Finance & Accounting

Questions: a) Prepare a Statement of Cash Flows for the year ended 31st October 20X4 in accordance with IAS 7 (revised), using the indirect method. b) Prepare a Business Report commenting on the cash position of Equity PLC. Answers: (a). CASH FLOW STATEMENT FOR THE YEAR ENDED ON 31ST OCTOBER, 20X4 OF EQUITY PLC 000 000 Cash flows from operating activities Net profit/loss before tax and interest 15,000.00 Adjustments for: Depreciation (LB+PM) 6,000.00 Revaluation of fixed assets 2,000.00 Investment income - Interest expenses 1,200.00 - Profit/+ Loss on Sale of Fixed Asset 1,000.00 10,200.00 Operating profit before working capital changes 25,200.00 Increase in trade and other receivables (7,000.00) Decrease in inventories 5,000.00 Increase in bank overdraft 3,000.00 Decrease in trade payables (5,000.00) (4,000.00) Cash generated from operations 21,200.00 Interest paid (1,200.00) Income taxed paid (2,400.00) Dividends paid (12,400.00) Cash flow before extraordinary items - (16,000.00) Net cash from operating activities 5,200.00 Cash flows from investment activities Acquisition of subsidiary - Payment to acquire tangible fixed assets (23,500.00) Receipt from sales of tangible fixed assets 500.00 Payment to acquire investment (5,000.00) Investment income received - Dividends received - (28,000.00) Net cash used in investing activities (28,000.00) Cash flows from financing activities Proceeds from / (Payment) for share capital 7,000.00 Proceeds from / repayment of long-term borrowings 5,000.00 Payment of finance lease liabilities - 12,000.00 Net cash flow from financing activities 12,000.00 Net increase/decrease in cash and cash equivalents (10,800.00) Cash and cash equivalents at the beginning of the period (Cash + Cash Equiv) 12,000.00 Cash and cash equivalents at the end of the period - (Cash + Cash Equiv) Introduction To have a proper understanding of a company it is essential to review the financial statements. It helps in delivering the correct answer. The evaluation is best done with the tool named ratio analysis. It helps in assessing the financial health of the business and aids in the process of decision-making (Albrecht et. al, 2011). The current report will throw light on the financial position of Equity PLC and the cash position will be evaluated by utilizing the indirect method in tune with the IAS 7. Moreover, it facilitates in the preparation of cash flow statement. Further the following major ratios will be used for analysing the financial statements: Profitability this ratio is an indicator of how profitable the company is and does it has the capability to create wealth for the users. The profit derived by the business is considered here (Williams, 2012). Efficiency the manner in which the business undertakes the resources and put to use is indicated by this ratio (Williams, 2012). Liquidity ratio this ratio is an indicator of the liquid position of the business and provides a view that whether the business will be able to meets its obligations (Williams, 2012). Leverage ratio this ratio considers the contribution of the owner and other parties. (b). Equity PLC Analysis Ratios Profitability According to the profitability ratio, Equity PLC can be tagged as a profitable company and has been able to produce a sales margin that is more than a half for every sale. But, it needs to be noted that the company should consider the operating expenses that has costed its net margin to drift down to 11% in the accounting year. Efficiency Here the company must work on the concept of working capital and its management. It should be more specific in inventory, as well as accounts receivable and its collections. The company had a trouble because the investment was locked for an average of 209 days during the year and this lead to locking up of the investment. This impacted the smooth flow of the working capital (Horngren, 2013). However, the inventory turnover ratio indicates that the company was able to turn over 1.75 times in the year. It must be undertaken that the company must be having some obsolete inventory in it. This must be looked into. The customers were provided a credit period of 65 days. This was compensated in a strong manner because it took 105 days credit from the suppliers. The advancing credit cost must be weighed with that of the cost of taking credits that ensures the company is not impacted in a negative manner (Northington, 2011). In this scenario, the company took 105 days from the supplier and he nce, working capital is high in this regard. Liquidity The liquidity position of the company is average. The quick ratio is around the base ratio that is 1:1. Moreover, this strikes the fact that the company needs to consider the management of