Statements of cash flows
Analysis & Interpretation
Problems
Review questions
Review Questions – Ch 05
1. Explain the information that a user can obtain from a cash flow statement that cannot be obtained from the current or comparative statements of financial position.
2. Many people preferred the direct method for cash flow preparation, but IAS 7 did not require it. Discuss possible reasons for allowing choice and the effectiveness of the IASB’s encouragement to companies to use the direct method.
3. A negative free cash flow is always a sign of a company in trouble. Discuss.
1. China Trading Company has just completed its first year of trading, to 31 August 20X9. The financial statements have been completed for taxation purposes, but a statement of cash flows was not included. Xin Huang, owner of China Trading Company, has provided you with the following information and asked you to prepare the statement of cash flows for the year.
DetailsCash Book
$
To open bank account40,000
Payments to suppliers978,300
Interest received5,400
Payments to staff545,000
Receipts from customers1,850,000
Drawings22,000
Sale of surplus office equipment8,000
Rent paid25,000
Purchase of Ford van33,500
Loan from owner25,000
Advertising5,000
Taxes paid109,000
PAYE paid136,250
Telephone and tolls3,500
Office expenses14,600
2.Your friend Freddie, the owner of Freddie’s Fashions Ltd, tells you that profits from his first year of trading were $450,000, but the bank balance is just $7,800. He does not understand why there is such a large difference between the profits and bank balance, and has asked you to explain the reasons to him. What would you tell him?
3Ch 05 - Question 7 Maytix – p.129
Review Questions – Ch 27
1.Explain:
(i) Basic earnings per share
(ii) Fully diluted earnings per share
(iii) Potential ordinary shares and
(iv) Limitations of EPS as a performance measure.
2.Why are issues at full market value treated differently from rights issues?
- Income smoothing describes the management practice of maintaining a steady profit figure.Explain why managers might wish to smooth the earnings figure. Give three examples of how they might achieve this.
4.Explain the relationship between EPS and the price/earnings (P/E) ratio. Why may the P/E ratio be considered important as a stock market indicator?
Problem
- Ch27 Question 1 – Alpha plc – p.699
Review Questions – Ch 28
1. (a) Explain the uses and limitations of ratio analysis when used to interpret the published financial accounts of a company.
(b) State and express two ratios that can be used to analyse each of the following:
(i) profitability
(ii) liquidity
(iii) management control.
(c)Explain briefly points which are important when using ratios to interpret accounts under each of the headings in (b) above.
2.Discuss why a company might decide to report EBITDA in addition to operating profit.
3.Discuss why an increasing current ratio might not be an indicator of better working capital management.
Problems
1Ch 28 Question 4 – Saddam Ltd – p.734
- Ch 28 Question 7 – Euroc Ltd – p.736
Review Questions – Ch 29
- Explain what you would look for when examining a company’s common-sized statement of financial position.
- Discuss the difficulties when attempting to identify comparator companies for benchmarking as, for example, when comparing relative performance with competitors.
3. Discuss Z-score analysis with reference to Altman’s Z-score. In particular,
(a) What are the benefits of Z-score analysis
(b) What are the criticisms levelled at Z-score analysis?
Problems
- Ch 29 Question 2 – Amalgamated Engineering – p.774
- Handout Exercise 5 –Wholesale Distributors Ltd – p.323 of handout
You should also be working through the Briscoe exercise as this will provide guidance for completing the Assignment.