How to prepare for ASSET?

How to prepare a statement of cash flows using the indirect method?

• The following information relates to P, a small private company. It consists of a draft of statement of financial position as at year ended 2010 and 2009 P' Statement of Financial position year 2010 : 2009 Non-current asset $ : $ Land and buildings 62,300 : 49,200 Plant 84,600 : 70,000 Land and building depreciation (6,800) : (5,000) Plant depreciation (37,600) : (22,500) Investments at cost 8,200 : 16,900 Current asset Inventory 43,300 : 57,400 Interest receivable 1,700 : - Tax receivable 1,100 : - Trade receivables 50,400 : 28,600 Cash at bank (1,900) : 1,200 TOTAL ASSET 205,300 : 195,800 EQUITY AND LIABILITIES Capital and reserves: Ordinary share capital 58,000 : 30,000 Reserves: Revaluation reserve on increasing value of land 18,000 : 12,000 Retained earnings 62,500 : 70,300 Non-current liabilities Loan note 39,800 : 43,200 Current liabilities Interest payable 300 : - Trade payables 26,700 : 31,400 Tax payable - : 8,900 TOTAL EQUITY AND LIABILITIES 205,300 : 195,800 The following information is relevant: 1. There were no disposals of land and buildings during the year. The increase in the revaluation reserve was entirely due to the revaluation of the company’s land. 2. Plant with a net book value of $12,000 (historical cost $23,500) was sold during the year for $7,800. The loss on sale has been included in the profit before interest and tax 3. Investments with a cost of $8,700 were sold during the year for $11,000. The profit has been included in the profit before interest and tax. There were no further purchases of investment. 4. The profit before interest and tax of the year is $17,900  Note: Cash at bank in 2011 is bank overdraft. Required: From the above information, prepare a statement of cash flows using the indirect method for company for the year to Dec 31th 2011.

• Answer:

  First, let's address the items on the balance sheet, along the way and at the end we'll account for the "additional info". For review: Sources of cash are increases in Liabilities and Equity, and decreased in Assets. (L+, E+, A-). Uses are the opposite. year 2010 : 2009 <<<IMPORTANT TO NOTE THE "DIRECTION" OF THE YRS HERE (backward) Non-current asset $ : $ Land and buildings 62,300 : 49,200 (per notes: no buildings or land sold) - the adjustment, aka increase in revaluation reserve, does NOT affect NI, it goes directly to Other Comprehensive Income and is reflected in the Equity section - will address this when we examine the Equity section. So deduct the change in the reserve ($6k) from the 2010 value: 62,300 - 6,000 = 56,300 <adj'd 2010 value of land and buildings; 2009 value: 49,200 ; so 56,300 - 49,200 = $7,100 increase in land & buildings is a USE of cash. Plant 84,600 : 70,000 (the increase signals a USE of cash, , BUT! we must also account for Note #2. I am going to move "plant depreciation" up in the line item list, because this needs to be accounted for re: the sale of the plant.) Plant depreciation (37,600) : (22,500) First make the adjustments for the sale of the plant. Use the 2009 numbers.. Plant: 70,000....subtact cost basis for sold plant (23,500) = Adj'd 2009 Plant: 46,500 Now you have:2010 : 2009 Plant: 84,600 : 46,500 <increase in Asset=USE of $38,100 cash 2010Accum. Depr. Plant:(Accum Depr for plant sold: cost23,500-book12,000=11,500<accum depr for plant sold. If the plant had NOT been sold, accum. depr. would be: [2010 Acc Depr]37,600 + 11,500 = 49,100 in 2010. So: 49,100 - [yr 2009] 22,500 = $26,600 in depr is expensed in 2010. This is important because depr. is a non-cash expense, but is accounted for in NI, so it must be added back for cash flow purposes. Add back $26,600 to NI before interest and taxes [Adjusted NI: 17,900 + 26,600 = 44,500.] Since we're on the issue of the plant sold, let's examine the cash flowing from the sale of the plant. The loss on sale is a paper loss, so add it back to NI - add back the loss (12,000 - 7800) = 4,200. [Adjusted NI: 44,500 + 4,200 = 48,700]. The price paid for the plant is a SOURCE of cash: $7,800. Land and building depreciation (6,800) : (5,000) <DEPR. is a NONCASH item that must be added back to NI - add back 1,800 (Adj'd NI: 48,700 + 1800 = 50,500) Investments at cost 8,200 : 16,900 Re: Note#3. If the investment hadn't been sold, 2010 investment at cost would be 8200 + 8700 = 16,900...no change from 2009, so we only have to account for the cash flow relative to the sale of that asset. The cashflow from sale: $11,000 of which (11,000 - 8700 = 2300 is already accounted for in the NI. $8700 add'l SOURCE of cash is NOT already accounted for in NI, so account for it in the cash flow. Current asset Inventory 43,300 : 57,400 <decrease in asset is SOURCE of cash >$14,100 Interest receivable 1,700 : - <increase in recvble is USE of cash -$1700 (remember this will be accounted for in NI, although it has not been received, only accrued) Tax receivable 1,100 : - <same as above USE of cash -$1,100 Trade receivables 50,400 : 28,600 <USE of cash -$21,800 Cash at bank (1,900) : 1,200 << is used to reconcile NI and cash flow - more later: in the meantime, the overdraft is a SOURCE of cash like a loan $1900 EQUITY AND LIABILITIES Capital and reserves: Ordinary share capital 58,000 : 30,000 <increase in E is a SOURCE $28,000 Reserves: Revaluation reserve on increasing value of land 18,000 : 12,000<NONCASH item affecting Other Comprehensive income, NOT NI (US GAAP). Retained earnings 62,500 : 70,300 >the difference here is a decrease of $7800, yet we would have expected it to increase by the NI $17,900; this means that $25,700 was paid out (USE of cash), probably in the form of dividends. Non-current liabilities Loan note 39,800 : 43,200 <reduction is a USE of cash -$3,400 Current liabilities Interest payable 300 : - <increase is a SOURCE of cash $300 Trade payables 26,700 : 31,400 <decrease=USE -$4,700 Tax payable - : 8,900 <decrease= USE -$8,900 Now for the totals: NI adjusted for non-cash items: $50,500 Net of Sources & Uses (before dividends): ($26,000) Dividends - USE - (changes reflected in retained earnings): ($25,700) Total: ($1200)<<this is reflected in the cash account, i.e. it WAS $1200 at the end of 2009 Hope this helps...