Practice questions
Original questions written by HomiLabs in the style of the exam, with answers and mark schemes. They are not
Cambridge past paper questions and have not been reviewed by Cambridge. Try each one before opening the answer.
Q1Statement of cash flows (IAS 7) · Core · Paper 3 style · 7 marksExtracts from the records of Noor Textiles Ltd for the year ended 31 December 2026:Profit from operations $84,600; depreciation $21,300; loss on disposal of equipment $1,400.Inventories increased by $5,800; trade receivables decreased by $3,200; trade payables increased by $2,700.
- (a) Prepare a reconciliation of profit from operations to cash generated from operations. [5]
- (b) Explain why depreciation is added back to profit from operations. [2]
Show answer
- (a) $Profit from operations 84,600Adjustments for: Depreciation 21,300 Loss on disposal of equipment 1,400 Increase in inventories (5,800) Decrease in trade receivables 3,200 Increase in trade payables 2,700Cash generated from operations 107,400
B1 depreciation added; B1 loss on disposal added; B1 inventory increase deducted; B1 receivables decrease and payables increase added; B1 total 107,400.
- (b) Depreciation is an expense that reduced profit but involved no outflow of cash (the cash left when the asset was bought, shown under investing), so it is added back.
1 mark: non-cash expense; 1 mark: cash outflow occurs on purchase / shown in investing.
The company classifies interest paid and tax paid as operating cash flows, interest and dividends received as investing cash flows, and dividends paid as financing cash flows.
- (a) State the section of the statement of cash flows in which each item appears, or state that it does not appear.(i) Proceeds from an issue of ordinary shares(ii) Purchase of machinery(iii) Tax paid(iv) Interest received(v) Repayment of debentures(vi) A bonus issue of shares [6]
- (b) Explain what is meant by 'cash equivalents'. [2]
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- (a) (i) Financing activities(ii) Investing activities(iii) Operating activities(iv) Investing activities(v) Financing activities(vi) Does not appear – no cash flow
1 mark each.
- (b) Short-term, highly liquid investments that are readily convertible to known amounts of cash and have an insignificant risk of change in value – usually with a maturity of three months or less from acquisition.
1 mark: short-term and highly liquid/readily convertible; 1 mark: insignificant risk / three months or less.
Kestrel Foods Ltd: at 1 January 2026 tax payable was $18,400 and interest accrued was $900. The statement of profit or loss for 2026 shows a tax charge of $23,900 and finance costs of $6,200. At 31 December 2026 tax payable was $21,700 and interest accrued was $1,300.
- (a) Calculate the tax paid during 2026. [2]
- (b) Calculate the interest paid during 2026. [2]
- (c) State where the company would show these two amounts if it follows the common classification in which both are operating cash flows. [1]
Show answer
- (a) $20,600
M1 18,400 + 23,900 − 21,700; A1 20,600.
- (b) $5,800
M1 900 + 6,200 − 1,300; A1 5,800.
- (c) Both are deducted from cash generated from operations to give net cash from operating activities.
B1.
Ravi Plastics Ltd has 400,000 ordinary shares. In April 2026 it paid a final dividend for 2025 of $0.05 per share. In September 2026 it paid an interim dividend for 2026 of $0.03 per share. In February 2027 the directors proposed a final dividend for 2026 of $0.06 per share.
- (a) Calculate the dividends paid shown in the statement of cash flows for the year ended 31 December 2026. [2]
- (b) Explain why the proposed final dividend for 2026 is not included. [2]
Show answer
- (a) $32,000
B1 20,000 and 12,000; B1 total 32,000.
- (b) It was proposed after the year end and not paid during 2026, so there was no cash outflow in the year; it is not even a liability at 31 December 2026 (IAS 10), and will appear as a cash flow in 2027 when paid.
1 mark: no cash paid in 2026; 1 mark: not a liability at year end / included in 2027.
Property, plant and equipment of Hilltop Ltd had a carrying amount of $340,000 at 1 April 2026 and $392,000 at 31 March 2027. Depreciation for the year was $46,000. During the year equipment with a carrying amount of $18,000 was sold for $15,500.
