Warwick Business School IB9AXO: Foundations of Financial and Management Accounting

WEEK 5 - (WORKSHOP - LECTURE 4): SOLUTIONS

Q1.
(a)
A company’s credit sales are £45,678 during 20X8. Accounts receivable at 1 January
20X8 are £4,602 and at 31 December 20X8 are £5,709. What cash has the company
received from its credit customers during 20X8?
Solution
£
Sales 45,678
Add: opening accounts receivable 4,602
Less: Closing accounts receivable (5,709)
Cash received 44,571

OR £
Sales 45,678
Less: INCREASE in accounts receivable (1,107)
Cash received 44,571

(b)
The financial statements of A Ltd at 31 December 20X8 and 20X7 included the following figures:
20X8 20X7
Revenue (Income Statement) £400 £200
Trade receivables (SOFP) £ 50 £ 30

Required:
How much cash was received from the credit customers during the year ended 31 December 20X8?
Assume all sales were made on credit.

Solution:
Trade receivable balance at start (1/1/20X8) £ 30
Add: Credit sales in 20X8 £400
£430
Less: Trade receivable balance at end (31/12/20X8) £ 50
Cash received from credit customers £380

Q2.
(a)
A company’s cost of sales in its income statement for the year ended 31 October 20X5 is
£105,066. Inventory at 31 October 20X4 is £6,430 and at 31 October 20X5 is £5,757. Accounts
payable at 31 October 20X4 are £9,204 and at 31 October 20X5 are £8,580.
i. What are the purchases for the year?
ii. Assuming all purchases are made on credit, what cash has the company paid to
suppliers during the year?

Solution
(i) £
Cost of sales 105,066
Add: Closing inventory 5,757
Less: Opening inventory (6,430)
Purchases 104,393
Warwick Business School IB9AXO: Foundations of Financial and Management Accounting

OR £
Cost of sales 105,066
Less: DECREASE in inventory (673) *
Purchases 104,393

* Note – the decrease in inventory is deducted here because it is reducing an expense. i.e., it
is an increase to profit. (In the reconciliation of operating profit to cash flows from operating
activities, a decrease in inventory would be shown as a positive figure.)

(ii) £
Purchases 104,393
Add: opening accounts payable 9,204
Less: Closing accounts payable (8,580)
Cash paid 105,017

OR £
Purchases 104,393
Add: DECEASE in accounts payable 624 *
Cash paid 105,017

* Similarly – the decrease in accounts payable is added here because it is increasing an

expense. i.e., it is reduction from profit. (In the reconciliation of operating profit to cash flows
from operating activities, a decrease in accounts payable would be shown as a negative
figure.)

(b)

The financial statements of A Ltd at 31 December 20X8 and 20X7 included the following figures:

20X8 20X7

Purchases (income statement) £800 £900

Accounts payable (SOFP) £100 £160

Required:

How much cash was paid to suppliers during the year ended 31 December 20X8? Assume all
purchases were made on credit.

Solution:
Trade (accounts) payable balance at start (1/1/20X8) £160
Add: Credit purchases in 20X8 £800
£960
Less: Trade payable balance at end (31/12/20X8) £100
Cash paid to credit suppliers £860
Warwick Business School IB9AXO: Foundations of Financial and Management Accounting

Q3.

(A)
At 30 June 20X3 a company has issued £100,000 7% debentures. On 1 April 20X4
The company issues a further £50,000 of the same debentures.
(a) What is the interest expense for the year ended 30 June 20X4?
(b) (i) Assuming the company pays interest quarterly in arrears on the last day of each
quarter (31 March, 30 June, 30 September and 31 December), and the company
pays all interest when it is due, what is the cash paid for interest in the year
ended 30 June 20X4?
(ii) If there is an accrual for interest at 30 June 20X3 and 20X4 of £1,750 and
£2,625 respectively, what is the cash paid for interest in the year ended 30
June 20X4?

