Homework

Solutions Topic 8

Tutorial Homework Questions:

 Q1: Question 3 – Final Exam 2013s1 - Adapted

 Q2: Additional Question 1 – Wine & Knight Ltd
 Q3: Additional Question 2 - One.Tel (adapted from TGC)
 Q4: Additional Question 3 – Silver Wheaton Corp
 Q5: Additional Question 4 – Argonaut Gold
 Q6: Question 1, Mid-session Exam 2006s2 (modified)

Q1: Question 3 – Final Exam 2013s1 - Adapted

MintyFresh Ltd
Reconciliation Note
30 June 2016

$000 $000
Net Profit after tax 19
Permanent Differences:
+ Depreciation expense 3 22

Timing Differences:
- Increase in Accounts receivable (1)
- Decrease in Allowance for doubtful debts (9)
- Decrease in Accounts payable (5)
+ Increase in Accrued expenses 39 24

Cash flows from Operations $46

Workings:

Acc. Depreciation - PPE

DR CR
Write off 29 46 o/b
c/b 20 3 Exp.
49 49

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Q2: Additional Question 1 – Wine & Knight Ltd

Wine & Knight Ltd

Reconciliation Note
31 December 2014
$000 $000

Net Profit after tax 64

Permanent Differences:
+ Depreciation expense 8 72

Timing Differences:
+ Decrease in Accounts receivable 6
- Increase in Inventory (4)
+ Decrease in Prepaid interest expense 2
- Decrease in Accounts Payable (32)
+ Increase in Income tax payable 8
+ Increase in Accrued expenses 2 (18)

Cash flows from Operations $54

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Q3: Additional Question 2 - One.Tel (adapted from TGC)
(A) Answer the following based on One.Tel’s Cash Flow Statement:

(i) What is the most important cash flow activity for One.Tel and why?

Suggested answer:

The section is cash flows from operations and the individual cash flow is receipts
from customers – this should be larger than payments to suppliers but this is not the
case for One.Tel.

Other answers are acceptable – as long as a reason is provided.

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(ii) What cash flow trend is most concerning for long-term stability of One.Tel?
Suggested answer:

It is concerning that cash flows from operations continues to be negative while the
majority of cash inflows come from financing activities. There needs to be positive
cash flows in operations to ensure the long-term stability of One.Tel. Ideally by 2000
we should see positive cash flows in operations and financing activities can’t always
be relied on to be positive (i.e. investors and lenders will stop funding the company
eventually and require a return of funds).

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(iii) Is it normal for cash flows from investing activities to be negative – Explain why
One.Tel’s is negative in 2000?

Yes, it is normal if a company is starting up and investing then this cash flow will be
negative. One.Tel’s investing activities is negative because it has purchased plant and
equipment, licences and they have paid some deferred consideration. Potentially the
licences and plant & equipment should assist in generating future revenue and thus
cash inflows in operations – that is if they are good purchases.

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(B)

(i) Analyse One.Tel’s Cash Flow statement – indicate what lifecycle stage the
company is in during the following years and provide reasons:

1999: Start-up phase – as the cash flows from operations as small and negative, there
are inflows from financing activities including from a share issue and investing
activities are negative.

2000: Start-up phase, although the size of the outflow in cash flows from operations is
concerning – i.e. evidence that the company may be in distress, there are still positive
cash inflows in financing and cash outflows in investing activities.

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(ii) Indicate one cash flow in 1999 that affects the 2000 cash flows and what is the
affect on cash flows?

The investment in long-term assets of licences and plant and equipment in 1999
should have helped to generate more inflows in operations. This is the case however,
cash receipts from customers is still a smaller amount than cash paid to suppliers.

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Q4: Additional Question – Silver Wheaton Corp

PART A
(i) Analyse Silver Wheaton’s Cash Flow statement – indicate what lifecycle stage the
company is in during the following years and provide reasons:

2012: The company appears to be approaching maturity phase – as cash flows from
operations are positive (inflow) and cash flows from financing is negative (outflow).
Cash flows in investing activities are negative (outflow) – although this is a smaller in
magnitude than operating and financing activities.

2013: The company appears to be somewhere between start-up to maturity – similar

pattern to 2012, except that cash flows in financing is positive – suggesting
expansion. The investing activities are a greater negative (outflow) for the 2013 year.

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(ii) Indicate one cash flow in 2012 that affects the 2013 cash flows and what is the
affect on cash flows?

