Cashflow

Solution - Analysis:

Operating cash flows:

Operating cash inflows at RM940,000 are considerably higher relative to profit before of RM440,000. This shows a satisfactory cash generating ability and increases the ability of Entity a in meeting its finance costs, taxation and dividends. It is possible that the significantly high cash flows relative to the operating profit is due to the (non-cash) increases, such as depreciation and provisions.

Working capital changes are relatively neutral; a large increase in inventory appears to be being financed by a substantial increase in trade payables. The slight decrease in trade receivables is consistent with an overall increase in operating capacity. This could be indicative of good control over the cash management of the trade receivables.

In the current year, Entity A has received a tax refund of RM60,000. This could be due to previous year losses. As Entity A made a profit during the current year, Entity A should be aware of potential tax payment in the next period.

Investing activities:

There has been a significant investment in property, plant and equipment. It is possible that this increase represents an increase in operating capacity as there has been an overall improvement in profit position. In addition, the cash inflow generated by investment income could be an indication of returns generated by investment property of Entity A.

Financing activities:

Financial structure of Entity A has changed during the year. Debt has been redeemed for RM420,000 and there has been a share issue raising RM1 million. This indicates a reduction in the gearing level of Entity A. The share issue could have been used to redeem the debt and also finance the investment in property, plant and equipment.

Cash position:

The overall effect of the year’s cash flows is that it has reduced a significant amount of previous year overdraft of RM120,000. In addition, it has also reversed the bank balance to a modest cash inflow...