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Cash Flow Statement The following are the balance sheets of Grant plc as at 31/12/2016 and 31/12/2015 together with an abridged profit and loss account for the year ended 31/12/2016 - Leaving Cert Accounting - Question 2 - 2017
Question 2
Cash Flow Statement The following are the balance sheets of Grant plc as at 31/12/2016 and 31/12/2015 together with an abridged profit and loss account for the year... show full transcript
Worked Solution & Example Answer:Cash Flow Statement The following are the balance sheets of Grant plc as at 31/12/2016 and 31/12/2015 together with an abridged profit and loss account for the year ended 31/12/2016 - Leaving Cert Accounting - Question 2 - 2017
Step 1
Prepare the cash flow statement of Grant plc for the year ended 31/12/2016
Answer
Cash Flow Statement of Grant plc for the year ended 31/12/2016
Operating Activities
- Net cash inflow from operating activities: €186,000
- Operating profit: €157,000
- Adjustments for:
- Depreciation charge: €64,000
- Loss on sale of fixed assets: €15,000
- Increase in stock: €(13,000)
- Increase in debtors: €(13,000)
- Decrease in creditors: €(13,000)
Net Cash inflow from operating activities
€186,000
Capital Expenditure and Financial Investment
- Sale of investments: €205,000
- Purchase of buildings: €(200,000)
- Purchase of machinery: €(50,000)
- Cash flows from investing activities: €(45,000)
Equity Dividends Paid
- Dividends paid: €(32,000)
Management of Liquid Resources and Financing
- Repayment of debentures: €(170,000)
- Cash flows from financing activities: €(170,000)
Net Cash movement in cash and cash equivalents
- Net cash from all activities: €(32,000)
Closing cash and cash equivalents
- Cash at bank: €3,500
- Cash at end of year: €(28,500)
Step 2
Cash flow statements are useful in assessing solvency. Explain the underlined term.
Answer
Solvency
Solvency refers to the ability of a company to meet its long-term financial obligations as they become due. A solvent company has sufficient assets to cover its liabilities, ensuring it can continue operations without defaulting on debts. It is crucial for maintaining operations, funding growth, and attracting investment.
Step 3
What is a Financial Reporting Standard?
Answer
Financial Reporting Standard
A Financial Reporting Standard (FRS) outlines the guidelines for preparing financial statements, ensuring consistency and transparency across firms. It serves as a framework that helps stakeholders understand a company's financial position, facilitating comparability over time and among different companies.
Step 4
What are the implications of reduced gearing, significantly between 2015 and 2016?
Answer
Implications of Reduced Gearing
- Increased investment capacity: Lower gearing allows the company to invest more in internal growth projects.
- Higher shareholder confidence: Investors generally view reduced gearing favorably, often leading to an increase in shareholder trust.
- Potential for lower dividends: Shareholders may receive lower dividends if the company retains more earnings for reinvestment.
- Easier access to additional borrowing: A lower debt-to-equity ratio means the company is perceived as less risky by lenders, making it easier to secure loans at favorable rates.