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Cash Flow Statement The following are the balance sheets of Reid plc as at 31/12/2020 and 31/12/2019 - Leaving Cert Accounting - Question 7 - 2021
Question 7
Cash Flow Statement The following are the balance sheets of Reid plc as at 31/12/2020 and 31/12/2019. Balance Sheets as at | ... show full transcript
Worked Solution & Example Answer:Cash Flow Statement The following are the balance sheets of Reid plc as at 31/12/2020 and 31/12/2019 - Leaving Cert Accounting - Question 7 - 2021
Step 1
(i) Prepare the abridged profit and loss account of Reid plc to ascertain the operating profit for the year ending 31/12/2020.
Answer
Abridged Profit and Loss Account for Reid plc for the year ending 31/12/2020
Income
- Operating Profit: €295,600
- Investment Income: €1,600
Expenditure
- Debenture Interest: €(24,000)
- Profit Before Tax: €273,200
- Taxation: €(68,400)
Final Profit
- Profit After Tax: €204,800
- Less Dividends: €(45,000)
- Retained Profit: €159,800
- Profit and Loss Balance 01/01/2020: €143,400
- Profit and Loss Balance 31/12/2020: €303,200
Step 2
(ii) Prepare the cash flow statement of Reid plc for the year ended 31/12/2020.
Answer
Cash Flow Statement for Reid plc for the year ended 31/12/2020
Operating Activities
- Net cash inflow from operating activities: €298,000
Returns on Investment and Servicing of Finance
- Investment Income Received: €1,600
- Debenture Interest Paid: €(29,000)
Taxation
- Tax Paid: €(34,000)
Capital Expenditure and Financial Investment
- Receipts for Sale of Buildings: €90,000
- Payments to Acquire Buildings: €(270,000)
- Purchase of Machinery: €(60,000)
Equity Dividends Paid
- Equity Dividends Paid: €(45,000)
Financing
- Repayment of Debentures: €(50,000)
- Receipts from Issue of Ordinary Shares: €150,000
- Receipts from Share Premium: €13,200
Increase in Cash
- Increase in Cash: €41,000
Step 3
Explain why earning profit may not always result in a corresponding increase in cash balances. Use figures from this question to support your answer.
Answer
Earning profit may not correlate with an increase in cash due to several factors:
- Credit Sales Increase Profit but Not Cash: The increase in debtors, which rose by €70,000, represents sales on credit that will not yield immediate cash inflow.
- Profit from Sale of Fixed Assets: The sale of buildings at €90,000 enhances profit but does not impact cash immediately, as profits are recognized upon sale, while cash is only received in the future.
- Expenses and Investments: High capital expenditures, like acquiring buildings €(270,000) and machinery €(60,000), reduce cash, despite generating profit on the income statement.
- Dividend Payments: The distribution of dividends totaling €(45,000) decreases cash, indicating cash outflows tied to profit distribution.
- Tax Payments: The tax liability results in cash outflows which, despite generating profit, diminishes actual cash availability.
Step 4
Outline reasons why Reid plc would prepare a cash flow statement.
Answer
Reid plc would prepare a cash flow statement for several reasons:
- To Trace Cash Inflows and Outflows: It provides a detailed account of how cash is generated and spent, helping understand the cash position.
- To Assist in Planning Future Cash Flows: Analyzing past cash flows helps in forecasting future cash requirements, necessary for budgeting.
- To Aid Financial Planning: Stakeholders assess the company’s ability to generate sufficient cash to meet obligations as they fall due, facilitating better financial management.
- Compliance with Regulations: Companies are often required to present cash flow statements as part of statutory reporting to provide transparency.
- Assessment of Financial Health: A cash flow statement provides insights into whether a company is solvent and has sufficient liquidity to sustain operations.