4 The financial statements of Nedberg plc for the year to 30 September 2002, together with the comparative balance

sheet for the year to 30 September 2001 are shown below:

Profit and loss account – year to 30 September 2002:
€m €m
Turnover 3,820
Cost of sales (note (1)) (2,620)
––––––
Gross profit for period 1,200
Operating expenses (note (1)) (300)
––––––
900
Interest – Loan note (30)
––––––
Profit before tax 870
Taxation (270)
––––––
Profit after tax 600
Dividends: ordinary – Interim (120)
Dividends: ordinary – Final (280) (400)
––––– –––––
Net profit for period 200
–––––
Balance sheets as at 30 September: 2002 2001
Fixed Assets €m €m €m €m
Intangible assets (note (2)) 650 300
Tangible assets 1,890 1,830
–––––– ––––––
2,540 2,130
Current assets
Stock 1,420 940
Debtors 990 680
Cash 70 nil
–––––– ––––––
2,480 1,620
Creditors: amounts falling due
within one year (note (3)) (1,300) (1,210)
–––––– ––––––
Net current assets 1,180 410
Creditors: amounts falling due after more than one year
10% Loan note (300) (100)
Provisions for liabilities and charges (note (4)) (570) (440)
–––––– ––––––
Net assets 2,850 2,000
–––––– ––––––
Share Capital and Reserves
Ordinary Shares of €1 each 750 500
Reserves
Share premium 350 100
Revaluation 140 nil
Profit and loss reserve 1,610 2,100 1,400 1,500
–––––– –––––– –––––– ––––––
2,850 2,000
–––––– ––––––

8
Notes to the financial statements:
(1) Cost of sales includes depreciation of tangible fixed assets of €320 million and a loss on the sale of plant of
€50 million. It also includes a credit for the amortisation of government grants. Operating expenses include a
charge of €20 million for the amortisation of goodwill.
(2) Intangible fixed assets:
2002 2001
€m €m
Deferred development expenditure 470 100
Goodwill 180 200
–––– ––––
650 300
–––– ––––
(3) Creditors: amounts falling due within one year:
Creditors 875 730
Bank overdraft nil 115
Accrued loan interest 15 5
Proposed dividends 280 200
Taxation 130 160
––––– –––––
1,300 1,210
––––– –––––
(4) Provisions for liabilities and charges:
Government grants 260 300
Deferred tax 310 140
–––– ––––
570 440
–––– ––––
The following additional information is relevant:
(i) Intangible fixed assets:
The company successfully completed the development of a new product during the current year, capitalising a
further €500 million before amortisation charges for the period.
(ii) Tangible fixed assets/revaluation reserve:
– The company revalued its buildings by €200 million on 1 October 2001. The surplus was credited to a
revaluation reserve.
– New plant was acquired during the year at a cost of €250 million and a government grant of €50 million
was received for this plant.
– On 1 October 2001 a bonus issue of 1 new share for every 10 held was made from the revaluation reserve.
– €10 million has been transferred from the revaluation reserve to realised profits as a year-end adjustment
in respect of the additional depreciation created by the revaluation.
– The remaining movement on tangible fixed assets was due to the disposal of obsolete plant.
(iii) Share issues:
In addition to the bonus issue referred to above Nedberg plc made a further issue of ordinary shares for cash.
Required:
(a) A cash flow statement for Nedberg plc for the year to 30 September 2002 prepared in accordance with
FRS 1 ‘Cash Flow Statements’. (20 marks)
Note: a reconciliation and analysis of net debt is not required.
(b) Comment briefly on the financial position of Nedberg plc as portrayed by the information in your cash flow
statement. (5 marks)
(25 marks)

9 [P.T.O.
 Assuming the land is sold:
Profit and loss account year to 30 September 2002 € €
Sales 2,400,000
Cost of sales (3/5 x €2 million) 1,200,000
––––––––––
Profit on sale of land 1,200,000
Balance sheet as at 30 September 2002
Fixed assets
Development land (€2 million – €1·2 million above) 800,000
Assuming the arrangement is secured loan:
Profit and loss account year to 30 September 2002
Interest on loan (240,000)
(10% of in substance loan of €2·4 million)
Balance sheet as at 30 September 2002
Fixed assets
Development land at cost 2,000,000
Creditors: amount due after more than one year
Secured loan 2,400,000
Accrued interest 240,000 (2,640,000)
–––––––––