- (a) Calculate the cash paid to purchase property, plant and equipment during the year. [3]
- (b) Calculate the profit or loss on disposal and state how it is shown in the statement of cash flows. [2]
Show answer
- (a) $116,000
M1 closing carrying amount + depreciation + disposals − opening; B1 18,000 disposal included; A1 116,000.
- (b) Loss of $2,500; added back to profit from operations in the operating activities section (the $15,500 proceeds appear under investing activities).
B1 loss 2,500; B1 added back in operating activities.
During the year a machine that cost $52,000, with accumulated depreciation of $31,500, was sold. The loss on disposal was $4,200.
- (a) Calculate the cash received from the sale. [2]
- (b) State where the proceeds and the loss on disposal appear in the statement of cash flows. [2]
Show answer
- (a) $16,300
M1 carrying amount 20,500 − 4,200; A1 16,300.
- (b) Proceeds of $16,300 – investing activities (cash inflow). Loss of $4,200 – added back to profit from operations in the operating activities reconciliation.
B1 each.
At 1 January 2026 Lotus Ltd had $12,400 in its bank account and $600 cash in hand. At 31 December 2026 it had a bank overdraft of $8,300 and $900 cash in hand. The overdraft is repayable on demand and forms part of the company's cash management. Net cash from operating activities was $46,000 and net cash used in investing activities was $81,000.
- (a) Calculate the cash and cash equivalents at the start and end of the year. [2]
- (b) Calculate the net change in cash and cash equivalents. [1]
- (c) Calculate the net cash from financing activities. [2]
Show answer
- (a) Start $13,000; end $(7,400) (net overdraft $7,400)
B1 each.
- (b) Decrease of $20,400
B1.
- (c) Inflow of $14,600
M1 −20,400 = 46,000 − 81,000 + F; A1 F = 14,600.
Opal Ltd's ordinary shares have a nominal value of $0.50. At the start of the year it had 600,000 shares in issue. During the year it made a rights issue of 1 new share for every 3 held at $0.90 per share. All the rights were taken up. It also issued $50,000 of debentures at par and paid dividends of $27,000.
- (a) Calculate the number of new shares issued. [1]
- (b) Calculate the cash raised by the rights issue and the increase in share premium. [3]
- (c) Calculate the net cash from financing activities. [1]
Show answer
- (a) 200,000 shares
B1.
- (b) Cash $180,000; share premium $80,000
B1 200,000 × 0.90 = 180,000; M1 premium per share 0.40; A1 80,000.
- (c) $203,000
B1 180,000 + 50,000 − 27,000.
During the year Pearl Logistics Ltd paid $92,000 for new vehicles and sold old vehicles for $14,500. It bought shares in another company for $20,000 and received interest of $2,300 and dividends of $1,100. The company classifies interest paid and tax paid as operating cash flows, interest and dividends received as investing cash flows, and dividends paid as financing cash flows.
- (a) Prepare the investing activities section of the statement of cash flows. [4]
- (b) Explain why a large net outflow from investing activities is not necessarily a bad sign. [2]
Show answer
- (a) Cash flows from investing activities $Purchase of vehicles (92,000)Proceeds from sale of vehicles 14,500Purchase of investments (20,000)Interest received 2,300Dividends received 1,100Net cash used in investing activities (94,100)
B1 vehicles bought and sold; B1 investment purchase; B1 interest and dividends received; B1 net (94,100).
- (b) It usually means the company is buying non-current assets to replace old ones or to expand, which should increase future profits and cash flows.
1 mark: investment in non-current assets/expansion; 1 mark: future profits and cash inflows.
- (a) For each transaction, state whether it increases, decreases or has no effect on cash, and, where there is an effect, the section of the statement of cash flows.(i) Depreciation of machinery is charged(ii) A bonus issue of shares is made(iii) Inventory is bought on credit(iv) A bank loan is repaid(v) An old vehicle is sold for cash at a loss(vi) Land is revalued upwards [6]
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- (a) (i) No effect(ii) No effect(iii) No effect when bought (cash leaves when the supplier is paid)(iv) Decrease – financing activities(v) Increase – investing activities (the proceeds; the loss is a non-cash adjustment)(vi) No effect
1 mark each.
