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Cash Flow Statement The following information has been extracted from the books of Thornton Ltd - Leaving Cert Accounting - Question 7 - 2007
Question 7
Cash Flow Statement The following information has been extracted from the books of Thornton Ltd. Profit and Loss (extract) for year ended 31/12/2006 Operating Prof... show full transcript
Worked Solution & Example Answer:Cash Flow Statement The following information has been extracted from the books of Thornton Ltd - Leaving Cert Accounting - Question 7 - 2007
Step 1
Reconcile the operating profit to net cash inflow from operating activities.
Answer
To reconcile the operating profit to net cash inflow from operating activities, we start with the operating profit and make adjustments for non-cash items and changes in working capital.
- Operating Profit: €190,000
- Add Depreciation: Include the depreciation expense of €20,000, leading to a subtotal of €210,000.
- Adjust for Changes in Working Capital:
- Increase in Stocks: Deduct €5,000 as it signifies a use of cash.
- Increase in Debtors: Deduct €12,000 as it indicates a cash outflow.
- Increase in Creditors: Add €7,000 for the cash inflow from creditors.
Calculating step-by-step:
- Starting with €210,000, subtract €5,000 (stocks) for €205,000.
- Subtract €12,000 (debtors) to get €193,000.
- Finally, add €7,000 (creditors) resulting in the net cash inflow from operating activities of €200,000.
Step 2
Prepare the cash flow statement of Thornton Ltd. for the year ended 31/12/2006.
Answer
Cash Flow Statement of Thornton Ltd. for the year ended 31/12/2006
Operating Activities
Net cash inflow from operating activities: €200,000
Returns on Investments and Servicing of Finance
- Interest paid: €(9,000) Total: €(9,000)
Taxation
Corporation Tax paid: €(38,000)
Capital Expenditure and Financial Investment
- Purchase of land/buildings: €(60,000)
Equity Dividends Paid
- Dividends paid during the year: €(15,000)
Financing
- Issue of shares: €10,000
- Repayment of debentures: €(60,000)
Increase in Cash
Cash at beginning of year: €58,000 Net Cash inflow for the year: €3,000 Cash at 31/12/2006: €61,000
Step 3
Reconcile the net cash flow to movement in net debt.
Answer
To reconcile the net cash flow to movement in net debt, we review the changes in cash and obligations.
- Increase in cash during period: €3,000
- Cash paid for creditors: €60,000
- Change in net debt: (Calculation)
- Starting debt at 1/1/2006: €67,000
- Ending debt at 31/12/2006: €48,000
- Therefore, the net movement in debt is €19,000.
- Cash flow net impact: increased cash leads to reduced net debt.