Solution

(A)
(a) £
Interest expense for period 1 July 20X3 – 31 March 20X4
7% x 100,000 x 9/12 5,250
Interest expense for period April – 30 June 20X4
7% x 150,000 x 3/12 2,625
Interest expense for year ended 30 June 20X4 7,875

(b)
(i) Cash paid for interest in the year ended 30 June 20X4 will be the same as the
expense, i.e. £7,875

(ii) £
Expense 7,875
Add: Opening accrual 1,750
Less: Closing accrual (2,625)
Cash paid for interest 7,000

(B)

Equity shares with a total nominal value of £30,000 in 25p have been issued and fully paid. The company
pays an ordinary dividend of 10p per share.

Required:
What was the total equity dividends paid and accounted for by the company in the statement of changes
in equity?

Solution:
Number of equity shares = £30,000 / 25p shares = 120,000 shares
Ordinary (equity) dividend= 10p per share x 120,000 shares= £12,000

(C)
A plc has the following issued share capital at 1 January 20X2:
Warwick Business School IB9AXO: Foundations of Financial and Management Accounting

£20,000 equity share capital (50p shares).

£10,000 8% irredeemable preference share capital (£1 shares).
The company paid the following dividends during the year:
The 20X2 final equity dividend of 4p per share.
An interim equity dividend of 3p per share.
Required
What figure for dividends paid will be accounted for in the financial statements of A Plc for year ended 31
December 20X2?

Solution:
Number of equity shares = £20,000 / 50p shares = 40,000 shares
Final equity dividend = 4p per share x 40,000 shares = £1,600
Interim equity dividend = 3p per share x 40,000 shares = £1,200
Total equity dividends = 7p per share x 40,000 shares = £2,800
Preference dividends = 8% x £10,000 = £ 800
Total Dividends = £3,600

Q4.
(a)

The following information has been taken from the financial statements of Marks plc for
20X2 and 20X1:
20X2 20X1
£000 £000
Operating profit 2,805 2,340
Depreciation charged in arriving at operating profit 825 705
Profit / (loss) on disposal on non-current assets 65 (102)
Inventories held at end of year 465 405
Trade receivables at end of year 345 360
Prepayments at end of year 66 57
Trade payables at end of year 255 225
Accruals at end of year 89 95

Required:
What is the figure for cash generated from the operations for Marks plc for 20X2?

Solution
Marks plc
Reconciliation of operating profit to cash generated from operations for the year 20X2

£
Operating profit 2,805
Add back: Depreciation 825
Deduct: Profit on disposal of non-current assets (65)
Increase in inventories (60)
Decrease in trade receivables 15
Increase in prepayments (9)
Increase in trade payables 30
Decrease in accruals (6)
Cash generated from operations 3,535

3
Warwick Business School IB9AXO: Foundations of Financial and Management Accounting

(b)
Operating profit 180
Add: depreciation 30
Less: profit on sale of non-current asset (75)
Changes in working capital:
Decrease in inventories (90-40) = 50
Increase in receivables (55-10) = (45)
Increase in payables (45-30) = 15
Decrease in accruals (20-15) = (5)
Cash generated from operations 150

(c)
Net profit 360
Add: depreciation 50
Add: loss on sale of non-current asset 60
Changes in working capital:
Decrease in inventories (180-80) = 100
Increase in receivables (110-20) = (90)
Increase in payables (90-60) = 30
Decrease in accruals (40-30) = (10)
Cash generated from operations 500

(d)

Marks plc
Reconciliation of operating profit to cash generated from operations for the year 20X2
£
Operating profit 2,805
Add back: Depreciation 825
Deduct: Profit on disposal of non-current assets (65)
Increase in inventories (60)
Decrease in trade receivables 15
Increase in prepayments (9)
Increase in trade payables 30
Decrease in accruals (6)
Cash generated from operations 3,535

Q5.
(a)

Cash flows from investing activities:

Purchase of new plant (£30,000)
Proceeds of sale of plant £12,000
Net cash outflow (£18,000)

Cash flow from operating activities (adjustment):

Profit on sale of plant of £3,000.

(b)

Cash flows from investing activities:

Purchase of new plant (£360,000)
Proceeds of sale of plant £144,000
Net cash outflow (£216,000)
Warwick Business School IB9AXO: Foundations of Financial and Management Accounting

Cash flow from operating activities (adjustment):

Profit on sale of plant of £36,000.

(c)

Cash flows from investing activities:

Purchase of new plant (£10,000)
Proceeds of sale of plant £4,000
Net cash outflow (£6,000)

Cash flow from operating activities (adjustment):

Profit on sale of plant of £1,000.