Oasis Ltd's retained earnings were $142,000 at 1 January 2026 and $171,500 at 31 December 2026. Dividends paid during the year were $34,000. The statement of profit or loss shows a tax charge of $17,800, finance costs of $5,400 and interest received of $1,200 (shown as investment income).
- (a) Calculate the profit for the year. [2]
- (b) Calculate the profit from operations to be used at the start of the statement of cash flows. [3]
Show answer
- (a) $63,500
M1 171,500 − 142,000 + 34,000; A1 63,500.
- (b) $85,500
B1 add back tax 17,800; B1 add back finance costs 5,400; B1 deduct investment income 1,200: 85,500.
The following information relates to Indus Engineering Ltd for the year ended 30 June 2027.Profit from operations $128,000; depreciation $34,500; profit on disposal of a vehicle $2,800. 30 June 2027 30 June 2026 $ $Inventories 41,700 46,200Trade receivables 44,600 38,900Trade payables 26,100 29,300Interest accrued 800 1,100Tax payable 24,500 22,000Finance costs for the year were $7,200 and the tax charge was $26,400. The company classifies interest paid and tax paid as operating cash flows, interest and dividends received as investing cash flows, and dividends paid as financing cash flows.
- (a) Prepare the operating activities section of the statement of cash flows for the year ended 30 June 2027. [8]
Show answer
- (a) Cash flows from operating activities $Profit from operations 128,000Depreciation 34,500Profit on disposal (2,800)Decrease in inventories 4,500Increase in trade receivables (5,700)Decrease in trade payables (3,200)Cash generated from operations 155,300Interest paid (7,500)Tax paid (23,900)Net cash from operating activities 123,900
B1 depreciation added; B1 profit on disposal deducted; B1 inventory +4,500; B1 receivables −5,700; B1 payables −3,200; B1 interest paid 7,500; B1 tax paid 23,900; B1 net cash 123,900.
Extracts from the statements of financial position of Zircon Ltd: 31 Dec 2026 31 Dec 2025 $ $Property, plant and equipment at cost 610,000 520,000Accumulated depreciation 205,000 180,000During 2026 a machine that cost $40,000, with accumulated depreciation of $29,000, was sold for $8,500. The company also received interest of $1,600 and dividends of $900 on its investments. The company classifies interest paid and tax paid as operating cash flows, interest and dividends received as investing cash flows, and dividends paid as financing cash flows.
- (a) Calculate the depreciation charge for 2026. [2]
- (b) Calculate the cost of property, plant and equipment purchased. [2]
- (c) Calculate the profit or loss on disposal. [1]
- (d) Prepare the investing activities section of the statement of cash flows. [3]
Show answer
- (a) $54,000
M1 205,000 − 180,000 + 29,000; A1 54,000.
- (b) $130,000
M1 610,000 − 520,000 + 40,000; A1 130,000.
- (c) Loss $2,500
B1 carrying amount 11,000 − 8,500.
- (d) Cash flows from investing activities $Purchase of property, plant and equipment (130,000)Proceeds from sale of machine 8,500Interest received 1,600Dividends received 900Net cash used in investing activities (119,000)
B1 purchases outflow; B1 proceeds; B1 interest and dividends received and net (119,000).
Extracts from the statements of financial position of Jade Ltd: 2026 2025 $ $Ordinary shares of $1 each 750,000 500,000Share premium 155,000 80,0008% debentures 120,000 200,000During 2026 the company made a bonus issue of 1 share for every 5 held, financed from retained earnings, and then issued shares for cash. Debentures were redeemed at par. Dividends paid were $46,000.
- (a) Calculate the number of shares issued for cash. [2]
- (b) Calculate the cash received from the share issue and the issue price per share. [2]
- (c) Prepare the financing activities section of the statement of cash flows. [3]
Show answer
- (a) 150,000 shares
B1 bonus shares 100,000; B1 250,000 − 100,000 = 150,000.
- (b) $225,000; issue price $1.50
B1 150,000 + premium 75,000 = 225,000; B1 225,000 ÷ 150,000 = $1.50.
- (c) Cash flows from financing activities $Proceeds from issue of shares 225,000Redemption of debentures (80,000)Dividends paid (46,000)Net cash from financing activities 99,000
B1 share proceeds 225,000 (bonus issue excluded); B1 redemption 80,000 outflow; B1 dividends and net 99,000.
