Question Tag: Cash Flow Statement

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CR – May 2016 – L3 – Q1 – Presentation of Financial Statements (IAS 1)

Explain earnings management, calculate goodwill, and prepare a consolidated statement of cash flows for Joy-land Group.

Question

Given that accrual accounting tends to mask actual cash flow performance, stock analyst and rating agencies are generally more interest in cash flow. The directors of Joy-land Plc have called for the cash flow statement of the group so as to have a view of earnings performance devoid of accruals. The following draft group financial statements relate to Joy-land Plc.
Joy-land Plc Group: Statement of financial position as of November 30

Joy-land Group: Statement of comprehensive income for the year ended November 30, 2015.

Joy-land Group: Statement of changes in equity for the year ended November 30, 2015

The following additional information relates to the financial statements of Joy-land
(i) On December 1 2013, Joy-land acquired 8% of the ordinary shares of Talk peace. Joy-land had treated this investment as available for sale in the financial statement to November 30, 2014. On December 1, 2014. Joyland acquired a further 52% of the ordinary shares of Talk-peace and gained control of the company, the consideration for the acquisitions was as follows:

At December 1, 2014 the fair value of the 8% holding in talk peace held by Joy-land at the time of the business combination was N20 million and the fair value of the noncontrolling interest in Talk-peace was N80million. no gain or loss on the 8% holding in Talk-peace had been reported in the financial statement at December 1, 2014, the
purchase consideration at December 1, 2014 comprised cash of N60 million and share of N60million.
The fair value of identifiable net assets of Talk-peace at the date of acquisition comprised the following:

(ii) Goodwill Impairment

Goodwill for all subsidiaries has undergone impairment testing for the financial year ending November 30, 2015.
Impairment losses identified were specific to subsidiaries 100% owned by Joy-land.

(iii) Purchase of Research Project (IAS 38)

On December 1, 2014, Joy-land purchased a research project from a third party for ₦32 million, which was recognized as an intangible asset under IAS 38.
Additional costs incurred during the year include:
- ₦8 million to complete the research phase.
- ₦16 million for product development (capitalizable).
- ₦4 million for initial marketing costs (not capitalizable; already accounted for correctly).
No other additions to intangible assets were recorded, except those from the acquisition of Talk-peace.

(iv) Rights Issue by Talk-peace

On November 30, 2015, Talk-peace issued new shares on a 1 for 4 basis.
The issue was fully subscribed and raised ₦20 million in cash.

(v) Investment Property (IAS 40)

Joy-land uses the fair value model to measure its investment properties.
During the year:
- Part of the air-conditioning system (carrying value: ₦2 million) was replaced with a new system costing ₦4 million.
- The replacement aligns with the treatment under IAS 40.

(vi) Sale of Surplus Land

Joy-land sold surplus land with a carrying value of ₦40 million for:
- ₦60 million in cash, and
- Plant valued at ₦16 million (part of the consideration).
The resulting gain on disposal has already been included in the income statement.
Depreciation for property, plant, and equipment (PPE) for the year totaled ₦108 million.

(vii) Defined Benefit Scheme

Joy-land operates a defined benefit pension scheme for select top executives and expatriates (in addition to its contributory pension scheme).
Current-year figures for the defined benefit scheme:

Description ₦’m

Opening Balance (Dec 1, 2014) 88

Current Year Charge to P&L 16

Contributions Paid (28)

Actuarial Loss to OCI 24

Closing Balance (Nov 30, 2015) 100

Description	₦’m
Opening Balance (Dec 1, 2014)	88
Current Year Charge to P&L	16
Contributions Paid	(28)
Actuarial Loss to OCI	24
Closing Balance (Nov 30, 2015)	100

(viii) The associate company did not pay any dividends in the year.
(ix) Deferred tax of N40illion arose on the gains on available for sale investments in the year

