Question 8.TQ.5: The following balance sheets have been prepared for Frank Li...
The following balance sheets have been prepared for Frank Limited:
| Balance sheets at: | \underline{28.2.08} | \underline{28.2.09} | ||
| £000 | £000 | £000 | £000 | |
| Fixed assets | ||||
| Plant and machinery at cost | 300 | 300 | ||
| Less: Depreciation | \underline{80} | \underline{100} | ||
| 220 | 200 | |||
| — | 100 | |||
| Investments at cost | ||||
| Current assets | ||||
| Stocks | 160 | 190 | ||
| Debtors | 220 | 110 | ||
| Bank | — | 10 | ||
| \overline{\underline{380}} | \overline{\underline{310}} | |||
| Less: Current liabilities | 200 | 160 | ||
| Creditors | 20 | — | ||
| Bank overdraft | \overline{\underline{220}} | \underline{160} | \overline{\underline{160}} | \underline{150} |
| \underline{\underline{380}} | \underline{\underline{450}} | |||
| Capital and reserves | ||||
| Ordinary share capital | 300 | 300 | ||
| Share premium account | 50 | 50 | ||
| Profit and loss account | \underline{30} | \underline{40} | ||
| 380 | 390 | |||
| Shareholders’ funds | ||||
| Loans | ||||
| Debentures | — | 60 | ||
| \overline{\underline{\underline{380}}} | \overline{\underline{\underline{450}}} | |||
Additional information:
There were no purchases or sales of plant and machinery during the year.
Required:
(a) Prepare Frank Limited’s cash flow statement for the year ended 28 February 2009.
(b) What does it tell the managers of Frank Limited?
Frank Ltd’s accounts:
Frank Limited
Cash flow statement for the year ended 28 February 2009
| £000 | £000 | |
| Net cash inflow from operating activities | 70 | |
| Management of liquid resources and financing | ||
| Issue of debenture loan | 60 | |
| Purchase of investments | \underline{(100)} | |
| Increase in cash | \underline{30} |
Reconciliation of operating profit to net cash inflow from operating activities
| £000 | |
| Operating profit (£40 – 30) | 10 |
| Depreciation charges | 20 |
| Increase in stocks | (30) |
| Decrease in debtors | 110 |
| Decrease in creditors | \underline{(40)} |
| Net cash inflow from operating activities | \underline{\underline{70}} |
No details of debenture interest were given in the question.
Reconciliation of net cash flow to movement in net debt
| £000 | £000 | |
| Increase in cash in the period | 30 | |
| Cash inflow from increase in debt | \underline{(60)} | (30) |
| Net debt at 1.3.08 | \underline{(20)} | |
| Net debt at 28.2.09 | \underline{(50)} |
Analysis of changes in net debt
| At 1.3.08 | Cash flows | At 28.2.09 | |
| £000 | £000 | £000 | |
| Cash at bank | (20) | 30 | 10 |
| Debt due after 1 year | — | (60) | (60) |
| Total | \overline{\underline{\underline{(20)}}} | \overline{\underline{\underline{(30)}}} | \overline{\underline{\underline{(50)}}} |
(b) The cash flow statement for the year ended 28 February 2009 tells the managers of Frank Limited that the company increased its cash position by £30 000 during the year. Its operating activities generated £70 000 in cash. This was supplemented by issuing £60 000 of debenture stock making the total increase in cash £130 000.
£100000 of cash was used, however, to purchase some investments.
More tests would need to be done but on the limited evidence available, the company’s cash position as at the end of the year looked healthy.