Coral Ltd had $150,000 of 6% debentures in issue throughout the year and a bank loan. Finance costs in the statement of profit or loss were $11,400. Interest accrued was $2,250 at the start of the year and $4,500 at the end.
- (a) Calculate the interest paid during the year. [2]
- (b) Calculate the interest charged on the bank loan. [1]
- (c) Explain how IAS 7 allows interest paid to be classified. [2]
Show answer
- (a) $9,150
M1 2,250 + 11,400 − 4,500; A1 9,150.
- (b) $2,400
B1 11,400 − 9,000 debenture interest.
- (c) Interest paid may be shown either as an operating cash flow (it is a cost that enters profit) or as a financing cash flow (it is a cost of obtaining finance). The company must choose one and apply it consistently from year to year.
1 mark: operating or financing; 1 mark: consistent application.
Extracts from the statements of financial position of Amber Ltd: End of year Start of year $ $Inventories 36,500 31,000Trade receivables 19,800 24,000Prepaid expenses 1,250 800Trade payables 21,900 17,600Accrued expenses 1,000 1,400
- (a) Calculate the adjustment for each item in the reconciliation of profit from operations to cash generated from operations, and the net adjustment. [4]
- (b) Explain why an increase in inventories is deducted from profit from operations. [2]
Show answer
- (a) Increase in inventories (5,500)Decrease in trade receivables 4,200Increase in prepayments (450)Increase in trade payables 4,300Decrease in accruals (400)Net adjustment: 2,150 added
B1 inventories and receivables; B1 prepayments; B1 payables and accruals; B1 net +2,150.
- (b) Cash has been spent buying goods that have not yet been sold, so they have not been charged in cost of sales; the cash outflow is greater than the cost charged against profit, so the increase is deducted.
1 mark: cash spent on goods not yet charged in profit; 1 mark: outflow exceeds cost of sales.
Agate Ltd's retained earnings were $214,000 at 1 April 2026 and $251,500 at 31 March 2027. Profit for the year was $82,500. During the year $15,000 was transferred from retained earnings to a general reserve. The company has 250,000 ordinary shares; it paid an interim dividend of $0.04 per share during the year and also paid the final dividend for the previous year.
- (a) Calculate the total dividends paid during the year. [3]
- (b) State the section of the statement of cash flows in which dividends paid are usually shown. [1]
- (c) Calculate the final dividend for the previous year that was paid, and the dividend per share. [2]
Show answer
- (a) $30,000
B1 profit added; B1 transfer to reserve deducted; A1 30,000.
- (b) Financing activities
B1 (operating is also allowed by IAS 7 if applied consistently).
- (c) $20,000; $0.08 per share
B1 30,000 − 10,000 = 20,000; B1 20,000 ÷ 250,000 = $0.08.
At 31 December 2026 Onyx Ltd had: cash at bank $14,200; cash in hand $650; a deposit of $20,000 made on 15 December 2026 that matures on 15 February 2027; a one-year deposit of $50,000 made on 1 October 2026; and an overdraft of $6,300 at another bank, repayable on demand and used for day-to-day cash management.
- (a) Define 'cash and cash equivalents' as used in IAS 7. [2]
- (b) Calculate the cash and cash equivalents at 31 December 2026. [2]
- (c) Explain how the one-year deposit is treated. [2]
Show answer
- (a) Cash on hand and demand deposits, plus short-term highly liquid investments readily convertible to known amounts of cash with insignificant risk of change in value (normally maturing within three months of acquisition); bank overdrafts repayable on demand that form part of cash management are deducted.
1 mark: cash and demand deposits; 1 mark: short-term liquid investments (≤ 3 months) / overdrafts included.
- (b) $28,550
B1 2-month deposit included, overdraft deducted; B1 28,550.
- (c) It is not a cash equivalent because its maturity is more than three months from acquisition. Placing the $50,000 on deposit is an investing cash outflow.
1 mark: excluded – maturity over three months; 1 mark: investing outflow.
