16. Accounting For Limited Companies- SOCF

Question 1

Describe what is included in the operating activities section of the SOCF

Answer 1

Operating profit

Depreciation

P/L on dips/sale of NCA

(Changes in) :inventory

Trade receivables

Trade payables

Interest paid

Tax paid

Question 2

Describe what is included in the investing activities of SOCF

Answer 2

Sale proceeds of NCA

Purchase price of additional NCAs

Interest received

Dividends received

Question 3

Describe what is included in the financing activities of SOCF

Answer 3

Cash received from issuing shares (including share premium)

Cash received from new loans/debentures

Repayments of loans,debentures or shares and dividends paid

Question 4

In the operating activities section what happens to operating profit?

Answer 4

Add

A loss would be shown as a negative number

Question 5

In the operating activities section what happens to depreciation?

Answer 5

Add

It’s an expense when calculating operating profit but it’s a cash outflow

Question 6

In the operating activities section what happens to loss on disposal of NCA?

Answer 6

Add

It’s an expense when calculating operating profit but it’s a cash outflow

Question 7

In the operating activities section what happens to profit on disposal of NCA?

Answer 7

Subtract

Its income when calculating operating profit but it’s not a cash inflow

Question 8

In the operating activities section what happens to decrease in inventory?

Answer 8

Add

Good for cash flow

Question 9

In the operating activities section what happens to increase in inventory?

Answer 9

Subtract

Bad for cash flow

Question 10

In the operating activities section what happens to decrease in TR?

Answer 10

Add

It’s good for cash flow

Question 11

In the operating activities section what happens to increase in TR?

Answer 11

Subtract

Bad for cash flow

Question 12

In the operating activities section what happens to increase in TP

Answer 12

Add

It’s good for cash flow

Question 13

In the operating activities section what happens to decrease in TP?

Answer 13

Subtract

It’s bad for cash flow

Question 14

If the total of ODSIDC section is positive

Answer 14

Cash from operating activities

Question 15

If the total of ODSIDC section is negative

Answer 15

Cash used in operating activities

Question 16

In the operating activities section what happens to interest paid?

Answer 16

Subtract

It may be called finance cost on the IS . It’s an outflow

Question 17

In the operating activities section what happens to Tax paid?

Answer 17

Subtract

This is the corporation tax paid during the year which is an outflow

Question 18

If the total of operating activities section is positive what is it called?

Answer 18

Net cash from operating activities

Question 19

If the total of operating activities section is negative what is it called?

Answer 19

Net cash used in operating activities

Question 20

In the investing activities section, what is done to sale of NCA?

Answer 20

Add

The disposal proceeds are an inflow

Question 21

In the investing activities section, what is done to purchase of NCA?

Answer 21

Subtract

Their cost is an outflow

Question 22

In the investing activities section, what is done to interest/dividends received?

Answer 22

Add

There are inflows

Question 23

If the total of investing activities section is positive what is it called?

Answer 23

Cash from investing activities

Question 24

If the total of investing activities section is negative what is it called?

Answer 24

Cash used in investing activities

Question 25

In the financing activities section, what is done to issue of shares including share premium?

Answer 25

Add The share issue is an inflow, unless it’s a bonus issue

Question 26

In the financing activities section, what is done to new loans/ debentures?

Answer 26

Add The cash receive is an inflow

Question 27

In the investing activities section, what is done to repayment of loans, debentures or shares

Answer 27

Subtract Their payment is an outflow

Question 28

In the financing activities section, what is done to dividends paid?

Answer 28

Subtract They’re outflows

Question 29

If the total of financing activities section is positive what is it called?

Answer 29

Cash from financing activities

Question 30

If the total of financing activities section is negative what is it called?

Answer 30

Cash used in financing activities

Question 31

What is included in the change in cash and cash equivalents section?

Answer 31

Net increase/decrease in C and CE (This is the total of the 3 sections, if negative, shown in brackets) C & CE at the start of the year (From last year’s SOFP) C & CE at the end of the year (From this year’s SOFP)

Question 32

How to calculate operating profit using retained earnings?

Answer 32

RE at end - RE at start + Tax + Interest + Dividend = Operating profit

Question 33

How to calculate profit for the year from changes in RE?

Answer 33

RE at start + PFTY - Dividends Paid =RE at end

Question 34

How to calculate operating profit for the year?

Answer 34

Operating profit -Finance cost (interest) - Tax charged on operating profit = Profit for the year

Question 35

How to calculate tax paid during the year

Answer 35

Tax liability from last years SOFP + Tax on this years profits from this years IS - Tax liability from this years SOFP = Tax paid during the year which

Question 36

Tip for tax paid

Answer 36

Tax on profits on the IS isn’t usually the amount of tax that was paid during the year

Question 37

Tips for interest / finance costs

Answer 37

Look out for debentures, even if the Q doesn’t mention finance costs. Where debentures were issued during the year, finance cost is the only for the months after the debenture was issued. Where debentures were repaid during the year, the finance cost us only for the months before the debenture was repaid.

Question 38

Calculating the cost of additions to NCA

Answer 38

If it’s not already provided in a SONCA: 1. Subtract the initial cost of disposals from the cost of NCA at the start of the year . 2. Add the amount if any revaluation of NCA. 3. Subtract the above fig from the cost of NCAs at the end of the year.

Question 39

Worked example: cost of additions to NCAs

Answer 39

Cost of NCA at the start of the year (or end of last year): 78900 —the initial cost of NCA sold during the year : (12800) + Any revaluation of NCA during the year: 22000 = 88100 The cost of NCA at the end of the year is £125600. Therefore the cost of NCA bought during the year = £125600 - £88100 = £37500

Question 40

Benefits of SOCF

Answer 40

SOCF can help shareholders to assess the cash position (liquidity) of the business. They show shareholders where cash has come from and where it has been spent. They provide some info that isn’t in the IS or SOFP.

Question 41

The importance of liquidity

Answer 41

Cash is essential to the short term survival of the business . If a business can’t pay its running costs, it can be placed into administration. Liquidity could affect the level of dividends. Liquidity may indicate whether the company can afford further expansion.

Question 42

Limitations of SOCF

Answer 42

Shareholders also need to use IS (to assess profitability) and SOFP (to assess liquidity and gearing). Like other fs, SOCF are historical and don’t always indicate what’ll happen in the future. Like other fs, many items are summarised and don’t provide detailed info.