The Managing Director of Kotoku Ltd received the financial reports for year ended 31st December 2019 with the 2018 comparatives from his Accountant. He does not understand why the company started the year with a bank balance of GHS6,000,000 but ended the year with a bank balance of only GHS300,000. He feels the Accountant has misappropriated the funds because the company made profits of GHS4,425,000 during the 2019 financial year and so adding that amount to the opening bank balance should result in a closing bank balance of GHS10,425,000. He approached you as a financial analyst to do a thorough analysis of the financial statement. An extract of Profit or loss, statement of financial position and the cashflow prepared from the full financial statements are shown below: Statement of Cashflow for the year ended 31st December 2019 GH¢ GH¢ Cash flows from operating activities Profit before taxation 7,275,000 Adjustment for items not involving a flow of cash: Interest Expenses 1,500,000 Profit on disposal (200,000) Depreciation 960,000 2,260,000 Adjusted profit 9,535,000 Movement in Working Capital Increase in inventories (2,700,000) Increase in trade receivables (1,500,000) Increase in trade payables 1,575,000 Decrease in cash due to working capital changes (3,825,000) Cash generated from operations 6,910,000 Interest paid (1,500,000) Taxes paid (1,350,000) Net cash inflow from operating activities 4,060,000 Cash flows from investing activities Purchase of PPE (7,310,000) Sale of PPE 400,000 Investments acquired (9,300,000) Net cash used in investing activities (16,210,000) Cash flows from financing activities Proceeds from long-term borrowing 10,500,000 Dividends paid (1,050,000) Net cash inflow from financing activities 9,450,000 Decrease in cash and cash equivalents (2,700,000) Cash and cash equivalents at the start of the period 6,000,000 Cash and cash equivalents at the end of the period 3,300,000 Required: Using a statement of Cash flow for the year ended 31st December 2019, write a report to the Managing Director of Kotoku Ltd, explaining to him the reasons for the decrease in bank balance from GHS6,000,000 to GHS300,000.
The Managing Director of Kotoku Ltd received the financial reports for year ended 31st December 2019 with the 2018 comparatives from his Accountant. He does not understand why the company started the year with a bank balance of GHS6,000,000 but ended the year with a bank balance of only GHS300,000. He feels the Accountant has misappropriated the funds because the company made profits of GHS4,425,000 during the 2019 financial year and so adding that amount to the opening bank balance should result in a closing bank balance of GHS10,425,000. He approached you as a financial analyst to do a thorough analysis of the financial statement. An extract of Profit or loss,
Statement of Cashflow for the year ended 31st December 2019
|
GH¢ |
GH¢ |
|
Cash flows from operating activities Profit before |
7,275,000 |
|
Adjustment for items not involving a flow of cash: Interest Expenses 1,500,000 |
|
|
Profit on disposal (200,000) |
|
|
|
|
|
|
2,260,000 |
|
Adjusted profit |
9,535,000 |
|
Movement in Increase in inventories (2,700,000) |
|
|
Increase in trade receivables (1,500,000) |
|
|
Increase in trade payables 1,575,000 |
|
|
Decrease in cash due to working capital changes |
(3,825,000) |
|
Cash generated from operations |
6,910,000 |
|
Interest paid |
(1,500,000) |
|
Taxes paid |
(1,350,000) |
|
Net |
4,060,000 |
|
Cash flows from investing activities |
|
|
Purchase of PPE |
(7,310,000) |
|
|
Sale of PPE |
400,000 |
|
|
Investments acquired |
(9,300,000) |
|
|
Net cash used in investing activities |
|
(16,210,000) |
|
Cash flows from financing activities Proceeds from long-term borrowing |
10,500,000 |
|
|
Dividends paid |
(1,050,000) |
|
|
Net cash inflow from financing activities |
|
9,450,000 |
|
Decrease in cash and cash equivalents |
|
(2,700,000) |
|
Cash and cash equivalents at the start of the period |
|
6,000,000 |
Cash and cash equivalents at the end of the period 3,300,000
Required:
Using a statement of Cash flow for the year ended 31st December 2019, write a report to the Managing Director of Kotoku Ltd, explaining to him the reasons for the decrease in bank balance from GHS6,000,000 to GHS300,000.
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