the inventory so those obsolete inventories are eliminated. Moreover, the current ratio is not strong that will ascertain an average situation (Parrino et. al, 2012). Leverage When it comes to financial leverage, it can be ascertained that Equity PLC utilizes the debt to structure its business effectively and hence the company is not under a threat or difficulty for using the debt. This is highlighted by the ratios that are computed. The total debt needed to finance the total assets declined marginally because the total debt in tune to shareholder equity reduced. The company utilized less of debts to acquire the assets and this is properly highlighted by the decreasing equity leverage 9 Parrino et. al, 2012). Moreover, the lender is in strong position as the payment of interest will not have any problem as indicated by the operations of the company. This is reflected by the interest coverage ratio that reflects the payment of interest can be done at least 12.5 times from the profit that arises before interest and taxation during the year. Cash position of Equity PLC The income statement of Equity PLC has reflected a positive scenario while the cash flow statement projects a different one. When the cash flow statement is evaluated that has been computed utilizing the indirect method of reconciliation, it can be observed that the statement is negative. By investigating the cash flow, the following points came to the forefront: Cash is generated from operations and this is due to the fact that operating profit before working capital has increased. Net cash is used in investing activities and this is due to the payment that has been done to acquire assets and investments. Since, cash has moved out of the business and this is a strong situation of the business because cash is used for purchase of fixed assets that will help the business in the long run (Spiceland et.al, 2011). Cash has flown in due to financing activities and this is due to proceeds that have derived from the share capital and proceeds that have derived from the long term borrowings. Trade payable have declined year to year that indicates an increment in the payment of the vendors. This will need investigations because the decline in the inventory has been noticed on a year to year basis (Melville, 2013). The trade receivable enhanced considering the two statements that strikes an increment in the customer credit. Assets were written off and it aided in the increment of plant and machinery that led to year on year gap. The payment of interest enhanced that needs additional scrutiny however; an increment of the loans and overdraft might have led to such factor. Conclusion From the above study and investigation, Equity PLC looks formidable and good for the purpose of investment. The shareholders are getting adequate returns and that is the main motto. However, it needs to keep into mind various plans to operate with ease. The company should observe the operating expenses. Firstly, it should budget, monitor, as well as plan the financial statements. Secondly, it should tame the procedure of purchasing (Davies Crawford, 2012). It should adhere to the authorization and the spending limits. Thirdly, the company should discuss with the suppliers grading the prices and introduction of new suppliers. Moreover, it should provide the employees with the responsibility of evaluating the expenses. Fourthly, it must enhance the limit of the working capital and management of the inventory (Needles Powers, 2013). The company must adhere to the basic principles of inventory management that is it should be kept in a stock room; the procedures must be standard for del ivery of product and continuous stock check. It should have strong software that will look into the system of inventory. This will enable the company to have a good control over the cash flow pattern and hence, will able to get opportunities. References Albrecht, W., Stice, E. and Stice, J 2011, Financial accounting, Mason, OH: Thomson/South-Western. Davies, T. and Crawford, I 2012, Financial accounting, Harlow, England: Pearson. Horngren, C 2013, Financial accounting, Frenchs Forest, N.S.W: Pearson Australia Group. Melville, A 2013, International Financial Reporting A Practical Guide, 4th edition, Pearson, Education Limited, UK Needles, B.E. Powers, M 2013, Principles of Financial Accounting, Financial Accounting Series: Cengage Learning. Northington, S 2011, Finance, New York, NY: Ferguson's. Parrino, R., Kidwell, D. and Bates, T 2012, Fundamentals of corporate finance, Hoboken, NJ: Wiley Spiceland, J., Thomas, W. and Herrmann, D 2011, Financial accounting, New York: McGraw-Hill/Irwin,University Press Williams, J 2012, Financial accounting, New York: McGraw-Hill/Irwin.