Required
(a) As the CFO of the group, briefly explain to the legal and engineer directors what is meant by earnings management giving TWO examples of how accruals could be employed in the earning management. (3 marks)
N’m
Balance at the beginning, December 1, 2014 88
Charge to profit or loss for the year 16
Pension contributions paid during the year (28)
Actuarial loss to other comprehensive income 24
Balance at the end, November 30 2015 100
(b) Determine the goodwill arising on the acquisition of the subsidiary on December 1, 2014 and total goodwill impairments of the group as at November 30, 2015 statement of cash flow on the assumption that it is the policy of Joyland Plc to value Non-controlling interest at full fair value. (3 marks)
(c) Prepare a consolidated statement of cash flows for the Joy-land Group for the year ended November 30, 2015 using the indirect method under IAS 7 ‘statement of Cash flow.
Note; Ignore deferred taxation other than where is mention in the question.

Answer

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Tags: Cash Flow Statement, consolidated financial statements, Earnings Management, Goodwill, Impairments, Non-Controlling Interest
Level: Level 3

Topic: Presentation of Financial Statements (IAS 1)

AT – Nov 2014 – L3 – SB – Q2b – Corporate Tax Compliance and Reporting

Explain why tax charges differ from applicable rates and why tax payments differ between cash flows and profit statements.

Question

Mr. Ojoowuro, the director of a grocery store, has noticed that the tax charge for his company is N15 million on profits before tax of N105 million, resulting in an effective tax rate of 14.3%. Another company, Irin Plc, has an income tax charge of N30 million on a profit before tax of N90 million, resulting in an effective rate of 33.3%, yet both companies state that the rate of income tax applicable to them is 25%. Mr. Ojoowuro has also noticed that in the statements of cash flows, both companies have paid the same amount of tax of N24 million.

Required:
Advise Mr. Ojoowuro on the possible reasons why the income tax charge in the financial statements as a percentage of the profit before tax may not be the same as the applicable income tax rate and why the tax paid in the statement of cash flows may not be the same as the tax charge in the statement of profit or loss and other comprehensive income.

Answer

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Tags: Cash Flow Statement, Effective Tax Rate, Income Tax Rates, Tax Accounting
Level: Level 3

Topic: Corporate Reporting and Compliance
Series: NOV 2014

FM – Nov 2017 – L3 – Q1 – Financial Planning and Forecasting

Prepare forecast financials for Lekki Plc and suggest divestment options for a poorly performing subsidiary.

Question

Despite the global recession, demand for the company’s products has recently increased and is expected to grow over the next two years.

As part of a recent strategic review, the directors made the following projections for the years ending March 31, 2018, and March 31, 2019:

An anticipated annual revenue increase of 8% for each year.
Operating costs (excluding depreciation) expected to rise by 4% per year.
Tax rate to remain at 21%, payable in the year liability arises.
The trade receivables/revenue and trade payables/operating costs ratios will stay the same.
Inventory levels to increase by 10% in the year ending March 31, 2018, and then remain stable.
Non-current assets, including Lekki Plc.’s headquarters and factory, are not depreciated, and capital allowances are negligible.
Dividend growth rate to remain at 6% annually, with dividends declared at the year-end and paid the following year.
Purchase of new machinery at N8 million, financed through existing overdraft facilities. Machinery to be depreciated straight-line over 8 years with a N1 million residual value; capital allowances will apply at 18% reducing balance.
Finance costs are projected to increase by 50% in the year ending March 31, 2018, and remain stable thereafter.

Financial Statement Extracts (March 31, 2017):

Income Statement:
- Revenue: N60,240,000
- Operating Costs: N49,500,000
- Operating Profit: N10,740,000
- Finance Costs: N800,000
- Profit before Tax: N9,940,000
- Tax: N2,286,000
- Profit after Tax: N7,654,000
Statement of Financial Position:
- Assets:
  - Non-current Assets: N28,850,000
  - Current Assets:
    - Inventories: N9,020,000
    - Trade Receivables: N9,036,000
    - Cash and Equivalents: N396,000
- Equity and Liabilities:
  - Ordinary Share Capital: N16,700,000
  - Retained Earnings: N12,482,000
  - Non-current Liabilities: N8,000,000 (6% Debentures)
  - Current Liabilities: N10,120,000 (Trade Payables, Dividends)

Assume today is April 1, 2017.

a. Prepare a Forecast Financial Statement (Income Statement, Statement of Financial Position, and Cash Flow Statement) for each of the years ending March 31, 2018, and March 31, 2019.
(24 Marks)

Note: All calculations should be rounded up to the nearest N’000.

b. Beyond March 31, 2019, the directors are considering the disposal of a smaller subsidiary due to poor performance. The Finance Director suggests avoiding liquidation to minimize industrial relations issues.

