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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 assets
_________
Answer is C but why?Option A – for operating activities flows to be positive suggests that:
Receivables have decreased
Payables have increased and
Inventory has decreasedFor an entity that is currently going through a period of expansion you would expect receivables and inventory also to have increased particularly inventory as a direct rsult of payables increasing
Option B – financing activities is a negative flow suggesting repayment of loans or redemption of shares. An outflow of financing cash cannot have been used to finance NCA
Option D – If the proceeds of sale of existing NCA had been used to cover to acquisition of new NCA, there would not have been any movement in the investing activities
OK?
I do get it why A, B and D are not the answers but can you point me out a conceptual idea of C being the answer so as to make it easier for me to reflect upon if a similar question appears tomorrow?
Can you see that there is a negative cash flow from investing activities and a negative cash flow from financing activities?
Well, where do you imagine the cash has come from to acquire those new assets?
In my view you have your own joyful way of preaching and explaining things. Just one thing, your writing in your lectures needs patience 😉
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