3 Pinto is a publicly listed company. The following financial statements of Pinto are available:
Profit and loss account for the year ended 31 March 2008 £’000
Turnover 5,740
Cost of sales (4,840)
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Gross profit 900
Distribution costs (120)
Administrative expenses (note (ii)) (350)
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Operating profit 430
Income from and gains on investment property 60
Finance costs (50)
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Profit before tax 440
Tax (160)
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Profit for the year 280
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Balance sheets as at 31 March 2008 31 March 2007
£’000 £’000 £’000 £’000
Fixed assets
Tangible assets (note (i)) 2,880 1,860
Investment property 420 400
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3,300 2,260
Current assets
Stock 1,210 810
Debtors 480 540
Tax asset nil 50
Bank 10 nil
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1,700 1,400
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Creditors: amounts falling due within one year
Bank overdraft nil 120
Creditors 1,410 1,050
Warranty provision (note (iv)) 200 100
Taxation 150 nil
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(1,760) (1,270)
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Net current assets (liabilities) (60) 130
Creditors: amounts falling due after more than one year
6% loan notes (note (ii)) nil (400)
Provisions for liabilities
Deferred tax (50) (30)
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3,190 1,960
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Capital and reserves
Equity shares of 20 pence each (note (iii)) 1,000 600
Share premium 600 nil
Revaluation reserve (note (i)) 150 50
Profit and loss account 1,440 2,190 1,310 1,360
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3,190 1,960
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The following supporting information is available:
(i) The increase in the revaluation reserve is attributable to a revaluation of Pinto’s property during the year.
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 tangible fixed assets the year ended 31 March 2008.
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 profit and loss account.
(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 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 pence per share was paid on 1 January 2008.
Required:
(a) Prepare a cash flow statement for Pinto for the year to 31 March 2008 in accordance with FRS 1 Cash Flow
Statements. (15 marks)
(b) Comment on the cash flow management of Pinto as revealed by the cash flow statement 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) Cash flow statement of Pinto for the Year ended 31 March 2008:
Reconciliation of operating profit to net cash inflow from operating activities
£’000 £’000
Operating profit 430
Adjustments for:
Redemption penalty costs included in administrative expenses 20
Depreciation charges 280
Loss on sale of tangible fixed assets 90 370
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Working capital adjustments
Increase in stock (1,210 – 810) (400)
Decrease in debtors (540 – 480) 60
Increase in warranty provision (200 – 100) 100
Increase in creditors (1,410 – 1,050) 360 120
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Net cash inflow from operating activities 940
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Cash Flow Statement
Net cash inflow from operating activities 940
Returns on investments and servicing of finance (note 1) (10)
Tax refund (w (i)) 60
Capital expenditure (note 1) (1,290)
Equity dividends paid (1,000 x 5 x 3 pence) (150)
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Cash outflow before financing (450)
Financing (note 1) 580
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Increase in cash (120 + 10) 130
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Note 1 Gross cash flows
Returns on investment and servicing of finance
Investment income received (60 – 20 gain on investment property) 40
Finance costs paid (50) (10)
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Capital expenditure
Purchase of tangible fixed assets (w (ii)) (1,440)
Sale of tangible fixed assets (240 – 90) 150 (1,290)
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Financing
Proceeds from issue of equity shares (400 + 600) 1,000
Redemption of loan notes (400 plus 20 penalty) (420) 580
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Workings (in £’000)
(i) Tax:
tax asset b/f 50
deferred tax b/f (30)
profit and loss account 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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(ii) Tangible fixed assets:
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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(b) Comments on the cash management of Pinto
Operating cash flows:
Pinto’s operating cash inflows at £940,000 are considerably higher than operating profit 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 stock appears to be being financed by a substantial increase in creditors and a modest reduction in debtors. The reduction in debtors is perhaps surprising as
other indicators point to an increase in operating capacity which has not been matched with an increase in debtors. This
could be indicative of good control over the cash management of the debtors (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 the balance sheet 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.
Capital expenditure:
There has been a dramatic investment/increase in tangible fixed assets. Their carrying amount 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 assets disposed of. However, the
net expenditure of £1,290,000 is much higher than the depreciation of the tangible fixed assets and, coupled with 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:
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
tangible fixed assets. The remainder of the finance 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) 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 tangible fixed assets. 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 15:36
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