Required: Discuss three non-liquidation methods to divest the subsidiary.
(6 Marks)

Answer

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Tags: Cash Flow Statement, Divestment Options, Finance Strategy, Forecast Financial Statements, Income Statement, Statement of Financial Position, Subsidiary
Level: Level 3

Topic: Financial Planning and Forecasting
Series: NOV 2017

FR – May 2015 – L2 – SB – Q3 – Statement of Cash Flows (IAS 7)

Calculate and analyze financial ratios and prepare cash flows from operating activities for Galadanci Plc.

Question

(a) Galadanci Plc, a telecommunications company, has the following financial statements for the years ending 31 December 2013 and 2014. Using the statements below, calculate specific ratios and analyze Galadanci Plc’s performance:

Statements of Profit or Loss and Other Comprehensive Income for the year ended

	2014 (N’billion)	2013 (N’billion)
Revenue	2,430	1,638
Cost of Sales	(1,701)	(983)
Gross Profit	729	655
Administrative Costs	(311)	(180)
Distribution Costs	(207)	(117)
Finance Costs	(36)	(6)
Profit before Taxation	175	352
Income Tax Expense	(54)	(102)
Profit for the Year	121	250

Statements of Financial Position as at 31 December

Additional Information for 2014

Galadanci Plc acquired 60% of Papanga Plc’s shares to diversify into agriculture.
The company increased its mobile subscriber base, raising the average revenue per user.
No dividends were received from Papanga Plc, and the share value remained constant.

Required:

Calculate the following ratios for the year ended 31 December 2014, analyze Galadanci Plc’s performance, and comment on qualitative factors impacting the company:
- Gross Profit Percentage
- Return on Capital Employed (where capital employed = Total Assets – Current Liabilities)
- Net Profit (PBIT) Percentage
- Asset Turnover
- Gearing Ratio
- Debt/Equity Ratio (16 Marks)
Prepare Galadanci Plc’s Cash Flows from Operating Activities using the indirect method according to IAS 7. (4 Marks)

Answer

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Tags: Asset Turnover, Cash Flow Statement, Gearing Ratio, Gross Profit, Return on Capital Employed
Level: Level 2

Topic: Statement of Cash Flows (IAS 7)
Series: MAY 2015

FR – NOV 2016 – L2 – Q4 – Statement of Cash Flows (IAS 7)

Preparation of statement of cash flows using indirect method and explanation of benefits of published cash flow statements to users.

Question

The summarised Financial Statements for the year ended March 31, 2016 of Perfect World Plc are as follows:

STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED MARCH 31, 2016

	N’m
Revenue	19,350
Cost of Sales	(9,000)
Gross Profit	10,350
Operating Expenses	(4,500)
Finance Costs	(1,125)
Profit Before Tax	4,725
Income Tax Expense	(2,025)
Profit for the year	2,700

STATEMENT OF FINANCIAL POSITION AS AT MARCH 31

	2016	2015
	N’m	N’m
Non-Current Assets:
Property, Plant & Equipment	18,900	16,650
Current Assets
Inventories	6,750	7,200
Trade Receivables	9,900	8,100
	16,650	15,300
Total Assets	35,550	31,950
Equity
Share Capital	5,400	5,400
Retained Earnings	9,900	8,550
	15,300	13,950
Non-Current Liabilities
Deferred Tax	4,815	3,825
Financial Lease Liabilities	5,850	5,400
	10,665	9,225
Current Liabilities
Trade Payables	5,625	4,905
Current Tax	1,013	923
Finance Lease Obligation	2,250	2,025
Bank Overdraft	697	922
	9,585	8,775
Total Equity & Liabilities	35,550	31,950

Additional Information include:

(i) Dividend paid during the year amounted to N1,350million.

