Modupe runs a manufacturing business. Some of her products are manufactured under a licence which was granted on 1 January 20X2. Modupe paid £10,000 for the licence which runs for five years. She is amortising the cost of the licence at the rate of 20 per cent each year for five years. On 1 March 20X4, Modupe bought a new machine for £18,000. The machine replaced another machine which had been fully depreciated, and which was scrapped on 28 February 20X4. Machinery and most other non-current assets are depreciated on a straight-line basis over 10 years. There were no other purchases or sales of non-current assets. Modupe tells you, her financial adviser, that she is worried that the cash at bank figure has fallen by such a large amount since the start of her financial year. She wonders if she should have made the investment in buying a new machine. Modupe’s statement of profit or loss for the year ended 31 May 20X4 was as follows: (image 1) Depreciation of £57,756 is included in expenses. Depreciation of £107,775 is included in cost of goods manufactured. This includes the amount charged to depreciation in respect of the new machine. Amortisation of £2,000 in respect of the patent is also included in cost of goods manufactured. (image 2) Questions: (indicative wordcount 480 words) Prepare Modupe’s statement of cash flows for the year ended 31 May 20X4. Write a brief report to Modupe explaining the reasons why the cash at bank balance has fallen during the year. Advise her on any actions she could take to improve the cash position.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Modupe runs a manufacturing business. Some of her products are manufactured under a licence which was granted on 1 January 20X2. Modupe paid £10,000 for the licence which runs for five years. She is amortising the cost of the licence at the rate of 20 per cent each year for five years.

On 1 March 20X4, Modupe bought a new machine for £18,000. The machine replaced another machine which had been fully depreciated, and which was scrapped on 28 February 20X4. Machinery and most other non-current assets are depreciated on a straight-line basis over 10 years.

There were no other purchases or sales of non-current assets.

Modupe tells you, her financial adviser, that she is worried that the cash at bank figure has fallen by such a large amount since the start of her financial year. She wonders if she should have made the investment in buying a new machine.

Modupe’s statement of profit or loss for the year ended 31 May 20X4 was as follows:

(image 1)

Depreciation of £57,756 is included in expenses. Depreciation of £107,775 is included in cost of goods manufactured. This includes the amount charged to depreciation in respect of the new machine. Amortisation of £2,000 in respect of the patent is also included in cost of goods manufactured.

(image 2)

Questions: (indicative wordcount 480 words)

Prepare Modupe’s statement of cash flows for the year ended 31 May 20X4.
Write a brief report to Modupe explaining the reasons why the cash at bank balance has fallen during the year. Advise her on any actions she could take to improve the cash position.

Modupe's statements of financial position at 31 May 20X4 and 20X3 were as follows:
20X4
20X4
20X3
20X3
£
£
£
£
ASSETS
Non-current assets
1,745,500
1,895,031
Current assets
Inventory
314,447
303,638
Receivables
484,393
455,660
Cash at bank
2,880
37,446
801,720
796,744
2,547,220
2,691,775
CAPITAL AND LIABILITIES
Сapital
Capital brought forward
2,169,331
2,198,061
(Loss)/profit for the year
(109,071)
1,270
Drawings
(96,000)
(30,000)
1,964,260
,169,331
Non-current liabilities
Long-term loan
150,000
142,000
Current liabilities
Payables
432,960
380,444
2,547,220
2,691,775

Modupe's statement of profit or loss for the year ended 31 May 20X4 was as follows:
£
Revenue
3,777,242
Cost of sales
Opening inventory
303,638
Add: goods manufactured
3,006,162
3,309,800
Less: closing inventory
(314,447)
(2,995,353)
Gross profit
781,889
Expenses
(885,960)
Interest paid
(5,000)
Loss for the year
(109,071)

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