Investments in silver and gold interest in, within the investing activities, 2012 should
have resulted in an increase in cash flows from operations in 2013. The cash flows in
operations do not appear to have increased – perhaps these investments were not
overly successful (or another part of the operations was not as profitable as in the
prior year).

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PART B – Refer to the cash flow statement and the article above on Silver Wheaton
Corp. Answer the following questions:

(i) Indicate where the cash flows are they going (use) and why (purpose)?

Cash flows are being used to repay debt and pay dividends within the financing
section. In investing activities the cash is being used in the silver and gold interests
and other.

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(ii) What cash flow trend is most concerning for long-term stability of the company?

The cash flows from operations, while positive (inflow) is reducing from 2012 to
2013. This could be concerning if the trend continues – reducing the company’s
available cash flows.

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(iii) Comment on the company’s Free Cash Flows trend leading to 2013:

The Free Cash flow trend is deteriorating – the company has less available free cash
flows in 2013 to invest and expand the company than in 2011. This could put pressure
on the company if they continue to expand (i.e. invest more) the available cash flows
are reducing over the three year period.

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Q5: Additional Question 4 – Argonaut Gold

PART A
(i) Analyse Argonaut Gold Cash Flow statement – indicate what lifecycle stage the
company is in during the following years and provide reasons:

2012: Start-up phase – as cash flows in financing as positive (inflow) and investing
activities is negative (outflow). Cash flows in operations is of less magnitude than
financing activities – suggesting a start-up company being funded primarily through
equity raisings and debt.

2013: Start-up phase approaching maturity – as financing activities is negative

(outflow) and being repaid, while investing activities are negative (outflow) which
indicates the company is still investing (hence approaching maturity phase). Cash
flows in operations are positive – consistent with approaching maturity.

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(ii) Indicate one cash flow in 2012 that affects the 2013 cash flows and what is the
affect on cash flows?

One answer:

Proceeds from debt in the financing section in 2012 is then linked to 2013 cash flows
being used to pay back debt obtained in that period and prior periods.

Another answer:

The increasing debt obtained in 2012 could has in turn increased the interest paid in
2013 within financing activities.

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PART B - Refer to the cash flow statement and the article above on Argonaut Gold.
Answer the following questions:

(i) Indicate where the cash flows are they going (use) and why (purpose)?

A large proportion of funds is being used on expenditures of mineral properties, plant

and equipment. These expenditures should expand the company further and the
investment should ideally result in future cash flows in operations in future periods.

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(ii) What cash flow trend is most concerning for long-term stability of the company?

Collection of cash from customers is slowing down – as evidenced by the increasing

negative amount for the change in receivables. This is in turn impacting the cash
flows in operations – with this amount decreasing from 2012 to 2013. The company
should consider chasing up customers to increase cash collected from customers.

Another answer could focus on:

There is an increasing difference between Net income and Cash flows from
operations – this indicates there are considerable accrual amounts that separate the
two numbers. Ideally cash flows from operations should be closer to Net income.

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(iii) Comment on the company’s free Cash Flows in 2012:

Free cash flows for the company in 2012 is positive and this enables the company to
invest and pay down debts/pay dividends in 2013.

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Q6: Question 1, Mid-session Exam 2006s2 (modified)

AFM Ltd
Reconciliation Note
30 June 2006

Net Profit after tax 221

Permanent differences:
+ Depreciation 64
- Gain on sale of equipment (43) 242

Timing differences:
- Increase in Accounts receivable (275)
+ Increase in Allowance for D. D. 16
+ Decrease in Inventories 8
+ Decrease in Prepaid insurance 2
- Decrease in Accounts payable (12)
+ Increase in Wages payable 10
+ Increase in Interest payable 10
- Decrease in Income tax payable (13) (254)

Cash flows from Operations ($12)

Accum. Depn - Buildings Accum. Depn - Equipment

DR CR DR CR
170 o/b Write-off 45 148 o/b

c/b 193 23 Depn exp. c/b 144 41 Depn exp

193 193 189 189

Total depreciation expense = 23 + 41 = 64

DR Cash 63
DR Acc. Depn – Equipment 45
CR Gain on sale 43
CR Equipment 65

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Check with estimation of the direct method – not required for the answer:

Receipts from customers $1,275

Payments to suppliers (940)
Payments for insurance (8)
Payments for wages (182)
Payments for interest on borrowings (5)
Payments for income tax (152)

Cash outflow from operations ($12)

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