Question
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
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? RESPOND TO ANNS QUESTIONS
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