You are given the following summarized statements of financial position and income statements for the Solverham Company for the past two years.

Dividends paid in year 1 were £10,000, and in year 2 were £15,000 a Prepare a cash flow statement for the year ended 31 December year 2.

b Explain how cash flow differs from profit.

c The company’s managing director is pleased that the company has money in the bank having paid off a significant overdraft. He is particularly pleased that he ignored his chief accountant, who said that the company could not afford to buy more fixed assets or to increase the dividend. Critically assess the chief accountant’s advice.

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Statement of financial position as at 31 December Non-current assets at cost Provision for depreciation Net book value Current assets Inventories Receivables Year 1 Year 2 000 000 000 000 200 220 (60) (82) 140 138 Cash Total assets 95 70 80 50 = | 175 25 145 315 283 Liabilities and equity Current liabilities Payables 40 60 Overdraft 80 120 60 Non-current liabilities 12% debentures 110 135 Equity Share capital 50 50 Retained earnings 35 85 38 88 315 283