Question

CASE STUDY Solve the case based on the following information: The comparative statements of financial position for Cactus Ltd, which is a merchandising business selling indoor plants, follows.

Cactus Ltd Comparative Statement of Financial Position As at 31 December 2019 and 2018

	2019	2018
Assets	€	€
Current assets:
Cash	195 800	15 000
Trade receivables	58 400	72 000
Inventory	59 800	53 000
Prepayments	2 300	5 000
Total current assets:	316 300	145 000
Non-current assets:
Land	65 500	90 000
Buildings and equipment	156 000	90 000
Less Accum. depreciation	(54 100) 101 900	(40 000) 50 000
Total property, plant and equipment	167 400	140 000
Long-term investments	0	36 400
Total non-current assets	167 400	176 400
Total assets	483 700	321 400

Liabilities and equity	2019	2018
Current liabilities:
Trade payables	49 400	28 000
Salary payable	20 000	18 500
Accruals	18 700	22 200
Total current liabilities	88 100	68 700
Non-current liabilities
Long-term notes payable	85 000	65 000
Bank loan payable	22 600	0
Total non-current liabilities	107 600	65 000
Total liabilities	195 700	133 700
Equity:
Ordinary share capital	150 000	100 000
Share premium	75 000	0
Retained profits	63 000	87 700
Total equity	288 000	187 700
Total liabilities and equity	483 700	321 400

The following data is also available for Cactus Ltd for the year ended 31 December 2019

€

Cost of sales 56,500

Depreciation expense 14,100

Other operating expenses 17,700

Loss on sale of investments 1,400

Gain on sale of land 7,200

Sales revenue 97,300

Interest revenue 4,100

Dividend revenue 3,600

Salary expense 24,000

Interest expense 5,900

Insurance expense 2,300

It is known in addition that:

• A building was purchased for €46,000 and paid for immediately.

• Equipment was purchased by signing a note payable for €20,000.

• A plot of land was sold, no new plots of land were purchased.

• Ordinary shares have the nominal value of €1 per share

Required:

1. Prepare the classified statement of profit or loss (i.e. show also gross profit and operating profit) for Cactus Ltd for the year ended 31 December 2019.

2. Find answers to the following questions: a) Did Cactus Ltd issue any new shares during 2019? If yes, how many shares were issued and how much did the share issue raise? b) Did Cactus Ltd take out any loans in 2019 (in addition to the note payable for the purchase of equipment)? c) Were any dividends paid? If yes, how much? d) How much cash was received from the sale of land? e) How much cash was received from the sale of investments?

3. Prepare the statement of cash flows for Cactus Ltd for the year ended 31 December 2019 in the indirect method.

4. Write your comments on the following aspects for Cactus Ltd. based on its performance in the year ended 31 December 2019: a) Bring out the main factors that have affected the profit or loss differently from the cash flows. b) Is the cash generated from operations sufficient to cover interest and dividends that have been paid? c) How were the investments in non-current assets financed? d) Calculate the level of gearing as at 31 December 2019 and as at 31 December 2018. Comment on how risky you consider the capital structure of Cactus Ltd. e) What recommendations would you like to give the company manager(s) for the following period(s)?

i Loss on sale of non-current assets (including financial assets, e.g. investments) will lower the profit for the year – this effect will have to be eliminated in the section of operating activities in the statement of cash flows as the full amount of cash received will have to be shown under investing activities.

ii Gain on sale of non-current assets (including financial assets, e.g. investments) will increase the profit for the year – this effect will have to be eliminated in the section of operating activities in the statement of cash flows as the full amount of cash received will have to be shown under investing activities.

Please provide your answer in several comments if the answers are going to be too wide. Thank you!

Answer 1