Question 2 The CEO of Allied Products considers R.20 000 to be a minimum cash balance for operating purposes. As can be seen from the l/S and B/S below, only R15 000 in cash was available at the end of 2010. Since the company reported a large net income for the year, and also issued bonds and sold long-term investments, the sharp decline in cash is puzzling to the CEO. 2.1 Use the 1/S, B/S and attached CFS Spreadsheet to draw up a cash flow statement (CFS) for Allied Products for the year 2010 (22) Note the following Some of the CFS entries are already calculated and entered on the spreadsheet and must therefore just be transferred to the CFS - Net cash provided by operating activities (Rx 10) = 21 - Net cash used in investing activities (R x 10)=-106 - Net cash used in financing activities (Rx 10")=67 2.2 Briefly explain why the loss on the sale of equipment is recorded as a positive value (R6) and the gain on the sale of long-term (LT) investments is negative (-F20) respectively. 2.3 Explain to the CEO the major reasons for the decline in the company's cash position. (6) [32] ALLIED PRODUCTS Comparative Balance Sheet 31 December 2010 and 2009 (rands x 10 ALLIED PRODUCTS Income Statement Year ended 31 December 2010 (rands x 10 Sales Less Cost of sales Gross Margin Less Operating expenses: Net operating income 2010 2009 3885 | BOO 500 300 214 86 33 210 196 15 20 Assets Current assets: Cash Accounts receivable Inventory Prepaid expenses Total current assets Long term investments Plant and equipment Less accumulated depreciation Net plant and equipment Total assets Non-operating Items: Gain on sale of investments Loss on sale of equipment Income Before Taxes 454 15 300 250 7 572 90 860 210 650 1312 6 120 14 100 750 190 Less income taxes 30 560 1134 Net income 70 275 8 230 15 Liabilities and Stockholder's Equity Current liabilities: Accounts payable Accrued liabilities Total current liabilities Bonds payable Deferred income taxes Total liabilities Stockholders' equity: Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders equity 283 200 42 245 100 39 384 525 595 500 192 150 750 787 1312 1134 2 CFS Spreadsheet ALLIED PRODUCTS Statement of Cash Flows Worksheet For the Year Ended 31 December 2010 (1) (2) (3) (4) Cash 2010 2009 Change Source/Use Flow Adjust Effect Assets (except cash and cash equivalents) Current assets: Accounts receivable Merchandise inventory Prepaid expenses 7.00 15.00 -8.00 Source 8.00 (5) (6) Adjusted Classification Effect 8.00 Operating Noncurrent assets Plant and Equipment Long-term investments 860 90 750 120 110 -30 Use Source -110 30 90 -30 -200 Investing O Investing Contra Assets, Liabilities and Stockholders' Equity Contra assets: Accumulated depreciation 210 20 Source 190 20 40 60 Operating Current liabilities Accounts payable Accrued liabilities 8 15 -7 Use -7 Operating Noncurrent liabilities Bonds payable Deferred income tax Stockholder's equity: Common stock Retained earnings: Net income Dividends 28 -28 Use -28 -28 Financing Additional Entries Praceeds from sale of equipment Loss on sale of equipment Proceeds from sale of LT Investment Gain on sale of LT investments 44 6 SO -20 44 Investing 6 Operating 50 Investing -20 Operating