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Hi John, I have a question on 2015DecQ3 Flufftort Co.
1) for a(i), here is what I do for share repurchase:
dr. share capital 10m
cr. cash 7.6m
cr. overdraft 2.4m
but I am wondering why in this case, the answer only shows the effect of share repurchase on share capital by reducing 10m and cash by reducing 7.6, but the overdraft component is missing?2) for a(ii), it indicates that the finance cost for the bank loan would be 10% per annum.
I am wondering why dr. interest expense 65m*10% = 6.5m cr. interest payable isn’t shown in the BS of 30 June 2016 by increasing current liabilities by 6.5 in addition to 12 shown in the answer?3) for a(ii), why cash is a balancing figure of 5, instead of carrying forward the balance of 7.6 from 2015?
Thanks a lot!!
1. The question says that the figure shown for retained earning in the 2016 forecast (which is 2.4) can be assumed to be the net increase in cash for the year. So the 2.4 makes the cash balance zero.
2. It is assumed that the interest will have been paid (which is a sensible assumptions).
3. 7.6 is the cash balance at the end of 2015. There is not reason why it should still be 7.6 at the end of 2016 – lots of things will change the cash balance 🙂
thanks, John, I have a further question on that
1) It makes sense that the retained earning is the net increase in cash, so the double entry becomes
dr. share capital 10m
cr. cash 7.6+2.4m=10mbut since 2.4m is spent on share repurchase, I am wondering why it will still remain in the retained earnings on BS, is it because of the following entries such as 2.4m is added to the retained despite 2.4m being spent?
dr. cash 2.4m (spent)
cr. retained earning 2.4m (remain in RE)thanks again:)
regarding question 3, I agree that there is a lot of changes so the cash figure will not remain as 7.6 in 2016. I am wondering whether we could calculate the cash figure itself from the information provided other than calculating it by balancing the figure?
In a(i), cash figure is solely calculated using the information provided, I am unsure when to use balance method and when to calculate the figure for cash?
Don’t think of double entries in Paper AFM – it is not a financial accounts exam.
2.4 is the increase in retained earnings. Separately, 2.4 is the net increase in cash after taking account of everything that affects the cash balance.You could calculate the cash figure separately, but it would be waiting time that you will not have in the exam (especially given that there are only 4 marks for each of the SOFP’s). Appreciate that each item in the SOFP will be marked separately and that even if you had not put any figure in for the cash you would only lose 1 of the 8 marks. I cannot give you a ‘rule’ as to when to calculate and when to use a ‘balancing figure’ – looking at the marks available helps. Getting the right figures gets the marks whether they have been calculated or whether they are just the balancing figures.
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