June 2015 Exam Q3 – Clarion

“Why plant acquired under finance lease ($8M) not included in purchase of PPE when doing CF from investing activities?”

One of the purposes of buying assets under a finance lease arrangement is exactly because we can’t afford to pay the cash and buy it outright. Instead we pay in instalments and the amount that we have paid for this particular asset is the deposit and the first instalment net of the finance lease interest included within that first instalment (the interest would appear within the figure for “interest paid” in the operating activities section)

And that figure, net of interest, is shown in financing activities … because it’s the finance lease creditor that is financing the acquisition of the asset

“Also, I don’t get it why sale of investment worth $1.6M, isn’t it supposed to be $200k instead?”

Ask yourself “How much CASH was received from the sale of the investments?” This is a statement of CASH flows! The $200,000 profit achieved on the sale will have appeared in the statement of profit or loss as an income, but it’s non-cash so will have been added back (ie deducted because it’s an income) as a non-cash item in arriving at the figure “Net cash flow from operating activities”

“$300k of dividend received isn’t included in CF from investing activities too.”

Here’s an extract from the question requirement part (e)

“… in respect of cash flows from investing (ignore investment income) and financing activities”

“Why redemption of loan note is deducted in CF from financing activities?”

How do you think that a loan will be repaid? It’s a cash outflow, in the same way that an increase in borrowing by way of loan notes is a cash inflow

OK?