Question 8.TQ.4: You are presented with the following information: Dennis Lim...
You are presented with the following information:
Dennis Limited
Balance sheet at 31 January 2007
| \underline{31 January 2006} | \underline{31 January 2007} | |||
| £000 | £000 | £000 | £000 | |
| Fixed assets | ||||
| Land at cost | 600 | 700 | ||
| Current assets | ||||
| Stock | 100 | 120 | ||
| Debtors | 200 | 250 | ||
| Cash | \underline{6} | \underline{10} | ||
| 306 | 380 | |||
| Less: Current liabilities | ||||
| Creditors | \underline{180} | \underline{126} | \underline{220} | \underline{160} |
| \underline{\underline{726}} | \underline{\underline{860}} | |||
| Capital and reserves | ||||
| Ordinary share capital | 700 | 800 | ||
| Profit and loss account | \underline{26} | \underline{60} | ||
| \underline{\underline{726}} | \underline{\underline{860}} | |||
Required:
(a) Prepare Dennis Limited’s cash flow statement for the year ended 31 January 2007.
(b) Outline what it tells the managers of Dennis Limited.
Dennis Ltd’s accounts:
(a)
Dennis Limited
Cash flow statement for the year ended 31 January 2007
| £000 | £000 | |
| Net cash inflow from operating activities | 4 | |
| Capital expenditure | ||
| Payments to acquire tangible fixed assets | \underline{(100)} | |
| (96) | ||
| Management of liquid resource and financing | ||
| Issue of ordinary share capital | \underline{100} | |
| Increase in cash | \underline{\underline{4}} |
Reconciliation of operating profit to net cash inflow from operating activities
| £000 | |
| Operating profit (£60 – 26) | 34 |
| Increase in stocks | (20) |
| Increase in debtors | (50) |
| Increase in creditors | \underline{40} |
| Net cash inflow from operating activities | \underline{\underline{4}} |
(b) Dennis Limited generated £4 000 cash from its operating activities during the year to 31 January 2007. It also increased its cash position by that amount during the year. However, it did invest £100 000 in purchasing some tangible fixed assets during the year, but this appeared to be paid for out of issuing another £100 000 of ordinary shares.
The cash from operating activities seems low. Its probably needs to examine its stock policy and its debtor collection arrangements because both stocks and debtors increased during the year. Its creditors also increased. Taken together, these changes might indicate that it is beginning to run into cash flow problems.