(ii) Perfect World Plc finances a number (but not all) of its property plant and equipment purchased using finance lease. During the period, property, plant and equipment which would have cost N2,700million to purchase outright was acquired under finance lease.

(iii) There was no accrual of interest at the beginning or at the end of the year.

(iv) Depreciation charged for the year totalled N4,365million. There were no disposals of property, plant and equipment during the year.

Required:

a. Prepare the statement of cashflows of Perfect World Plc for the year ended March 31, 2016 using indirect method. (14 Marks)

b. Draft a Memo to the Director of Perfect World Plc summarising the major benefits that users receive from a published statement of cashflows. (6 Marks)

Answer

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Tags: Cash Flow Statement, Financing Activities, Indirect Method, Investing Activities, Operating Activities
Level: Level 2

Topic: Statement of Cash Flows (IAS 7)
Series: NOV 2016

FR – May 2019 – L2 – Q2c – Statement of Cash Flows (IAS 7)

Discuss the advantages of the direct method of preparing a statement of cash flows over the indirect method.

Question

Discuss the advantages of the direct method of preparing a statement of cash flows over the indirect method.

Answer

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Tags: Cash Flow, Cash Flow Statement, Direct Method, IAS 7
Level: Level 2

Topic: Statement of Cash Flows (IAS 7)
Series: MAY 2019

FA – Nov 2014 – L1 – SB – Q6b – Financial Statements (Preparation of Statement of Profit or Loss, Statement of Financial Position, Cash Flow Statement, and Statement of Changes in Equity)

Preparing the statement of cash flows (indirect method) showing cash generated from operating activities.

Question

The financial data extracted from the books of Solomon Enterprises Limited for the year ended 31 December 2013 are as follows:

Particulars	N’000
Sales	55,924
Cost of sales	41,028
Selling and distribution expenses	2,748
Administration expenses	2,404
Interest expenses	1,528
Tax paid	1,584
Increase in inventories	11,868
Decrease in receivables	1,416
Increase in payables	4,944

Additional information:
Included in administration expenses are:
i. Depreciation charges for the year of N500,000
ii. Loss on disposal of assets of N48,000

Required:
Prepare the Statement of Cash Flows showing cash flow generated from operating activities using the indirect method. (11 Marks)
Show all workings.

Answer

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Tags: Cash Flow from Operations, Cash Flow Statement, IAS 7, Indirect Method
Level: Level 1

BL – Nov 2019 – L1 – SA – Q5 – Law of Trusts

Cash Flow Statement, Financial Position, Solvency Question Short Summary: Identifying the information not revealed by a statement of cash flow

Question

Question:
Which of the following information CANNOT be revealed by a statement of cash flow?
A. The entity’s short-term solvency
B. Operating cash position
C. Financial position of the entity
D. Liquidity position of the entity
E. Investing activities of the entity

Answer

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Tags: Cash Flow Statement, Financial Position, Solvency
Level: Level 1

Topic: Law of Trusts
Series: NOV 2019

FA – May 2023 – L1 – SB – Q2 – Financial Statements Preparation

Preparation of a statement of cash flows for Samu PLC using the indirect method.

Question

Samu PLC is a listed company. The following financial statements of the company are available:

Statement of Profit or Loss for the Year Ended December 31, 2018:

	N’m
Revenue	6,740
Cost of Sales	(4,840)
Gross Profit	1,900
Income from Investment Property	60
Distribution Costs	(120)
Administrative Expenses	(350)
Finance Costs	(50)
Profit Before Tax	1,440
Income Tax Expense	(160)
Profit After Tax for the Year	1,280

Statement of Financial Position as at December 31:

