Week 8b - Creating a Cash Flow Statement

Question 1

How will cash flow statement problems normally be presented in questions where you are required to draw up a CFS?

Answer 1

CFS problems will normally be presented as two consecutive years’ statements of financial position and from this, and some accompanying notes, the cash flows in and out can be deduced

Question 2

Using the following information, from two consecutive years of statement of financial positions, deduce the cash flows in and out for the business and provide an explanation as to how you came to this result

Year 1
Fixed assets = £400,000
Ordinary share capital = £1,200,000
Bank overdraft = £20,000
Long-term loans = £560,000

Year 2
Fixed assets = £320,000
Ordinary share capital = £1,500,000
Bank = £50,000
Long-term loans = £300,000

Answer 2

Explanation

• If there have been no fixed asset sales or acquisitions, then there has been depreciation of £80,000 (add back to operating profit figure)

- Share issue of £300,000 – however check share 
premium account (cash in)

• Positive cash flow for the year of £70,000 – this will be the final figure in the CFS
• Repaid £260,000 of loan (cash out)

Question 3

Example of a Cash Flow Statement Problem

SOFPs of McCluskey Manufacturing as at 31 December
2016 (£m) 2017(£m)
Non-current assets
Property, plant and equipment 435 412
Fixtures and fittings 163 180
Patents and trademarks 37 32
635 624
Current assets
Inventory 41 35
Trade receivables 139 145
Bank 2 5
182 185
Total assets 817 809

Capital and reserves
Ordinary share capital 260 260
Share premium account 49 49
Profit and loss account 103 147
General reserve 70 110
482 566
Non-current liabilities
Long-term loans 250 150
Current liabilities
Overdraft 8 34
Trade payables 39 30
Corporation tax 23 18
Accruals 15 11
85 93
Total liabilities 817 809

• You are also given the following information:
• During 2017 the business spent £67 million on additional fixtures and fittings. There were no further acquisitions or disposals of any other property, plant and equipment or fixtures and fittings.
• The taxation charge for 2017 was £36 million.
• Interest charged for the year was £26 million. Interest received was £14 million

Task:
• Prepare the cash flow statement for McCluskey Manufacturing plc as at 31/12/2017; and
• Provide a brief analysis of McCluskey Manufacturing plc using the cash flow statement

Answer 3

•The first thing we need to establish is the operating profit
• We can see from the SOFPs that the profit and loss account was £103m in 2016 and £147m in 2017, this is an increase of £44m
• However, the general reserve has also increased from £70m in 2016 to £110m in 2017, which is an increase of £40m. As this amount would have come from the profit for 2017 this amount can also be added
• We can also add the tax charged for 2017, this is not the same as the tax paid (which will be dealt with later), and according to the notes is £36m
• Therefore the operating profit = £44m + £40m + £36m, which = £120m
• We can see from the notes that were no disposals of any property, plant and equipment or fixtures and fittings, therefore we do not need to consider any profit or loss on disposal
• We can therefore start to look at the depreciation
• The figure for property, plant and equipment is simply the difference between the figures for 2016 and 2017; i.e. £435m and £412m, meaning depreciation of £23m
• However, when working out the depreciation for fixtures and fittings we have to consider the purchase of £67m worth of assets. If there had been no depreciation, the figure in 2017 would have been £163m + £67m, or £230m. However, the figure for 2017 is £180m, therefore there must have been depreciation of £50m – depreciation is added to operating profit
• We can now start to look at the changes in working capital
• Inventory decreased from £41m to £35m, which is a
decrease of £6m – this is added to the operating profit figure
• Trade receivables increased from £139m to £145m, which is a increase of £6m – this is subtracted from the operating profit figure
• Trade payables decreased from £39m to £30m, which is a decrease of £9m – this is subtracted from the operating profit figure
• Accruals decreased from £15m to £11m, which is a
decrease of £4m – this is subtracted from the operating profit figure
• We can now look at interest and tax
• According to the notes the interest paid was £26m and that received was £14m, these are added and subtracted from the profit respectively as they will be dealt with in the finance section of the CFS
• The tax paid (as opposed to charged) is calculated by adding the tax charged (£36m) to the tax owing at the end of 2016 (£23m). Therefore, the amount outstanding at the end of 2017 should be £59m, so as it is £18m, £41m must have been paid in tax
• We can now complete the first part of the CFS