4 Cash Flow Statement of Nedberg plc for the Year to 30 September 2002:
Reconciliation of operating profit to net cash inflow from operating activities
€m €m
Net profit before interest and tax 900
Adjustments for:
amortisation – development expenditure (w (i)) 130
amortisation – goodwill (200 – 180) 20 150
–––
depreciation tangible fixed assets 320
amortisation of government grant (w (ii)) (90)
loss on sale of plant 50
increase in stock (1,420 – 940) (480)
increase in debtors (990 – 680) (310)
increase in creditors (875 – 730) 145
––––
Net cash inflow from operating activities 685
––––
Cash Flow Statement
Net cash flow from operating activities 685
Returns on investments and servicing of finance (note 1) (20)
Taxation (w (iii)) (130)
Capital expenditure (note 2) (680)
––––
(145)
Equity dividends paid (120 + 200) (320)
––––
(465)
Management of liquid resources nil
Financing (note 3) 650
––––
Increase in cash (70 + 115) 185
––––
Notes
1 Returns on investment and servicing of finance
Interest paid (30 – (15 – 5 accrual adjustments)) (20)
2 Capital expenditure
Purchase of plant (w (iv)) (250)
Capitalised development costs (w (i)) (500)
Receipt of government grant 50
Proceeds of sale of plant (w (iv)) 20 (680)
––––
3 Financing
Issue of share ordinary shares (w (v)) 450
Issue of loan notes (300 – 100) 200 650
––––

21
Workings
(i) Development expenditure: €m
Balance b/f 100
Amount capitalised 500
Amortisation – balancing figure (130)
––––
Balance c/f 470
––––
(ii) Government grant:
Balance b/f 300
Cash received 50
Amortisation (90)
––––
Balance c/f 260
––––
(iii) Tax:
Tax provision b/f 160
Deferred tax b/f 140
Profit and loss account charge 270
Tax provision c/f (130)
Deferred tax c/f (310)
––––
Difference cash paid 130
––––
(iv) Tangible fixed assets:
Balance b/f 1,830
Revaluation surplus 200
Plant acquired 250
Depreciation (320)
Disposal at net book value – balancing figure (70)
–––––
Balance c/f 1,890
–––––
Disposal of plant:
Net book value from above 70
Loss on sale (from question) (50)
–––
Difference is sale proceeds 20
–––
(v) Share capital:
Ordinary shares b/f (500)
Bonus issue 1 for 10 (from revaluation reserve) (50)
Ordinary shares c/f 750
––––
Difference issue for cash 200
Plus increase in share premium (350 – 100) 250
––––
Total cash proceeds of issue of ordinary shares 450
––––
(vi) Reconciliation of reserve movements
Revaluation reserve:
Balance b/f nil
Revaluation of buildings 200
Bonus issue (50)
Transfer to realised profits (10)
––––
Balance c/f 140
––––
Profit and loss reserve:
Balance b/f 1,400
Net profit for period 200
Transfer from revaluation reserve 10
––––––
Balance c/f 1,610
––––––

22
4 Minster is a publicly listed company. Details of its financial statements for the year ended 30 September 2006,
together with a comparative balance sheet, are:
Balance Sheet at 30 September 2006 30 September 2005
€’000 €’000 €’000 €’000
Fixed assets (note (i))
Tangible 1,280 940
Software 135 nil
Investments at fair value through profit and loss 150 125
–––––– ––––––
1,565 1,065
Current assets
Stock 480 510
Trade debtors 270 380
Amounts due from long-term contracts 80 55
Bank nil 35
–––––– ––––––
830 980
–––––– ––––––
Creditors: amounts falling due within one year
Bank overdraft 25 40
Trade creditors 350 555
Taxation 60 50
–––––– ––––––
(435) (645)
–––––– ––––––
Net current assets 395 335
Creditors: amounts falling due after more than one year
9% loan note (120) nil
Provisions for liabilities
Environmental provision 162 nil
Deferred tax 18 (180) 25 (25)
–––––– –––––– –––––– ––––––
Net assets 1,660 1,375
–––––– ––––––
Share capital and reserves
Equity shares of 25 cent each 500 300
Reserves
Share premium (note (ii)) 150 85
Revaluation reserve 60 25
Profit and loss account 950 1,160 965 1,075
–––––– –––––– –––––– ––––––
1,660 1,375
–––––– ––––––
Profit and loss account for the year ended 30 September 2006
Turnover 1,397
Cost of sales (1,110)
––––––
Gross profit 287
Operating expenses (125)
––––––
162
Investment income and gain on investments 20
Finance costs (note (i)) (40)
––––––
Profit before tax 142
Tax (57)
––––––
Profit for the year 85
––––––

