Anne Jakao, the CEO and major shareholder of AJK Limited, a small retail supermarket, recently submitted a loan application for Ksh.15 million for AJK Limited to Kenya Bank Limited. The loan was to be act as bridging finance to assist in the opening of a new store in a neighboring country. The credit officer of the bank requested for a statement of cash flows in addition to the most recent statement of comprehensive income, statement of changes in equity and statement of financial position that Anne had earlier submitted.

As a close family friend, Anne has asked you to assist the accounts clerk of AJK Limited prepare a statement of cash flows. From the records provided to you, you prepared the following statement:

AJK Limited

Statement of Cash Flows

For the period ended June 30, 2021

Cash flow from operating activities	Sh000
Profit for the period	8,250
Add: Depreciation	2,550
Gain on sale of investments	(500)
Operating profit before working capital changes	10,300
Decrease in receivables	900
Increase in inventories	(750)
Increase in prepaid expenses	(50)
Decrease in accounts payable	(200)
Cash generated from operations	10,200
Income tax paid	(300)
Net cash from operating activities	9,900
Cash flow from investing activities
Proceeds from sale of investments	3,500
Purchase of land	(4,000)
Purchase of stores equipment	(3,000)
Net cash used by financing activities	(3,500)
Cash flow from financing activities
Proceeds from issue of shares	4,000
Dividend paid	(5,000)
Net cash used by financing activities	(1,000)
Change in cash and cash equivalents	5,400
Cash and cash equivalent, beginning	4,000
Cash and cash equivalent, ending	9,400

After reviewing the statement, Anne telephoned you and commented, Are you sure this statement is right? She also raised the following questions:

(i) Which format did you use to present the cash flows from operating activities?

(ii) Is depreciation a source of cash? How is it that depreciation is included in the statement of cash flows?

(iii) Ordinary shares were issued to raise cash that was used to purchase land. This transaction had nothing to do with cash. Should not the two items related to this transaction be eliminated altogether from the statement?

(iv) Why is the gain from sale of investment reported separately from the proceeds from the sale of the investment? Should not the two items be combined in one so that it is only the book value that is reported?

(v) Why does the bank need the statement of cash flows? Can they not compute the increase in cash and cash equivalents from the statement of financial position for the last two years?

Required

(a) Respond to Annes questions

(b) Do you think the statement of cash flows enhances AJK Limiteds chances of receiving the loan? Explain