On 1 January 2026 Basalt Ltd had $200,000 of 10% debentures. Interest is paid half-yearly on 30 June and 31 December, and nothing was accrued at the start of the year. On 1 July 2026 these debentures were redeemed at par, after the June interest had been paid. On the same day the company issued $250,000 of 7% debentures; interest on these is paid once a year on 30 June.
- (a) Calculate the finance costs for the year ended 31 December 2026. [2]
- (b) Calculate the interest paid during the year and the interest accrued at 31 December 2026. [2]
- (c) Show how the debenture transactions appear in the financing activities section. [2]
Show answer
- (a) $18,750
B1 old debentures 10,000; B1 new debentures 8,750 → 18,750.
- (b) Paid $10,000; accrued $8,750
B1 each.
- (c) Proceeds from issue of 7% debentures $250,000Redemption of 10% debentures ($200,000)Net inflow $50,000
B1 each line.
At 1 January 2026 Slate Ltd's statement of financial position showed tax payable of $30,000, the estimated tax for 2025. The tax actually paid for 2025 during 2026 was $32,500. The estimated tax for 2026 is $27,000; this is payable in 2027.
- (a) Calculate the tax charge in the statement of profit or loss for 2026. [2]
- (b) Use the opening and closing tax liabilities and the tax charge to calculate the tax paid in 2026. [2]
- (c) Explain why the under-provision for 2025 is included in the 2026 tax charge. [2]
Show answer
- (a) $29,500
B1 under-provision 2,500; B1 27,000 + 2,500 = 29,500.
- (b) $32,500
M1 30,000 + 29,500 − 27,000; A1 32,500 (agrees with the amount paid).
- (c) The 2025 tax was an estimate. The difference found when the actual liability was agreed is a change in an accounting estimate, so it is recognised in the current year's profit or loss rather than by changing the 2025 statements.
1 mark: 2025 figure was an estimate; 1 mark: change in estimate recognised in current period.
Sapphire Ltd: statements of financial position at 31 December 2026 2025 $ $Property, plant and equipment 486,000 410,000Inventories 62,000 55,000Trade receivables 48,000 51,500Bank – 9,800Total assets 596,000 526,300Ordinary shares of $1 each 300,000 250,000Share premium 45,000 30,000Retained earnings 86,300 46,7008% debentures 100,000 150,000Trade payables 39,500 34,000Tax payable 18,200 15,600Bank overdraft 7,000 –Total equity and liabilities 596,000 526,300Additional information for 2026:1 Profit from operations was $96,000. Interest paid was $10,000 and the tax charge was $21,400.2 Depreciation was $52,000. Equipment with a carrying amount of $21,000 was sold for $17,500.3 50,000 shares were issued for cash at $1.30 each. Debentures of $50,000 were redeemed at par on 30 June 2026.4 Dividends paid were $25,000.The company classifies interest paid and tax paid as operating cash flows, interest and dividends received as investing cash flows, and dividends paid as financing cash flows.
- (a) Calculate the cash paid for property, plant and equipment. [2]
- (b) Calculate the tax paid. [1]
- (c) Prepare the statement of cash flows for the year ended 31 December 2026. [10]
Show answer
- (a) $149,000
M1 486,000 − 410,000 + 52,000 + 21,000; A1 149,000.
- (b) $18,800
B1 15,600 + 21,400 − 18,200.
- (c) Sapphire Ltd – Statement of cash flows for the year ended 31 December 2026 $ $Cash flows from operating activitiesProfit from operations 96,000Depreciation 52,000Loss on disposal of equipment 3,500Increase in inventories (7,000)Decrease in trade receivables 3,500Increase in trade payables 5,500Cash generated from operations 153,500Interest paid (10,000)Tax paid (18,800)Net cash from operating activities 124,700Cash flows from investing activitiesPurchase of property, plant and equipment (149,000)Proceeds from sale of equipment 17,500Net cash used in investing activities (131,500)Cash flows from financing activitiesProceeds from issue of shares 65,000Redemption of debentures (50,000)Dividends paid (25,000)Net cash used in financing activities (10,000)Net decrease in cash and cash equivalents (16,800)Cash and cash equivalents at 1 January 2026 9,800Cash and cash equivalents at 31 December 2026 (7,000)
B1 depreciation and loss on disposal added; B1 inventory −7,000; B1 receivables +3,500 and payables +5,500; B1 interest and tax paid (net operating 124,700); B1 purchases 149,000; B1 proceeds 17,500; B1 share issue 65,000 (capital + premium); B1 debenture redemption and dividends; B1 net decrease 16,800; B1 opening 9,800 and closing (7,000) overdraft.
