3 Pinto is a publicly listed company. The following financial statements of Pinto are available:
Statement of comprehensive income for the year ended 31 March 2008 $’000
Revenue 5,740
Cost of sales (4,840)
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Gross profit 900
Income from and gains on investment property 60
Distribution costs (120)
Administrative expenses (note (ii)) (350)
Finance costs (50)
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Profit before tax 440
Income tax expense (160)
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Profit for the year 280
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Other comprehensive income
Gains on property revaluation 100
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Total comprehensive income 380
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Statements of financial position as at 31 March 2008 31 March 2007
$’000 $’000 $’000 $’000
Assets
Non-current assets (note (i))
Property, plant and equipment 2,880 1,860
Investment property 420 400
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3,300 2,260
Current assets
Inventory 1,210 810
Trade receivables 480 540
Income tax asset nil 50
Bank 10 1,700 nil 1,400
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Total assets 5,000 3,660
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Equity and liabilities
Equity shares of 20 cents each (note (iii)) 1,000 600
Share premium 600 nil
Revaluation reserve 150 50
Retained earnings 1,440 2,190 1,310 1,360
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3,190 1,960
Non-current liabilities
6% loan notes (note (ii)) nil 400
Deferred tax 50 50 30 430
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Current liabilities
Trade payables 1,410 1,050
Bank overdraft nil 120
Warranty provision (note (iv)) 200 100
Current tax payable 150 1,760 nil 1,270
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Total equity and liabilities 5,000 3,660
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The following supporting information is available:
(i) An item of plant with a carrying amount of $240,000 was sold at a loss of $90,000 during the year. Depreciation
of $280,000 was charged (to cost of sales) for property, plant and equipment in the year ended 31 March 2008.
Pinto uses the fair value model in IAS 40 Investment Property. There were no purchases or sales of investment
property during the year.
(ii) The 6% loan notes were redeemed early incurring a penalty payment of $20,000 which has been charged as
an administrative expense in the income statement.
(iii) There was an issue of shares for cash on 1 October 2007. There were no bonus issues of shares during the year.
(iv) Pinto gives a 12 month warranty on some of the products it sells. The amounts shown in current liabilities as
warranty provision are an accurate assessment, based on past experience, of the amount of claims likely to be
made in respect of warranties outstanding at each year end. Warranty costs are included in cost of sales.
(v) A dividend of 3 cents per share was paid on 1 January 2008.
Required:
(a) Prepare a statement of cash flows for Pinto for the year to 31 March 2008 in accordance with IAS 7
Statement of cash flows. (15 marks)
(b) Comment on the cash flow management of Pinto as revealed by the statement of cash flows and the
information provided by the above financial statements.
Note: ratio analysis is not required, and will not be awarded any marks. (10 marks)
(25 marks) 3 (a) Statement of cash flows of Pinto for the Year to 31 March 2008:
Cash flows from operating activities $’000 $’000
Profit before tax 440
Adjustments for:
Depreciation of property, plant and equipment 280
Loss on sale of property, plant and equipment 90 370
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Increase in warranty provision (200 – 100) 100
Investment income (60)
Finance costs 50
Redemption penalty costs included in administrative expenses 20
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920
Working capital adjustments
Increase in inventories (1,210 – 810) (400)
Decrease in trade receivables (540 – 480) 60
Increase in trade payables (1,410 – 1,050) 360 20
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Cash generated from operations 940
Finance costs paid (50)
Income tax refund (w (ii)) 60
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Net cash from operating activities 950
Cash flows from investing activities
Purchase of property, plant and equipment (w (i)) (1,440)
Sale of property, plant and equipment (240 – 90) 150
Investment income received (60 – 20 gain on investment property) 40
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Net cash used in investing activities (1,250)
Cash flows from financing activities
Proceeds from issue of equity shares (400 + 600) 1,000
Redemption of loan notes (400 plus 20 penalty) (420)
Dividends paid (1,000 x 5 x 3 cents) (150)
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Net cash from financing activities 430
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Net increase in cash and cash equivalents 130
Cash and cash equivalents at beginning of period (120)
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Cash and cash equivalents at end of period 10
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Note: investment income received and dividends paid may alternatively be shown in operating activities.
