Coaltown is a wholesaler and retailer of office furniture. Extracts from the companys financial statements are set out below:

Statements of comprehensive income for the year ended:

31 March 2009

31 March 2008

Revenue

Cost of sales

cash credit

$000

12,800

53,000

(380)

(220)

$000

65,800

(43,800) 22,000

(11,200)

$000

26,500

28,500

$000

55,000

(33,000) 22,000

(6,920)

(180) 14,900

(4,400) 10,500

1,200 11,700

$000 Total

26,800 12,900 12,000

(4,000) 47,700

$000

80,000 (48,000)

32,000

7,900 39,900

Gross profit

Operating expenses

Finance costs loan notes

overdraft

Profit before tax Income tax expense

Profit for period

Other comprehensive income Gain on property revaluation

Total comprehensive income for the year

(180) (600) nil

10,200 (3,200)

7,000

5,000 12,000

Statement of changes in equity for the year ended 31 March 2009:

$000

Equity

shares premium

8,000 500 8,600 4,300

16,600 4,800

Statements of financial position as at 31 March:

$000 $000

Assets

Non-current assets (see note)

Cost 93,500 Accumulated depreciation (43,000)

50,500

Current assets

Inventory 5,200

Trade receivables 7,800

Bank nil 13,000

$000 reserve

2,500

5,000

7,500

$000 earnings

15,800

7,000 (4,000)

Balances b/f

Share issue Comprehensive income Dividends paid

Balances c/f

18,800

$000

4,400 2,800 700

Total assets

63,500

2009

2008

$000

Share Revaluation Retained

Equity and liabilities

Equity shares of $1 each 16,600 Share premium 4,800 Revaluation reserve 7,500 Retained earnings 18,800

47,700

Non-current liabilities

10% loan notes 4,000 Current liabilities

Bank overdraft 3,600

Trade payables 4,200

Taxation 3,000

nil 4,500 5,300 300

8,000 500 2,500 15,800 26,800

3,000

10,100 39,900

Warranty provision

Total equity and liabilities

Note

Non-current assets

1,000 11,800 63,500

During the year the company redesigned its display areas in all of its outlets. The previous displays had cost $10 million and had been written down by $9 million. There was an unexpected cost of $500,000 for the removal a nd disposal of the old display areas. Also during the year the company revalued the carrying amount of its property upwards by $5 million, the accumulated depreciation on these properties of $2 million was reset to zero.

All depreciation is charged to operating expenses.

Required:

(a) Prepare a statement of cash flows for Coaltown for the year ended 31 March 2009 in accordance

with IAS 7 Statement of Cash Flows by the indirect method. (15 marks)

(b) The directors of Coaltown are concerned at the deterioration in its bank balance and are surprised that the amount of gross profit has not increased for the year ended 31 March 2009. At the beginning of the current accounting period (i.e. on 1 April 2008), the company changed to importing its purchases from a foreign supplier because the trade prices quoted by the new supplier were consistently 10% below those of its previous supplier. However, the new supplier offered a shorter period of credit than the previous supplier (all purchases are on credit). In order to encourage higher sales, Coaltown increased its credit period to its customers, and some of the cost savings (on trade purchases) were passed on to customers by reducing selling prices on both cash and credit sales by 5% across all products.

Required:

(i) Calculate the gross profit margin that you would have expected Coaltown to achieve for the year ended 31 March 2009 based on the selling and purchase price changes described by the directors; (2 marks)

(ii) Comment on the directors surprise at the unchanged gross profit and suggest what other factors may have affected gross profit for the year ended 31 March 2009; (4 marks)

(iii) Applying the trade receivables and payables credit periods for the year ended 31 March 2008 to the credit sales and purchases of the year ended 31 March 2009, calculate the effect this would have had on the companys bank balance at 31 March 2009 assuming sales and purchases would have remained unchanged. (4 marks)

Note: the inventory at 31 March 2008 was unchanged from that at 31 March 2007; assume 365 trading

days.