Explore BrainMass

Explore BrainMass

    Multiple Choice relating to balance sheet and cash flow

    Not what you're looking for? Search our solutions OR ask your own Custom question.

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    *Please see attachment for company's 30 June 2003 and 2004 Balance Sheet and other additional information.

    Required

    (a) Calculate the operating profit for the year ended 30 June 2004.
    (b) Prepare a reconciliation of the operating profit for the year ended 30 June 2004 to the net cash flow from operating activities.
    (c) Prepare a cash flow statement for the year ended 30 June 2004.
    (d) Prepare a statement showing the change in the bank balance between 30 June 2003 and 30 June 2004.
    (e) Explain why a cash flow statement is important to shareholders.
    (f) Explain how cash flow statements differ from cash budgets.

    © BrainMass Inc. brainmass.com September 26, 2022, 9:54 pm ad1c9bdddf
    https://brainmass.com/business/balance-sheet/operating-profit-cash-flow-statements-36620

    Attachments

    SOLUTION This solution is FREE courtesy of BrainMass!

    7. Prior to the acquisition, shareholders funds were 130,000. Shareholders funds include the share capital, share premium, retained earnings and profit and loss account. This is so since the amounts in all these cases belong to the shareholders. Share capital and share premium are directly given by the shareholders and the retained earnings and profit and loss account are the amounts earned by the company by utilizing the shareholders funds. Thus these four elements constitute the shareholders funds. In this example they total to 130,000 prior to acquisition. For the purpose of acquisition, 30000 $ 1 ordinary shares were issued at a premium of 100%. This means that they were issued at $2 and the amount realized was 60,000. The total shareholders funds would become 130000+60000=190,000.
    Answer is C

    8. The directors emoluments are not included in the directors report. They are included separately in the annual report under Director Emoluments. They form the part of annual report but not a part of Directors Report.
    Answer A

    9. The level of dividends paid gives an indication of the company's long-term capital investment policy. This is so since retained earnings always form a significant component of capital investments to be made by the company. The company depends on retained earnings since they are available to use by the company without much problem, since the directors can decide how much to retain. Raising fresh equity or debt is time consuming and expensive. Thus level of dividends give an indication of the capital investments. A high level of dividends shows that not much capital expenditure will be taken up by the company and the earnings are being given to the shareholders. Similarly a low level of dividends signifies that the company wishes to invest substantially in capital investments.
    Answer C

    10. This is from the accounting standard FRS10/IAS10 which gives the material events to be adjusted in the balance sheet after the date. It lists a debtor in the balance sheet subsequently becoming bankrupt as a material event.
    Answer B

    11. This is important since changes in depreciation have an material effect on the Profit and Loss Statement. Therefore by disclosing the changes, proper comparison with previous years can be made.
    Answer B

    12. Interest cover is the number of times the interest amount can be paid from the Earnings Before Interest and Taxes ( also called Operating Profit). This is calculated by dividing operating profit by the interest amount. The higher the value it shows that company is in a good position to pay the interest. The interest cover ratio tells us the safety margin that the business has in terms of being able to meet its interest obligations. That is, a high interest cover ratio means that the business is easily able to meet its interest obligations from profits. Similarly, a low value for the interest cover ratio means that the business is potentially in danger of not being able to meet its interest obligations.
    In this case Operating Profit is 200 and interest is 40, therefore interest cover is 200/40=5.
    Dividend cover is number of times dividends (amount) can be paid from Profit after Tax after paying off the preference dividend, if any. The amount should be the balance left after all obligations have been taken care of and only equity shareholders are left. In this case it is 125-25 ( reduce the preference shares, since they are a fixed obligation before equity shares)=100 divided by the dividend of 50. The dividend cover is 100/50=2
    Answer C.

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    © BrainMass Inc. brainmass.com September 26, 2022, 9:54 pm ad1c9bdddf>
    https://brainmass.com/business/balance-sheet/operating-profit-cash-flow-statements-36620

    ADVERTISEMENT