CLASSIFICATION OF CASH FLOWS The accountant for Delta Ltd prepared the following statement of cash flows. DELTA LTD Statement of cash flows for the year ended 30 June 2019 $’000 Cash flows from operating activities Cash received from customers 870 Cash paid to suppliers of goods and services (650 Interest received 40) Interest paid (200) Income tax paid (100) Net cash outflow from operating activities (40) Cash flows from investing activities Cash received from sale of investments 300 Cash paid for purchase of property, plant and equipment (400) Net cash outflow from investing activities (100) Cash flows from financing activities Proceeds from borrowings 160 Dividends paid (30) Net cash inflow from financing activities 130 Net decrease in cash and cash equivalents (10) Cash and cash equivalents at the beginning of the year 15 Cash and cash equivalents at the end of the year 5 The managers were worried that investors would be displeased by the negative operating cash flow and that the company’s share price might fall as a result. One manager suggested that the interest paid and interest received might be classified as financing cash flows and investing cash flows respectively, so that the company’s cash flow would look better. Required 1. Calculate the net cash flows for each activity if Delta Ltd reclassified interest paid and interest received as suggested by the manager. 2. Drawing on your understanding of the efficient market hypothesis (see chapter 2), is the change in the classification of interest paid or received in the statement of cash flows likely to make a difference to the share price? Give reasons for your answer. CASE STUDY