8
The following supporting information is available:
(i) Included in tangible fixed assets is a coal mine and related plant that Minster purchased on 1 October 2005.
Legislation requires that in ten years’ time (the estimated life of the mine) Minster will have to landscape the area
affected by the mining. The future cost of this has been estimated and discounted at a rate of 8% to a present
value of €150,000. This cost has been included in the carrying amount of the mine and, together with the
unwinding of the discount, has also been treated as a provision. The unwinding of the discount is included within
finance costs in the profit and loss account.
Other land was revalued (upward) by €35,000 during the year.
Depreciation of tangible fixed assets for the year was €255,000.
There were no disposals of tangible fixed assets during the year.
The software was purchased on 1 April 2006 for €180,000.
The market value of the investments had increased during the year by €15,000. There have been no sales of
these investments during the year.
(ii) On 1 April 2006 there was a bonus (scrip) issue of ordinary shares of one for every four held utilising the share
premium reserve. A further cash share issue was made on 1 June 2006. No shares were redeemed during the
year.
(iii) A dividend of 5 cent per share was paid on 1 July 2006.

Required:
(a) Prepare a cash flow statement for Minster for the year to 30 September 2006 in accordance with FRS 1
Cash flow statements. (15 marks)
Note: you are not required to prepare a reconciliation of net cash flow to movement in net debt or an analysis
of changes in net debt.

(b) Comment on the financial performance and position of Minster as revealed by the above financial statements
and your cash flow statement. (10 marks)

(25 marks)

9 [P.T.O.
4 (a) Cash Flow Statement of Minster for the Year ended 30 September 2006:
Reconciliation of operating profit to net cash inflow from operating activities
€’000 €’000
Operating profit 162
Adjustments for:
Depreciation of tangible fixed assets 255
Amortisation of software (180 – 135) 45 300
–––– ––––
462
Working capital adjustments
Decrease in stock (510 – 480) 30
Decrease in debtors (380 – 270) 110
Increase in amounts due from long-term contracts (80 – 55) (25)
Decrease in trade creditors (555 – 350) (205) (90)
–––– ––––
Net cash inflow from operating activities 372
––––
Cash Flow Statement for Minster year ended 30 September 2006
Net cash inflow from operating activities 372
Returns on investments and servicing of finance (note 1) (23)
Taxation (w (ii)) (54)
Capital expenditure (note 1) (600)
Equity dividends paid (500 x 4 x 5 cent) (100)
––––
Cash outflow before use of liquid resources and financing (405)
Financing (note 1) 385
––––
Decrease in cash (35 – (40 – 25)) (20)
––––
Note 1
Returns on investment and servicing of finance
Investment income received (20 – 15 gain on investments) 5
Finance costs paid (40 – 12 re unwinding of environmental provision) (28) (23)
––––
Capital expenditure
Purchase of – tangible fixed assets (w (i)) (410)
Purchase of – software (180)
Purchase of – investments (150 – (15 + 125)) (10) (600)
––––
Financing
Issue of equity shares (w (iii)) 265
Issue of 9% loan note 120 385
–––– ––––
Workings (in €’000)
(i) Tangible fixed assets:
carrying amount b/f 940
non-cash environmental provision 150
revaluation 35
depreciation for period (255)
carrying amount c/f (1,280)
––––––
difference is cash acquisitions (410)
––––––
(ii) Taxation:
tax provision b/f (50)
deferred tax b/f (25)
profit and loss account charge (57)
provision c/f 60
deferred tax c/f 18
–––––
difference is cash paid (54)
–––––

18
 €’000
(iii) Equity shares
balance b/f (300)
bonus issue (1 for 4) (75)
balance c/f 500
–––––
difference is cash issue 125
–––––
Share premium
balance b/f (85)
bonus issue (1 for 4) 75
balance c/f 150
–––––
difference is cash issue 140
–––––
Therefore the total proceeds of cash issue of shares are €265,000 (125 + 140).