Workings (in $’000)
(i) Property, plant and equipment:
carrying amount b/f 1,860
revaluation 100
depreciation for period (280)
disposal (240)
carrying amount c/f (2,880)
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difference is cash acquisitions (1,440)
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(ii) Income tax:
tax asset b/f 50
deferred tax b/f (30)
income statement charge (160)
tax provision c/f 150
deferred tax c/f 50
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difference is cash received 60
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(b) Comments on the cash management of Pinto
Operating cash flows:
Pinto’s operating cash inflows at $940,000 (prior to investment income, finance costs and taxation) are considerably higher
than the equivalent profit before investment income, finance costs and tax of $430,000. This shows a satisfactory cash
generating ability and is more than sufficient to cover finance costs, taxation (see later) and dividends. The major reasons for
the cash flows being higher than the operating profit are due to the (non-cash) increases in the depreciation and warranty
provisions. Working capital changes are relatively neutral; a large increase in inventory appears to be being financed by a
substantial increase in trade payables and a modest reduction in trade receivables. The reduction in trade receivables is perhaps surprising as other indicators point to an increase in operating capacity which has not been matched with an increase
in trade receivables. This could be indicative of good control over the cash management of the trade receivables (or a
disappointing sales performance).
An unusual feature of the cash flow is that Pinto has received a tax refund of $60,000 during the current year. This would
indicate that in the previous year Pinto was making losses (hence obtaining tax relief). Whilst the current year’s profit
performance is an obvious improvement, it should be noted that next year’s cash flows are likely to suffer a tax payment
(estimated at $150,000 in current liabilities at 31 March 2008) as a consequence. In any forward planning, Pinto should
be aware that the tax reversal position will create an estimated total incremental outflow of $210,000 in the next period.
Investing activities:
There has been a dramatic investment/increase in property, plant and equipment. The carrying value at 31 March 2008 is
substantially higher than a year earlier (admittedly $100,000 is due to revaluation rather than a purchase). It is difficult to
be sure whether this represents an increase in operating capacity or is the replacement of the plant disposed of. (The voluntary
disclosure encouraged by IAS 7 Statement of cash flows would help to assess this issue more accurately). However, judging
by the level of the increase and the (apparent) overall improvement in profit position, it seems likely that there has been a
successful increase in capacity. It is not unusual for there to be a time lag before increased investment reaches its full
beneficial effect and in this context it could be speculated that the investment occurred early in the accounting year (because
its effect is already making an impact) and that future periods may show even greater improvements.
The investment property is showing a good return which is composed of rental income (presumably) of $40,000 and a
valuation gain of $20,000.
Financing activities:
It would appear that Pinto’s financial structure has changed during the year. Debt of $400,000 has been redeemed (for
$420,000) and there has been a share issue raising $1 million. The company is now nil geared compared to modest gearing
at the end of the previous year. The share issue has covered the cost of redemption and contributed to the investment in
property, plant and equipment. The remainder of the finance for the property, plant and equipment has come from the very
healthy operating cash flows. If ROCE is higher than the finance cost of the loan note at 6% (nominal) it may call into question
the wisdom of the early redemption especially given the penalty cost (which has been classified within financing activities)
of the redemption.
Cash position:
The overall effect of the year’s cash flows is that they have improved the company’s cash position dramatically. A sizeable
overdraft of $120,000, which may have been a consequence of the (likely) losses in the previous year, has been reversed to
a modest bank balance of $10,000 even after the payment of a $150,000 dividend.
Summary
The above analysis indicates that Pinto has invested substantially in renewing and/or increasing its property, plant and
equipment. This has been financed largely by operating cash flows, and appears to have brought a dramatic turnaround in
the company’s fortunes. All the indications are that the future financial position and performance will continue to improve. |
发表于 2008-10-11 14:53
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