Capital Allowances & Cash Flow Forecasts: Management Accounting Study Material | Summaries Financial Management

Capital allowances calculation:

NOVEMBER 2005 EXAMINATIONS

2006.1

STUDY MATERIAL P9

690

Cost of machinery 6,000

2006 WDA @ 25% 1,500

WDV 4,500

2007 WDA @ 25% 1,125

WDV 3,375

*Tax is calculated on profit plus depreciation less capital allowances:

2006 (6,257 600 1,500) 30% 1,607

2007 (8,389 600 1,125) 30% 2,359

Examiner’s Note

It was not intended that candidates should consider the impact of deferred taxation

in their answer here. Credit was available for those who did so.

(ii) Cash flow forecasts for 2006 and 2007

Calculations of cash receivable and cash payable:

2006 2007

Revenue 33,132 36,445

O/B trade receivables 3,700 4,075

C/B trade receuvables at 12.3% ,(4,075) ,(4,483)

(2005 3,700/30,120 100%)

Cash receivable 32,757 36,037

Costs and expenses 23,625 24,806

O/B trade payables 2,850 2,993

C/B trade payables at 12.67% ,(2,993) ,(3,143)

(2005 2,850/22,500 100%)

Cash payable 23,482 24,656

Cash flow forecasts

Cash received from sales 32,757 36,037

Costs and expenses 23,482 24,656

Machinery 6,000

Tax 1,491 1,607

Dividends 1,392 1,462

Finance costs 2,650 2,650

Total outflows 35,015 30,375

Net cash flow (2,258) 5,662

Opening balance ,(2,198 ,(2,060)

Closing balance ,(2,060) ,,3,602

Examiner’s Note

The question did not require candidates to show the figures for 2005; they are

shown here in italics for convenience.

H8044-Nov 2005.qxd 6/3/06 7:27 AM Page 690

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Capital allowances calculation:

NOVEMBER 2005 EXAMINATIONS

690 STUDY MATERIAL P

Cost of machinery 6,

2006 WDA @ 25% 1,

WDV 4,

2007 WDA @ 25% 1,

WDV 3,

*Tax is calculated on profit plus depreciation less capital allowances:

Examiner’s Note

It was not intended that candidates should consider the impact of deferred taxation

in their answer here. Credit was available for those who did so.

(ii) Cash flow forecasts for 2006 and 2007

Calculations of cash receivable and cash payable:

Revenue 33,132 36,

O/B trade receivables 3,700 4,

C/B trade receuvables at 12.3% ,(4,075) ,(4,483)

Cash receivable 32,757 36,

Costs and expenses 23,625 24,

O/B trade payables 2,850 2,

C/B trade payables at 12.67% ,(2,993) ,(3,143)

Cash payable 23,482 24,

Cash flow forecasts

Cash received from sales 32,757 36,

Costs and expenses 23,482 24,

Machinery 6,

Tax 1,491 1,

Dividends 1,392 1,

Finance costs 2,650 2,

Total outflows 35,015 30,

Net cash flow (2,258) 5,

Opening balance ,(2,198 ,(2,060)

Closing balance ,(2,060) ,,3,

Examiner’s Note

The question did not require candidates to show the figures for 2005; they are

shown here in italics for convenience.

There is need to finance a cash shortfall of just over £2 million by the end

of 2006. Of course, if the machinery was bought early in 2006, there may well be

a requirement to finance a much greater cash shortfall earlier in the year. There

is insufficient information in the question to comment further on this. However,

this would be a very short-term requirement as by the end of 2007 there is a

healthy cash surplus of £3.6 million. As the shortfall is caused by the purchase of

new machinery, there should be no problem in raising finance. Suitable methods

include bank overdraft, supplier credit or short-term leasing. However, as this is

a long-term asset, it could be argued it should be funded by long-term finance

and the cash surplus used for additional investments or, alternatively, repaid to

shareholders.

NOVEMBER 2005 EXAMINATIONS

MANAGEMENT ACCOUNTING – FINANCIAL STRATEGY 691

An alternative, equally acceptable, approach to presenting the cash flow forecasts is

as follows. Note that IAS 7 allows for some discretion in the presentation format of

cash flow statements. The question here required a forecast rather than a published

statement and any sensible format gained credit. There is also the potential for different

figures depending on rounding assumptions on accounts receivable and accounts

payable.

Operations

Operating profit 8,907 11,

Add back depreciation 600 600

Change in receivables (375) (407)

Change in payables 0,143 1,

Sub total 9,275 11,

Interest paid (2,650) (2,650)

Taxation (1,491) (1,607)

Net cash flow from operations 7,519 7,

Investments

New Machinery (6,000)

Financing

Dividends paid (1,392) (1,462)

Total net cash flows (2,258) (5,662)

Opening cash balance 198 (2,060)

Closing cash balance (2,060) (3,602)

Examiner’s Note

The question stated dividends of £1,392,000 were declared in 2005. It would be

usual, but not inevitable that these would be paid in 2006. Candidates who

assumed payment would be made in 2005 were not penalised.

Accounts see Financial statements