Q6.
(a)

Cash flows from financing activities

£’000
Issue of shares 200
Repayment of debentures (450 – 250) (200)
Dividends paid (70)
Net cash used in financing activities (70)

(b)
Cash flows from financing activities
£’000
Issue of shares 1,200
Repayment of debentures (1,000)
Dividends paid (300)
Net cash outflow from financing activities (100)

(c)

Cash flows from financing activities

£’000
Issue of shares 400
Repayment of debentures (100)
Dividends paid (140)
Net cash inflow from financing activities 160

Q7.

The net decrease in cash and cash equivalents during the year ended 31 July 20X6 is £1,870,000.

At start At end
(1/8/X5) (31/7/X6) Movement
£000 £000 £000
Bank / Cash 60 -1,810 -£1,870
ST investments 0 0 0
Total 60 -1,810 -£1,870
Warwick Business School IB9AXO: Foundations of Financial and Management Accounting

Q8. Practice Question Solution

Hexagon Ltd.

(i) Net cash flow for the year ended 31 March 20X8
£000
Bank balance at 1 April 20X7 30
Decrease in cash (156)
Bank overdraft at 31 March 20X8 £(126)

(ii) Cash flow from operating activities

Indirect method:
£000
Profit before tax 334
Add back interest (W1) 21
Profit from operations 355
Add back: Depreciation 124
Loss on sale of plant (W2) 8
Increase in inventory (142)
Decrease in receivables 26
Decrease in trade payables (10)
Cash flow from operating activities £361

(W1) Interest on debentures *

6% x 450 x 6/12 + 6% x 250 x 6
/12 £21

(W2) Profit/loss on sale of plant = Proceeds - NBV of plant

= 14,000 - (80,000 – 58,000)
= £ (8,000) (loss)

Note: Disposal of non-current assets has two effects. (1) Cash flow effect that result from the sale
of the asset and needs to be reflected in Investing CFs. (2) Gain/loss on the sale of noncurrent asset
which needs to be adjusted in operating CF.

(iii) Hexagon Ltd.

Statement of cash flows for the year ended 31 March 20X8

£000 £000
Cash flows from operating activities 361
Interest paid (21)
Tax paid (20X7 + part of 20X8)
(120 + (150 – 90)) (180)
Net cash from operating activities 160

Cash flows from investing activities

Purchase of non-current assets (W3) (260) 1
Warwick Business School IB9AXO: Foundations of Financial and Management Accounting

Proceeds from sale of non-current assets 14

Net cash used in investing activities (246)

Cash flows from financing activities

Issue of shares 200
Repayment of debentures (450 – 250) (200)
Dividends paid (70)
Net cash used in financing activities (70)

Decrease in cash and cash equivalents (156)

Cash and cash equivalents at start of year 30
Cash and cash equivalents at end of year £ (126)

(W3) Purchase of non-current assets - land

This will be the difference between the opening and closing cost of £80,000

Purchase of non-current assets – plant £000

Cost at 31 March 20X7 560
Less: cost of plant sold (80)
480
Cost at 31 March 20X8 660
Acquisitions £ 180

* Note – interest paid is shown here as an operating activity – many companies who are constantly
paying interest will just treat this as a normal day-to-day outflow. However, it may be shown under
financing as it relates to the finance provided.

Other items which may be shown under alternative headings are:

Interest received Usually investing, but may be operating

Dividends received Usually investing, but may be operating
Dividends paid Usually financing, but may be operating

(iv) Information provided:

· Statement of cash flows explains why, despite a healthy profit, the company has lost
cash over the year – mainly through the acquisition of non-current assets, which was
not financed by any other means other than operating activities
· Much cash from operating activities was used to pay tax liabilities
· Although the company issued shares, the funds raised have been used in entirety to
repay the debentures
· Reconciliation of profit before tax to cash flows from operations provides much useful
information, which used in conjunction with working capital management ratios,
provides information about this. Note, however, for this company the profit and cash
flow figures are similar.
· However, this aids understanding of management of working (liquid) capital and shows
that the large increase in inventories has reduced the cash available for other purposes.
This information is not obvious from just the income statement and statement of
financial position.