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Hi tutor kindly explain this one to me
Top Trades Co has been trading for a number of years and is currently going through a period of expansion.
An extract from the statement of cash flows for the year ended 31 December 20X7 for Top Trades Co is presented as
follows:
$’000
Net cash from operating activities 995
Net cash used in investing activities (540)
Net cash used in financing activities (200)
Net increase in cash and cash equivalents 255
Cash and cash equivalents at the beginning of the period 200
Cash and cash equivalents at the end of the period 455
Which of the following statements is correct according to the extract of Top Trades Co’s statement of cash flows?
A The company has good working capital management
B Net cash generated from financing activities has been used to fund the additions to non-current assets
C Net cash generated from operating activities has been used to fund the additions to non-current assets
D Existing non-current assets have been sold to cover the cost of the additions to non-current assetsThe correct answer is C but how do we know that?
A) The company is going through a period of expansion. I would have expected more of a negative flow in investing activities to be apparent in a period of growth / expansion, With investing activities being lower (substantially) than operating cash inflow, that suggests that Top Trades does NOT enjoy good working capital management
B) There is no cash generated from financing activities – it’s an outflow
D) However much value of non-current assets may have been sold, those proceeds certainly didn’t cover the cost of the additions to non-current assets
It has to be C)
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