(b) Report on the financial position of Minster for the year ended 30 September 2006
To:
From:
Date:
Operating cash flows:
Minster shows healthy cash inflows of €372,000 from operating activities. This is considered by many commentators as a
very important figure as it is often used as the basis for estimating the company’s future maintainable cash flows. Subject to
(inevitable) annual expected variations and allowing for any changes in the company’s structure this figure is more likely to
be repeated in the future than most other figures in the cash flow statements which are often ‘one-off’ cash flows such as
raising loans or purchasing fixed assets. The operating cash inflow compares well with the underlying operating profit of
€162,000. This is mainly due to depreciation charges of €300,000 being added back to the profit as they are a non-cash
expense. The operating cash inflow of €372,000 together with the reduction in net working capital of €90,000 is more than
sufficient to cover the company’s taxation payments of €54,000, finance payments of €28,000 and the dividend of
€100,000 and leaves an amount to contribute to the funding of the increase in fixed assets. It is important that these short
term costs are funded from operating cash flows; it would be of serious concern if, for example, interest or tax payments were
having to be funded by loan capital or the sale of fixed assets.
There are a number of points of concern. The dividend of €100,000 gives a dividend cover of less than one (85/100 =
0·85) which means the company has distributed previous year’s profits. This is not a tenable situation in the long-term. The
size of the dividend has also contributed to the lower cash balances (see below). There is less investment in both stock levels
and trade debtors. This may be the result of more efficient stock control and better collection of debtors, but it may also
indicate that trading volumes may be falling. Also of note is a large reduction in trade creditor balances of €205,000. This
too may be indicative of lower trading (i.e. less stock purchased on credit) or pressure from suppliers to pay earlier. Without
more detailed information it is difficult to come to a conclusion in this matter.
Capital expenditure:
The cash flow statement shows considerable investment in fixed assets, in particular €410,000 in tangible fixed assets.
These acquisitions represent an increase of 44% of the carrying amount of the tangible fixed assets as at the beginning of
the year. As there are no disposals, the increase in investment must represent an increase in capacity rather than the
replacement of old assets. Assuming that this investment has been wisely made, this should bode well for the future (most
analysts would prefer to see increased investment rather than contraction in operating assets). An unusual feature of the
required treatment of environmental provisions is that the investment in fixed assets as portrayed by the cash flow statement
appears less than if balance sheet figures are used. The balance sheet at 30 September 2006 includes €150,000 of fixed
assets (the discounted cost of the environmental provision), which does not appear in the cash flow figures as it is not a cash
‘cost’. A further consequence is that the ‘unwinding’ of the discounting of the provision causes a financing expense in the
profit and loss account which is not matched in the cash flow statement as the unwinding is not a cash flow. Many
commentators have criticised the required treatment of environmental provisions because they cause financing expenses
which are not (immediate) cash costs and no ‘loans’ have been taken out. Viewed in this light, it may be that the information
in the cash flow statement is more useful than that in the profit and loss account and balance sheet.
Financing:
The increase in total capital expenditure of €600,000 has been largely funded by an issue of shares at €265,000 and raising
a 9% €120,000 loan note. This indicates that the company’s shareholders appear reasonably pleased with the company’s
past performance (or they would not be very willing to purchase further shares). The interest rate of the loan at 9% seems
quite high, and virtually equal to the company’s overall return on capital employed of 9·1% (162/(1,660 + 120)). Provided
current profit levels are maintained, it should not reduce overall returns to shareholders.
Cash position:
The overall effect of the year’s cash flows has worsened the company’s cash position by an increased net cash liability of
€20,000. Although the company’s overdraft has reduced by €15,000, the cash at bank of €35,000 at the beginning of the
year has now gone. In comparison to the cash generation ability of the company and considering its large investment in fixed
assets, this €20,000 is a relatively small amount and should be relieved by operating cash inflows in the near future.
19