Cash Flow Statements

Cash Flow Statements were prepared for Highlow Engineering Company Limited for years ending March 31, 2002 and March 31, 2003. The statements conformed to the requirements of FRS1 (revised December 1996). Highlow Engineering Co. Ltd. cash flow statements list the cash flows for the periods under consideration using the following headings: 1. Operating activities (derived using the indirect method) 2. Returns on Investments and servicing of Finance 3. Taxation 4. Capital Expenditure 5. Equity dividends paid 6. Financing 7. Change in Cash

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‘Management of liquid resources’ which was a required heading for the revised FRS1 was not used since there were no such readily disposable investments to manage. The company’s treasury bills were convertible into cash within 24 hours so they were treated as cash. Based on the requirements of FRS1 (revised 1996), accompanying notes to the cash flow statements are provided in the excel spreadsheet. These notes included:

1. Reconciliation of the operating profit to the operating cash flow. The cash flow from operating activities was obtained by adjusting the operating profits by depreciation charged on the company’s fixed assets, profit and loss obtained from the disposal of equipment and motor vehicle during the period and the changes in working capital. In 2002, 49% of funds from operations were used to increase working capital while in 2003, the working capital increased by using approximately 57%.

2. Taxes Paid: Since there were no deferred taxes, the balance owed at the beginning of the year plus the taxes charged for the current year, less the balance at the end of the year was used to derive the amount paid. The amount paid in 2002 was 0.762 million while 1.114 million was paid in 2003. Please see accompanying excel document. 3. Dividends paid, the company had taken a position to pay dividend half way through each financial year, This is accounted for in calculating the preference dividends paid each year and its treatment is explained in Note 3 in the excel document. The total dividends paid each year were calculated using the same method as was used to calculate taxes paid.

4. Capital Expenditure: The company had acquired and disposed of some assets during the period so the details of these transactions are shown in note 4 in the excel spreadsheet. Part 1b. Cash flow analysis of Highlow Engineering Company Ltd. In appraising the cash flow statements the following observations were made. The net cash flow from operating activities in 2003 was very good. The company started in each year with good operating profits although 2003 started with approximately �2 million more than the previous year.

After adjustments were made for depreciation and profit or loss on fixed assets, the company’s earnings before interest, tax depreciation and amortisation (EBIDA) was very attractive particularly for 2003, which had an EBITDA of 10.63 million. At �6.03 million, the operating cash flow, derived by adjusting EBITDA with changes in working capital, was approximately 63% better than for the previous year, which was 3.71 million. The operating cash flow was sufficient to cover taxes, interest and preference dividend in both periods. The sum of these payments was 2,064,000 and 2,741,000 for 2002 and 2003 respectively. There was a 36% decline in preference dividends paid in 2003.

Since the company had acquired and disposed of some assets during the period there was a major net outflow of cash for capital expenditure from acquiring and disposal of fixed assets. These had the net effect of depleting the cash flows for both years. Significantly more was spent in 2003 to acquire fixed assets than was spent in 2002. This is because in 2002 the company bought no property and spent approximately 80% less on the purchase of motor vehicle. The net effect of purchasing and selling assets were an outflow of �9.8 million in 2003 compared to �7.2 million for 2002. Property was also revalued at 1,000,000.

The 2002 cash expenditure for capital expenditure was 300% greater than the depreciation charges and approximately 317% for 2003. This indicated a possible increase in productive capacity since a large percent of this was spent on equipment and motor vehicle. Dividends were paid to ordinary shareholders in both years although the company, at that stage, was realising a negative cash flow. The dividend paid in 2003 was 36.8% higher than that paid the previous year. It was interesting to see that there was a major outflow of capital to repay 8% bonds, which would become due in 2007 while at the same time there was a larger inflow of capital from a 10% bond. It appears that Highlow Engineering was refinancing and it was costing more to do so. Also of interest, is the fact that it went from a position of no bank overdraft at the start of 2002 to �3.6 million at the end of 2002 and to �9.0 million a year later.

The financing section of the cash flow statement, showed that, for both years, there was a net positive effect of the financing strategies employed although it was not sufficient to cover the negative cash flow created by the acquisition of fixed assets. From the cash flow statement the company seems to be having a liquidity problem. It had a negative overall cash flow, which seemed to have worsened from 2002 to 2003. It was heavily relying on loans in the form of bonds as explained earlier.