Extracts from the notes to the financial statements of Garnet Hotels Ltd for the year ended 31 December 2026:Land and buildings (at valuation): carrying amount $600,000 at 1 January and $780,000 at 31 December. During the year the land and buildings were revalued upwards by $90,000. Depreciation on buildings was $24,000. There were no disposals.Fixtures and equipment: carrying amount $210,000 at 1 January and $236,000 at 31 December. Depreciation was $41,000. Equipment that cost $30,000, with accumulated depreciation of $22,000, was sold at a profit of $1,500.
- (a) Calculate the cash spent on land and buildings. [3]
- (b) Explain why the revaluation does not appear in the statement of cash flows and state where it is reported. [2]
- (c) Calculate the cash spent on fixtures and equipment and the cash received from the sale. [3]
Show answer
- (a) $114,000
B1 revaluation deducted; B1 depreciation added; A1 114,000.
- (b) A revaluation changes the carrying amount but involves no cash. The surplus of $90,000 is credited to the revaluation reserve: it is reported as other comprehensive income and shown in the statement of changes in equity.
1 mark: no cash flow; 1 mark: revaluation reserve / other comprehensive income.
- (c) Purchases $75,000; proceeds $9,500
B1 carrying amount of disposal 8,000; B1 purchases 236,000 − 210,000 + 41,000 + 8,000 = 75,000; B1 proceeds 9,500.
Beryl Ltd's net cash from operating activities was $72,600. Interest paid was $5,200 and tax paid was $12,800 (both operating). Depreciation was $18,900 and there was a profit on disposal of $1,700. Inventories increased by $4,400, trade receivables decreased by $2,300 and trade payables decreased by $3,100.
- (a) Calculate the cash generated from operations. [2]
- (b) Calculate the profit from operations. [3]
- (c) Finance costs in the statement of profit or loss were $5,600 and the tax charge was $14,100. Calculate the profit for the year. [2]
Show answer
- (a) $90,600
M1 add back interest and tax paid; A1 90,600.
- (b) $78,600
M1 reverse each adjustment; B1 depreciation deducted and profit on disposal added back; A1 78,600.
- (c) $58,900
M1 78,600 − 5,600 − 14,100; A1 58,900.
During the year Topaz Ltd bought a new machine with a price of $64,000. It part-exchanged an old machine (cost $40,000, accumulated depreciation $27,000), for which the supplier gave an allowance of $11,000, and paid the balance in cash. It also bought vehicles for $28,000 cash. At the start of the year the carrying amount of property, plant and equipment was $300,000; depreciation for the year was $47,000.
- (a) Calculate the cash paid for property, plant and equipment shown under investing activities. [2]
- (b) Calculate the loss on the part-exchange and state where it appears in the statement of cash flows. [2]
- (c) Explain why the part-exchange allowance is not shown as proceeds from sale. [2]
- (d) Calculate the carrying amount of property, plant and equipment at the end of the year. [2]
Show answer
- (a) $81,000
B1 53,000 for the machine; B1 total 81,000.
- (b) Loss $2,000 (carrying amount 13,000 − allowance 11,000); added back to profit from operations in the operating activities section.
B1 2,000; B1 added back.
- (c) No cash was received for the old machine: the allowance only reduced the cash paid for the new one. IAS 7 excludes non-cash transactions, so only the net $53,000 paid is shown.
1 mark: no cash received; 1 mark: non-cash transaction / only net payment shown.
- (d) $332,000
M1 300,000 + 92,000 − 13,000 − 47,000; A1 332,000.
Information for Cobalt Ltd for the year ended 31 December 2026: 2026 2025 $ $Property, plant and equipment at cost 905,000 820,000Accumulated depreciation 352,000 310,000Tax payable 18,500 17,000An asset that cost $60,000, with accumulated depreciation of $45,000, was sold for $9,000.Profit for the year was $74,200, after finance costs of $8,000 (all paid) and a tax charge of $19,800.Inventories increased by $3,600, trade receivables decreased by $2,900 and trade payables increased by $1,700.The company classifies interest paid and tax paid as operating cash flows, interest and dividends received as investing cash flows, and dividends paid as financing cash flows.
