You are the management accountant of Holmes plc and you are in the process of preparing the consolidated cash flow statement. Your Managing Director is aware that the statement is required by FRS 1 – Cash flow statements, and that a number of notes to the statement must also be included. She has a reasonable understanding of the rationale behind the cash flow statement but is not clear as to why so many notes to the statement are required.
Requirements
(a) Prepare the consolidated cash flow statement of the Holmes group for the year ended 30 September 1999 in the form required by FRS 1 – Cash flow statements. Show your workings clearly.
Do not prepare notes to the cash flow statement.
(b) Write a memorandum to your Managing Director which explains the need for the following notes to the cash flow statement:
- reconciliation of operating profit to operating cash flows;
- reconciliation of net cash flow to movement in net debt;
- summary of the effect of the acquisition of Watson plc.
Do not prepare any of these three notes for Holmes plc.
Extracts from the consolidated financial statements of Holmes plc are given overleaf:
Consolidated profit and loss accounts for the year ended
|
30 September 1999 |
30 September 1998 |
|||
|
£ million |
£ million |
£ million |
£ million |
|
|
Turnover |
600 |
500 |
||
|
Cost of sales |
(300) |
(240) |
||
|
Gross profit |
300 |
260 |
||
|
Other operating expenses (Note 1) |
(150) |
(130) |
||
|
Group operating profit |
150 |
130 |
||
|
Share of operating profit of associates |
40 |
35 |
||
|
Interest payable: |
||||
|
– group |
50 |
45 |
||
|
– associates |
15 |
10 |
||
|
(65) |
(55) |
|||
|
Profit before exceptional item |
125 |
110 |
||
|
Exceptional item (Note 2) |
10 |
– |
||
|
Profit before taxation |
135 |
110 |
||
|
Taxation: |
||||
|
– group |
35 |
25 |
||
|
– associates |
8 |
(43) |
8 |
(33) |
|
Profit after taxation |
92 |
77 |
||
|
Minority interests |
(10) |
(6) |
||
|
Group profit |
82 |
71 |
||
|
Equity dividends |
(25) |
(25) |
||
|
Retained profit for year |
57 |
46 |
||
|
30 September 1999 |
30 September 1998 |
|||
|
£ million |
£ million |
£ million |
£ million |
|
|
Fixed assets |
||||
|
Intangible assets (Note 3) |
25 |
19 |
||
|
Tangible assets (Note 4) |
240 |
280 |
||
|
Investments in associates |
80 |
70 |
||
|
345 |
369 |
|||
|
Current assets |
105 |
90 |
||
|
Stocks |
120 |
100 |
||
|
Debtors |
20 |
70 |
||
|
Investments |
10 |
5 |
||
|
Cash in hand |
255 |
265 |
||
|
Creditors falling due within one year |
||||
|
Trade creditors (Note 5) |
40 |
30 |
||
|
Taxation |
10 |
8 |
||
|
Proposed dividends |
25 |
25 |
||
|
Obligations under finance leases |
25 |
20 |
||
|
Other creditors (Note 6) |
6 |
5 |
||
|
Bank overdraft |
20 |
80 |
||
|
126 |
168 |
|||
|
c/f |
129 |
345 |
97 |
369 |
|
Net current assets |
129 |
97 |
||
|
474 |
466 |
|||
|
Creditors falling due after more than one year |
||||
|
Obligations under finance leases |
(80) |
(70) |
||
|
12% loan stock |
– |
(90) |
||
|
Provisions for liabilities and charges |
||||
|
Deferred taxation |
(30) |
(24) |
||
|
Minority interests |
(65) |
(40) |
||
|
299 |
242 |
|||
|
Capital and reserves |
||||
|
Called-up share capital |
100 |
100 |
||
|
Revaluation reserve |
– |
20 |
||
|
Profit and loss account |
199 |
122 |
||
|
299 |
242 |
|||
Notes to the financial statements:
Note 1 – other operating expenses
|
1999 |
1998 |
|
|
£ million |
£ million |
|
|
Distribution costs |
81 |
75 |
|
Administrative expenses |
75 |
70 |
|
Investment income |
(6) |
(15) |
|
150 |
130 |
From time to time, the group invests cash surpluses in listed securities which are shown as current asset investments in the consolidated balance sheet.
Note 2 – exceptional item
This represents the gain on sale of a large freehold property sold by Holmes plc on 1 October 1998 and leased back on an operating lease in line with the practice adopted by the rest of the group. The property was not depreciated in the current year. The property had been revalued in 1990 and the revaluation surplus credited to a revaluation reserve. No other entries had been made in the revaluation reserve prior to the sale of the property.
Note 3 – intangible fixed assets
This comprises the unamortised balance of goodwill on consolidation which is written off over its useful economic life. During the year ended 30 September 1999, Holmes plc purchased 80% of the issued equity share capital of Watson plc for £100 million payable in cash. The net assets of Watson plc at the date of acquisition were assessed as having fair values as follows:
|
£ million |
|
|
Plant and machinery – owned |
50 |
|
Fixture and fittings – owned |
10 |
|
Stocks |
30 |
|
Debtors |
25 |
|
Cash at bank and in hand |
10 |
|
Trade creditors |
(15) |
|
Taxation |
(5) |
|
105 |
The goodwill arising was assessed as having a useful economic life of 16 years and a full year’s write-off was made in the year ended 30 September 1999. Apart from the acquisition of Watson plc, there were no other changes to the group structure in the year.
Note 4 – tangible fixed assets
|
30 September 1999 |
30 September 1998 |
|
|
£ million |
£ million |
|
|
Freehold land and buildings |
– |
90 |
|
Plant and machinery – owned |
130 |
100 |
|
Plant and machinery – leased |
90 |
70 |
|
Fixtures and fittings – owned |
20 |
20 |
|
240 |
280 |
During the year the group entered into new finance lease agreements in respect of some items of plant and machinery. The amounts debited to fixed assets in respect of such agreements during the year totalled £40 million. No disposals of plant and machinery (owned or leased) or fixtures and fittings took place during the year. Depreciation of tangible fixed assets for the year totalled £58 million.
Note 5 – trade creditors
Trade creditors at 30 September 1999 and 30 September 1998 do not include any accrued interest.
Note 6 – other creditors
These comprise dividends payable to minority shareholders.