	2018 (N’m)	2017 (N’m)
Non-Current Assets:
Plant and Equipment	2,880	1,860
Investment Property	420	400
Current Assets:
Inventory	1,210	810
Trade Receivables	480	590
Bank	1,010	–
Total Assets	6,000	3,660
Equity:
Equity Share Capital of N0.50 each	2,000	600
Share Premium	750	50
Retained Earnings	1,440	1,310
Non-Current Liabilities:
8% Loan Notes	250	430
Current Liabilities:
Trade Payables	1,410	1,050
Bank Overdraft	–	120
Income Tax Payable	150	100
Total Liabilities and Equity	6,000	3,660

Additional Information:

An item of plant with a carrying amount of N240 million was sold at a loss of N90 million during the year. Depreciation of N280 million was charged on property, plant, and equipment in the year ended December 31, 2018. There were no sales of investment property during the year.
Part of the 8% loan notes was redeemed during the year.
There was an issue of shares for cash on June 1, 2018.
Dividend was paid on September 1, 2018.

Required:

Prepare a statement of cash flows for Samu PLC for the year ended December 31, 2018, in accordance with IAS 7 Statement of Cash Flows, using the indirect method. (Total 20 Marks)

Answer

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Tags: Cash Flow Statement, Financing Activities, Investing Activities, Operating Activities
Level: Level 1

Topic: Financial Statements Preparation
Series: MAY 2023

FR – Nov 2015 – L2 – Q3 – Preparation of Financial Statements, Financial Statement Analysis

This question requires preparing a cash flow statement for CL Ltd using IAS 7 and calculating the gross profit margin based on changes in purchase and selling prices.

Question

(a) CL Ltd is a wholesaler and retailer of office furniture. Extracts from the company’s financial statements are set out below:

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED:

STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 MARCH 2015:

Description	Stated Capital	Capital Surplus	Income Surplus	Total
Balances b/f	8,500	2,500	15,800	26,800
Share issue	12,900	–	–	12,900
Comprehensive income	–	5,000	7,000	12,000
Dividends paid	–	–	(4,000)	(4,000)
Balances c/f	21,400	7,500	18,800	47,700

STATEMENT OF FINANCIAL POSITION
AS AT 31 MARCH:

Note:
Non-current assets
During the year, the company redesigned its display areas in all of its outlets. The previous displays had cost GHS10 million and had been written down by GHS9 million. There was an unexpected cost of GHS500,000 for the removal and disposal of the old display areas. Also, during the year, the company revalued the carrying amount of its property upwards by GHS5 million, and the accumulated depreciation on these properties of GHS2 million was reset to zero.
All depreciation is charged to operating expenses.

Required:
Prepare a statement of cash flows for CL Ltd for the year ended 31 March 2015 in accordance with IAS 7 – Statement of Cash Flows. (15 marks)

(b) The directors of CL Ltd are concerned at the deterioration in its bank balance and are surprised that the amount of gross profit has not increased for the year ended 31 March 2015. At the beginning of the current accounting period (i.e. on 1 April 2014), the company changed to importing its purchases from a foreign supplier because the trade prices quoted by the new supplier were consistently 10% below those of its previous supplier. However, the new supplier offered a shorter period of credit than the previous supplier (all purchases are on credit). In order to encourage higher sales, CL Ltd increased its credit period to its customers, and some of the cost savings (on trade purchases) were passed on to customers by reducing selling prices on both cash and credit sales by 5% across all products.

Required:
(i) Calculate the gross profit margin that you would have expected CL Ltd to achieve for the year ended 31 March 2015 based on the selling and purchase price changes described by the directors. (2 marks)

(ii) Comment on the directors’ surprise at the unchanged gross profit and suggest what other factors may have affected gross profit for the year ended 31 March 2015.

(3 marks)
(Total: 20 marks)

Answer

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Tags: Cash Flow Statement, Cost of Sales, Depreciation, Financial Analysis, Financing Activities, Gross Profit Margin, IAS 7, Operating Activities, Revenue, Working Capital
Level: Level 2

Topic: Financial Statement Analysis, Preparation of Financial Statements
Series: NOV 2015

CR – May 2016 – L3 – Q1 – Presentation of Financial Statements (IAS 1)