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DEF Ltd is a trading company listed on the local stock exchange. The followings...

Jun 11, 2024

Solution by Steps

step 1

Start with the profit before tax: $730,040

step 2

Adjust for non-cash items: - Depreciation:

232,900 - Impairment loss:

20,000 - Loss on disposal of machinery: $84,810

step 3

Adjust for changes in working capital: - Increase in inventories:

(430,040 - 285,550) = (144,490)

- Increase in trade receivables:

(342,700 - 224,150) = (118,550)

- Increase in trade payables: $(146,700 - 135,900) = 10,800

step 4

Calculate cash generated from operations:

\text{Cash generated from operations} = 730,040 + 232,900 + 20,000 + 84,810 - 144,490 - 118,550 + 10,800 = 815,510

step 5

Subtract finance costs and income tax paid: - Finance costs:

(89,600)

- Income tax paid:

(245,700)

\text{Net cash from operating activities} = 815,510 - 89,600 - 245,700 = 480,210

# Investing Activities

step 6

Calculate cash flows from investing activities: - Purchase of intangible assets:

(251,340)

- Proceeds from sale of intangible assets:

24,000 - Proceeds from sale of machinery:

127,800

\text{Net cash used in investing activities} = (251,340) + 24,000 + 127,800 = (99,540)

# Financing Activities

step 7

Calculate cash flows from financing activities: - Issue of preference shares:

75,000 - Dividend paid: (Assume dividend amount is given or needs to be calculated)

\text{Net cash from financing activities} = 75,000 - \text{Dividend paid}

# Net Increase in Cash and Cash Equivalents

step 8

Calculate the net increase in cash and cash equivalents:

\text{Net increase in cash and cash equivalents} = 480,210 - 99,540 + \text{Net cash from financing activities}

# Cash and Cash Equivalents at Beginning and End of Year

step 9

Calculate cash and cash equivalents at the end of the year: - Beginning cash:

3,800 - Net increase: (calculated in step 8)

\text{Cash and cash equivalents at end of year} = 3,800 + \text{Net increase}

Answer

The statement of cash flows for the year ended 31 December 20X3 shows the net cash from operating activities, investing activities, and financing activities, leading to the net increase in cash and cash equivalents.

Part (b): Explain to the board of directors of DEF Ltd. what information is included in the statement of cash flows that cannot be obtained from reviewing the other primary financial statements.

Key Concept

The statement of cash flows provides insights into the liquidity and cash management of the company.

Explanation

Unlike the income statement and balance sheet, the statement of cash flows shows the actual cash inflows and outflows, helping to understand how the company generates and uses cash. It highlights the company's ability to generate cash from operations, invest in assets, and finance its activities.

Part (c): Discuss DEF's performance for the year concerning the profit for the year and the extract from the statement of cash flows prepared in (a).

Key Concept

DEF's performance can be evaluated by comparing the profit for the year with the net cash from operating activities.

Explanation

While DEF Ltd. reported a profit of

484,340, the net cash from operating activities was

480,210. This indicates that the company's operations are generating sufficient cash to support its profitability. However, the cash used in investing activities and the need for financing activities should also be considered to assess the overall financial health and sustainability of the company.

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