Question

Question 1 ways Fresh Pte Ltd is an importer and distributor of fresh fruits and vegetables in Singapore. The following is the Statement of Cash Flows of Always Fresh Pte Ltd for the financial year ended 30 September 2018. Always Fresh Pte Ltd Statement of Cash Flows (Indirect Method) For Year Ended 30 September 2018 198,750 42,000 (19,000) (10,500) (119,500) 91,750 (33.750) Cash flows from operating activities Profit before tax Adjustments to reconcile profit to net cash provided by operating activities Depreciation expenses Increase in accounts receivable Decrease in accounts payable Increase in inventories Cash generated from operating activities Income tax paid Net cash from operating activities Cash flows from investing activities Cash paid for an energy-saving refrigeration system" Net cash used in investing activities Cash flows from financing activities Repayment of debt Net cash used in financing activities Net decrease in cash Cash balance at 1 October 2017 Cash balance at 30 September 2018 58,000 (100,000) (100,000) (50,000) (50,000) * (92,000) 205,670 113,670 * The energy-saving refrigeration system is expected to reduce fruit and vegetable spoilages and improve energy efficiency substantially. Required: (a) The CEO was puzzled that despite a net profit of $198,750, the bank account decreased from $205,670 on 1 October 2017 to $113,670 on 30 September 2018, Examine and explain the main causes and comment on the company's cash level to the CEO (18 marks) (b) Based on the Statement of Cash Flows, identify the possible business actions Always Fresh Pte Ltd can take to improve cash flows from operations. (4 marks) ACC202 Copyright © 2019 Singapore University of Social Sciences (SUSS) Examination - January Semester 2019 Page 2 of 10

Answer 1

a) The reasons for the reduction in cash balance despite good net profit are as follows

1) Net profit is the result of the income statement where only the accruing events are considered. i.e. Whereas in the cash flow statement all cash outflows are taken into effect.

2) $ 100,000 paid to purchase the energy-saving system. However, only the depreciation related to current year is being considered in arriving at the net profit

3) $ 50,000 is repaid towards debt and $ 10,500 accounts payable discharged but the same has not been considered in the income statement.

b) To increase cash flow from operations, investment in inventories should be decreased.

c) Differences between Income Statement and Cash flow Statement

Parameter	Income Statement	Cash Flow Statement
Objective	To know the profitability and owner's equity	To ascertain the liquidity and solvency of business
Depreciation	Considered	Not considered
Basis	Accrual	Cash