- (a) Calculate the depreciation charge for the year. [2]
- (b) Calculate the loss on disposal. [1]
- (c) Calculate the profit from operations. [1]
- (d) Prepare the operating activities section of the statement of cash flows. [5]
Show answer
- (a) $87,000
M1 352,000 − 310,000 + 45,000; A1 87,000.
- (b) $6,000
B1 15,000 − 9,000.
- (c) $102,000
B1 74,200 + 8,000 + 19,800.
- (d) Cash flows from operating activities $Profit from operations 102,000Depreciation 87,000Loss on disposal 6,000Increase in inventories (3,600)Decrease in trade receivables 2,900Increase in trade payables 1,700Cash generated from operations 196,000Interest paid (8,000)Tax paid (18,300)Net cash from operating activities 169,700
B1 depreciation and loss added; B1 working capital changes; B1 cash generated 196,000; B1 tax paid 18,300; B1 net 169,700.
Quartz Minerals Ltd: extracts from the financial statements for the year ended 31 March 2027Statement of profit or loss: profit from operations $104,000; finance costs $9,600; tax $24,000; profit for the year $70,400.Statements of financial position at 31 March: 2027 2026 $ $Property, plant and equipment 545,000 478,000Inventories 70,500 66,000Trade receivables 41,200 45,600Cash and cash equivalents 23,900 (10,100)Trade payables 36,800 38,400Interest accrued 2,400 1,600Tax payable 25,000 21,5006% debentures 160,000 160,000Ordinary shares of $1 each 250,000 200,000Share premium 70,000 50,000Retained earnings 136,400 108,000(A bracketed figure for cash is an overdraft.)Depreciation for the year was $61,000. There were no disposals. All share issues were for cash. The company classifies interest paid and tax paid as operating cash flows, interest and dividends received as investing cash flows, and dividends paid as financing cash flows.
- (a) Calculate the dividends paid during the year. [2]
- (b) Calculate the interest paid and the tax paid. [2]
- (c) Prepare the statement of cash flows for the year ended 31 March 2027. [9]
Show answer
- (a) $42,000
M1 108,000 + 70,400 − 136,400; A1 42,000.
- (b) Interest $8,800; tax $20,500
B1 each.
- (c) Quartz Minerals Ltd – Statement of cash flows for the year ended 31 March 2027 $ $Cash flows from operating activitiesProfit from operations 104,000Depreciation 61,000Increase in inventories (4,500)Decrease in trade receivables 4,400Decrease in trade payables (1,600)Cash generated from operations 163,300Interest paid (8,800)Tax paid (20,500)Net cash from operating activities 134,000Cash flows from investing activitiesPurchase of property, plant and equipment (128,000)Cash flows from financing activitiesProceeds from issue of shares 70,000Dividends paid (42,000)Net cash from financing activities 28,000Net increase in cash and cash equivalents 34,000Cash and cash equivalents at 1 April 2026 (10,100)Cash and cash equivalents at 31 March 2027 23,900
B1 depreciation added; B1 working capital changes (−4,500, +4,400, −1,600); B1 cash generated 163,300; B1 interest and tax paid (net operating 134,000); B1 purchases 128,000; B1 share proceeds 70,000; B1 dividends 42,000; B1 net increase 34,000; B1 opening (10,100) and closing 23,900.
Flint Ltd's profit before tax for 2026 was $61,000. This was after finance costs of $7,700 and after including investment income of $5,400 (interest receivable $3,600 and dividends received $1,800). Interest receivable accrued was $700 at the start of the year and $1,100 at the end. During the year the company bought property, plant and equipment for $70,000 and sold investments for $12,000 (their carrying amount). The company classifies interest paid and tax paid as operating cash flows, interest and dividends received as investing cash flows, and dividends paid as financing cash flows.
