You are the management accountant of Holmes plc and you are in the process of preparing the consolidated cash flow statement. Your Managing Director is aware that the statement is required by FRS 1 - Cash flow statements, and that a number of notes to the statement must also be included. She has a reasonable understanding of the rationale behind the cash flow statement but is not clear as to why so many notes to the statement are required.

Requirements

(a) Prepare the consolidated cash flow statement of the Holmes group for the year ended 30 September 1999 in the form required by FRS 1 - Cash flow statements.

Show your workings clearly.

Do not prepare notes to the cash flow statement.

(30 marks)

(b) Write a memorandum to your Managing Director which explains the need for the following notes to the cash flow statement:

- reconciliation of operating profit to operating cash flows;

- reconciliation of net cash flow to movement in net debt;

- summary of the effect of the acquisition of Watson plc.

Extracts from the consolidated financial statements of Holmes plc are given below:
Do not prepare any of these three notes for Holmes plc.

From time to time, the group invests cash surpluses in listed securities which are shown as current asset investments in the consolidated balance sheet.
Note 2 - exceptional item This represents the gain on sale of a large freehold property sold by Holmes plc on 1 October 1998 and leased back on an operating lease in line with the practice adopted by the rest of the group. The property was not depreciated in the current year. The property had been revalued in 1990 and the revaluation surplus credited to a revaluation reserve. No other entries had been made in the revaluation reserve prior to the sale of the property.
Note 3 - intangible fixed assets This comprises the unamortised balance of goodwill on consolidation which is written off over its useful economic life. During the year ended 30 September 1999, Holmes plc purchased \(80 \%\) of the issued equity share capital of Watson plc for \(£ 100\) million payable in cash. The net assets of Watson plc at the date of acquisition were assessed as having fair values as follows:

The goodwill arising was assessed as having a useful economic life of 16 years and a full year's write-off was made in the year ended 30 September 1999. Apart from the acquisition of Watson ple, there were no other changes to the group structure in the year.

During the year the group entered into new finance lease agreements in respect of some items of plant and machinery. The amounts debited to fixed assets in respect of such agreements during the year totalled \(£ 40\) million. No disposals of plant and machinery (owned or leased) or fixtures and fittings took place during the year. Depreciation of tangible fixed assets for the year totalled \(£ 58\) million.
\section*{Note 5 - trade creditors}
Trade creditors at 30 September 1999 and 30 September 1998 do not include any accrued interest.
Note 6 - other creditors These comprise dividends payable to minority shareholders.

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Consolidated profit and loss accounts for the year ended Turnover 30 September 1999 million million Cost of sales Gross profit Other operating expenses (Note 1) Group operating profit Share of operating profit of associates Interest payable: group associates Profit before exceptional item Exceptional item (Note 2) Profit before taxation Taxation: group associates million 30 September 1998 million 600 500 (300) 300 (150) (240) 260 (130) 150 130 40 35 50 45 15 10 (65) (55) 125 110 10 135 110 3% 35 8 201 25 8 (43) Profit after taxation Minority interests Group profit Equity dividends Retained profit for year Consolidated balance sheets at Fixed assets Intangible assets (Note 3) 92 (10) 82 (25) 57 30 September 1999 30 September 1998 million million million million 25 19 Tangible assets (Note 4) 240 280 Investments in associates 80 70 345 369 Current assets Stocks Debtors 105 90 120 100 Investments 20 70 Cash in hand 10 5 255 265 Creditors falling due within one year Trade creditors (Note 5) 40 30 Taxation 10 8 Proposed dividends 25 25 Obligations under finance leases 25 20 Other creditors (Note 6) 6 5 Bank overdraft 20 80 126 168 Net current assets 129 97 Carried forward 474 466