Accounting Business Reporting for Decision Making

306 Accounting: Business Reporting for Decision Making

(continued)

Harvey Ltd

Statement of cash flows for the year ended 31 December 2017

$’000

Cash flows from investing activities

Payments for property, plant and equipment (257)

Net cash flows from investing activities (257)

Cash flows from financing activities

Proceeds from shares issue

Proceeds from borrowings

Repayment of borrowings

Distributions paid

50

250

(50

(20

)

)

Net cash flows from financing activities 230

Net increase/decrease in cash for the year

Cash at beginning of the financial year

(4

12

)

Cash at the end of the financial year 8

Step 5: Reconcile cash from operating activities with profit

$’000

Profit after tax

+ Depreciation

(Increase)/decrease in inventory

(Increase)/decrease in accounts receivable

(Increase)/decrease in prepaid expenses

Increase/(decrease) in accounts payable

Increase/(decrease) in tax payable

Increase/(decrease) in accruals

46

7

(7

(3

(6

1

(8

(7

)

)

)

)

)

Net cash flows from operating activities 23

7.3 Examine the statement of cash flows prepared for Harvey Ltd in self-evaluation activity 7.2.

Evaluate the cash performance of Harvey Ltd by conducting a general evaluation and ratio analysis.

SOLUTION TO 7.3

• The cash flows from operating activities of $23 000 is lower than the operating profit of $46 000.
  The reconciliation shows that, generally, current asset accounts increased while liability accounts
  decreased. This means that the entity now has more cash tied up in working capital than it had
  in the previous year.


• There was a large investment in property, plant and equipment. This was funded by an increase
  in borrowings of $200 000 and a share issue of $50 000.


• The increase in borrowings means that there will be an increase in interest payable in the future.
  This, together with an increase in equity, will put pressure on the cash from operating activities
  to fund larger future interest and dividend payments. A watchful eye over working capital will be
  needed. Hopefully, the planned expansions will result in increased sales and profit and thereby
  an increase in cash from operating activities.


• Ratio analysis shows the following.

Ratio Calculation Harvey Ltd

Cash adequacy ratio Cash from operating activities

Capital expenditure + Dividends paid

$23

$257 + $20

= 0.08 times or 8%

Cash flow ratio

(Liquidity)

Cash from operating activities

Current liabilities

$23

$109

= 0.211 times or 21.1%