Cash Flow Statement for McCluskey Manufacturing plc for the year ended 31stst December 2017

Operating activities £m £m
Profit before tax 120
Plus depreciation on fixtures and fittings 50
Plus dep. on property, plant and equipment 23
Plus interest paid 26
Plus decrease in inventory 6 105
Less increase in trade receivables (6)
Less decrease in trade payables (9)
Less decrease in accruals (4)
Less interest received (14) (33)
Taxation paid (41)
Net cash inflow from operating activities 151

• We now look at the investment part of the CFS
• We were told in the notes that £67m of fixtures and fittings were purchased, this represents cash going out of the business
• The patents and trademarks have also decreased by £5m, which is money coming into the business (i.e. they were sold). Due to a lack of information this could also have been caused by amortisation, which would have been treated like depreciation and added to the operating profit; however the overall result is the same
• We now look at the finance part of the CFS
• There is no change to ordinary share capital, therefore no shares have been issued or sold
• However, the long term loan has reduced from £250m to £150m, which means £100m of this has been paid back
• We also have to take off the interest paid (£26m) and add the interest received (£14m).
• We can now complete the CFS

Cash Flow Statement for McCluskey Manufacturing plc for the year ended 31stst December 2017
£m £m
Net cash inflow from operating activities 151
Investing activities
Purchase of fixtures and fittings (67)
Disposal of patents and trademarks 5
Net cash outflow from investing activities (62)
Financing activities
Repayment of long-term loan (100)
Interest paid (26)
Interest received 14
Net cash outflow from financing activities (112)
Decrease in cash or cash equivalents (23)

• According to the CFS there was an outflow of cash of £23m between 2016 and 2017. We must now double check that this is correct
• In 2016 the company had a bank balance of £2m and an overdraft of £8m, whereas in 2017 the bank balance was £5m and the overdraft was £34m.
• Therefore whilst the bank had increased by £3m, the
overdraft had also increased by £26m
• This confirms the fact that there was an outflow of cash of £23m between 2016 and 2017

• There are two ways you can calculate the reconciliation of the bank/overdraft balances to the final figure in the CFS:
• Annual cash flow:
• In 2016 there was £2m in the bank and an overdraft of -£8m, therefore the cash flow was -£6m
• In 2017 there was £5m in the bank an overdraft of -£34m, therefore the cash flow was -£29m. This represents a cash flow between 2016 and 2017 of -£23m
• Changes in bank balance and overdraft between the years:
• In 2016 there was £2m in the bank and in 2017 this figure was £5m, an increase of £3m
• In 2016 the overdraft was -£8m and in 2017 it was -£34m, an increase of -£26m. So, £3m and -£26m represents a negative cash flow of £23m.

•We can now start to analyse the CFS
•Some valid points are as follows
•The company is receiving a good cash inflow from its
operating activities
•Its trade receivables have increased slightly, which will
have to be monitored, but the inventory and trade payables have both gone down, which is a sign that stock is being sold and the company is able to pay its suppliers
•The company has made a large purchase in fixtures and
fittings and this may have led to the increase in profits for the year
•The company has also been able to pay off a substantial
amount of its long-term liabilities, which again
demonstrates a healthy position
•However, the bank overdraft has increased by a
considerable amount during the year, and this must be e
looked into, as it would appear to be at odds with the other activities during the year
•Perhaps the purchase of fixtures and fittings will lead to
increased sales next year, and the company will have to
ensure receivables pay in a timely manner so they are able to reduce their overdraft.