Question

QUESTION FOUR                                                                                                                              [25]

Study the Statement of Cash Flows provided below and answer the following questions:

4.1        Calculate the:

4.1.1 Dividends paid.                                                                                                                            (3)

4.1.2 Cash balance on 31 December 2016. Is the balance favourable or unfavourable?                  (4)

4.2        Did the company increase its loan or did it make a loan repayment?  

            Show your calculations.                                                                                                           (4)

4.3        Of what significance are the details of Cable Limited’s investing activities to potential

            investors?                                                                                                                                  (5)

4.4       Provide an interpretation of the Statement of Cash Flows of Cable Limited.                        (9) Information

The Statement of Cash Flows of Cable Limited for the year ended 31 December 2017 appears below:

CABLE LIMITED STATEMENT CASH FLOWS OF FOR THE YEAR ENDED 31 DECEMBER 2017

	R
Cash flows from operating activities	(200 000)
Operating profit	800 000
Non-cash flow adjustment:
Depreciation	300 000
Profit before working capital changes	1 100 000
Working capital changes	(600 000)
Increase in inventory	(500 000)
Increase in receivables	(400 000)
Increase in payables	300 000
Cash generated from operations	500 000
Interest paid	(50 000)
Dividends paid	?
Income tax paid	(250 000)
Cash flows from investing activities	100 000
Disposal of plant and equipment	100 000
Cash flows from financing activities	?
Increase/Decrease in loan	?
Net increase (decrease) in cash	50 000
Cash balance (31 December 2016)	?
Cash balance (31 December 2017)	(30 000)

END

Answer 1

Cash balance as on 31 December 2016 = -$30000 - $50000 = ($80000) (unfavorable)

Cash From Operating Activities = ($200000)

Cash From Operating Activities = Cash Generated from Operations - Interest Paid - Income Tax - Dividend
($200000) = $500000 - $50000 - $250000 - Dividend
Therefore Dividend Paid = $400000

Net Increase in Cash = Cash from Operating Activities + Cash from Investing Activities + Cash from Financing Activities
$50000 = ($200000) + $100000 + Cash From Financing Activities
Therefore Cash from financing Activites = $150000
Which means increase in Loan = $150000

Investing activities are important for investors as it shows whether company is investing in growth of business or selling assets for liquidity.

Interpretation is that, despite good profits company is not able to convert it into cash.