecation is a non-cash expenditure.
Loss on sale of property, plant and equipment	160	Sale of an asset is an investing activity.
Impairment loss on intangible assets	500	Impairment is a non-cash expense
Inventories written down	270	Inventories written down is a non-cash expense
Less: Non-Operating/Non-Cash Incomes
Decrease in provision for bad debts	-120
Change in Fair Value of Investment Properties	-1,000
Income from Revaluation of Assets	-8,400
Income net of non-operating and non-cash income/expenses before tax	60,260
Add/Subtract: Changes in Current Assets/ Liabilities
Decrease in Inventory	85
Decrease in Trade Receivables	1,310	A decrease in inventory implies liquidation of an asset. Hence added
Decrease in Trade Payables	-595	A decrease in receivables implies liquidation of an asset. Hence added
Increase in Other Payables	300	An increase in short term investments implies utilisation of cash for purchase of an asset. Hence subtracted.
Decrease in Interest Payables	-100	A decrease in payables implies utilisation of cash for payment of a liability. Hence subtracted
Decrease in Tax Payables	625	An increase in liabilities implies a new cash injection through borrowing. Hence added.
		A decrease in payables implies utilisation of cash for payment of a liability. Hence subtracted
Total Cash Flow from Operating Activities before Tax	61,885	An increase in liabilities implies a new cash injection through borrowing. Hence added.
Less: Tax	-10,340
Cash Flow from Operating Activities	51,545
Cash flow from Investing Activities
Purchase/Sale of Property Plant and Equipments	-79,670	Net of Change in Tangible Assets excluding Depreciation Charge and Loss on Sale of Asset
Revaluation of assets	8400
Cash Flow from Investing Activities	-71,270	-13,835
Cash flow from financing activities
Share Capital issued through Rights issue	11,700
Interest Expenses	-5,650	Interest Added back as a financing cost
Increase in Long Term Loans	20,000
Cash Flow from Financing Activities	26,050
Total Cash Inflow During the Year	6,325
Opening Balance of Cash and Cash Equivalents including Marketable Securities	7500
Closing Balance of Cash and Cash Equivalents including Marketable Securities	13,825
Expected Closing Balance of Cash and Cash Equivalents including Marketable Securities	14,150

The 325 Difference is essentially the difference between the comprehensive income reported in the income statement amounting to $46,560 and the amount transferred to the reserve accounts - ther Reserves, Retained Profits and Deferred Tax Liability amounting to (12,700 - 4,300) + (57,300-22,900) + (13,885 - 9,800) = 46,885.

Difference = 46,885 - 46,560 = 325.