- (a) Calculate the profit from operations. [2]
- (b) Calculate the interest received. [2]
- (c) Prepare the investing activities section of the statement of cash flows. [3]
- (d) Explain why investment income is deducted when calculating profit from operations. [1]
Show answer
- (a) $63,300
M1 61,000 + 7,700 − 5,400; A1 63,300.
- (b) $3,200
M1 700 + 3,600 − 1,100; A1 3,200.
- (c) Cash flows from investing activities $Purchase of property, plant and equipment (70,000)Proceeds from sale of investments 12,000Interest received 3,200Dividends received 1,800Net cash used in investing activities (53,000)
B1 purchase and sale; B1 interest 3,200 and dividends 1,800; B1 net (53,000).
- (d) It is not an operating item; the cash actually received is shown under investing activities, so it would otherwise be counted twice.
B1.
Summary statements of cash flows of Marble Furniture Ltd: 2026 2025 $ $Net cash from operating activities 38,000 92,000Net cash used in investing activities (145,000) (30,000)Issue of debentures 100,000 –Dividends paid (40,000) (40,000)At 31 December 2026 the company had a bank overdraft of $21,000. Profit for the year rose by 15% in 2026. Inventories and trade receivables both rose sharply during 2026, and the investing outflow was for a new factory.
- (a) Calculate the net change in cash and cash equivalents for 2026 and the balance at 1 January 2026. [2]
- (b) Advise the shareholders whether they should be concerned about the company's cash position. Justify your answer. [6]
Show answer
- (a) Decrease of $47,000; balance at 1 January 2026 $26,000 (in hand)
B1 net decrease 47,000; B1 opening 26,000.
- (b) Concerns: operating cash flow fell from $92,000 to $38,000 although profit rose 15% – profit is tied up in inventories and receivables (poor working-capital control); cash moved from $26,000 in hand to a $21,000 overdraft; dividends of $40,000 were paid that exceed operating cash; the new debentures add interest costs and must be repaid.Reassurance: the outflow was mainly a one-off investment in a new factory, financed largely by long-term debentures (matching long-term finance to long-term assets); the factory should raise future profits and cash; the company is still profitable.Decision: some concern – the investment is sensible, but management must improve credit control and inventory levels and may need to cut the dividend until operating cash flow recovers.
Up to 3 marks for concerns using figures; up to 2 marks for reassuring points; 1 mark for a justified conclusion.
- (a) State three uses of a statement of cash flows to the shareholders and managers of a company. [3]
- (b) Explain why a statement of cash flows is useful in addition to a statement of profit or loss. [2]
Show answer
- (a) Any three: shows how cash was generated and used; shows whether operating activities generate enough cash to pay interest, tax and dividends; helps assess liquidity and the ability to pay debts; shows how investment was financed; helps forecast future cash flows; cash figures are hard to manipulate and easy to compare.
1 mark each for any three.
- (b) Profit is based on the accruals concept and includes non-cash items such as depreciation and provisions, so a profitable business can still run out of cash. The statement of cash flows shows actual cash movements and liquidity.
1 mark: profit uses accruals/non-cash items; 1 mark: cash flows show liquidity/actual cash.
Ivory Ltd made a profit from operations of $120,000 for 2026, but its bank balance fell sharply. Its statement of cash flows shows: depreciation $26,000; increase in inventories $48,000; increase in trade receivables $61,000; decrease in trade payables $19,000; net cash from operating activities $18,000; net cash used in investing activities $200,000; net cash from financing activities $50,000.
- (a) Calculate the net change in cash and cash equivalents for 2026. [1]
- (b) Using the figures, explain three reasons why Ivory Ltd's cash fell although it was profitable. [6]
Show answer
- (a) Decrease of $132,000
B1 18,000 − 200,000 + 50,000.
- (b) 1 Working capital absorbed cash: inventories rose by $48,000 and receivables by $61,000, so much of the profit is tied up in unsold goods and unpaid customer balances.2 Suppliers were paid faster: payables fell by $19,000, another outflow not shown in profit.3 Heavy investment: $200,000 was spent on non-current assets, only $50,000 of which was financed by long-term financing; the rest came from existing cash.(Depreciation of $26,000 reduced profit without any cash outflow, which partly offset these.)
For each of three reasons: 1 mark for identifying it and 1 mark for supporting it with figures from the question.
