Question

QUESTION 3 (18 Marks: 24 Minutes)
The following is T Allen’s statement of financial position at 31 December 2006 and statement of changes in equity for the year ended 31 December 2006 together with comparative figures for 2005.
T ALLEN
STATEMENT OF FINANCIAL POSITION
AT 31 DECEMBER
2006
R
2005
R
ASSETS
Non-current assets
70 000
30 000
Furniture at cost
100 000
50 000
Accumulated depreciation
(30 000)
(20 000)
Current assets
530 000
470 000
Inventory
330 000
270 000
Accounts receivable
200 000
120 000
Cash at bank
-
80 000
600 000
500 000
EQUITY AND LIABILITIES
Capital and reserves
Capital
200 000
300 000
Current liabilities
400 000
200 000
Accounts payable
300 000
200 000
Bank overdraft
100 000
-
600 000
500 000
T ALLEN
STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER
Capital
R
Balance at 1 January 2005 200 000
Profit for the period 200 000
Withdrawals (100 000)
Balance at 31 December 2005 300 000
Profit for the period 100 000
Withdrawals (200 000)
Balance at 31 December 2006 200 000
Page 20 of 21
You are required to:
a) Prepare a statement of cash flows to explain why in spite of the fact that a profit has been earned during the year ended 31 December 2006, the business is in financial difficulties. Use the indirect method.
b) Explain the three main reasons why the business has gone into overdraft at 31 December 2006.

Answer 1

Statement of Cashflow (Indirect method)
For the period ended December 31, 2006
Cash flow from operating activities
Profit for the period		$100,000
Adjustment:
Depreciation	$10,000
Increase in inventory	($60,000)
Increase in accounts receivables	($80,000)
Increase in Accounts payable	$100,000
		($30,000)
Net cash flow from Operating activities		$70,000
Cash flow from Investing activities:
Purchase of Furniture	($50,000)
Net cash flow from Investing activities		($50,000)
Cash flow from Financing activities:
Cash Withdrawal	($200,000)
Net cash flow from financing activities		($200,000)
Net cash flow for the period		($180,000)
Beginning Cash Balance		$80,000
Ending Cash Balance		($100,000)
Reason for Bank Overdraft
The first reason is cash withdrawal from business which is more than the profit for
the period.
The second reason in changes in current assets and liabilities, more cash is used to
purchase inventory and less amount is collected from accounts receivables.
More than half of the cash available from operating activities are used to purchase
furniture.