The following is a list of amounts taken from the records of Lilly Lavender's,a flower sales and arranging service,for the year to 31/12/20X1.
a Prepare a fully classified Cash Flow Statement for the year ending 31 December 20X1.(Note: some items listed are not cash flow items. )
b Comment on Lilly's cash flows,in regard to operating,investing and financing activities,the ending cash bank balance,and any items you consider are relevant.
c Assume Lilly's net profit on her Income Statement is $240,000.Compare this with the final net operating cash flow for the business,and suggest reasons for the difference.
d Make 3 recommendations to Lilly in regard to her cash flows and cash position.

Question

The following is a list of amounts taken from the records of Lilly Lavender's,a flower sales and arranging service,for the year to 31/12/20X1.
  a Prepare a fully classified Cash Flow Statement for the year ending 31 December 20X1.(Note: some items listed are not cash flow items. )
b Comment on Lilly's cash flows,in regard to operating,investing and financing activities,the ending cash bank balance,and any items you consider are relevant.
c Assume Lilly's net profit on her Income Statement is $240,000.Compare this with the final net operating cash flow for the business,and suggest reasons for the difference.
d Make 3 recommendations to Lilly in regard to her cash flows and cash position.

Quizplus · Accepted Answer

The Answer is a

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b Lilly has very good cash flow from operations,with a net cash inflow of $207,000.This is easily sufficient to cover her drawings of $90,000.
However,she has purchased new buildings which has meant a net cash outflow from investing activities.Repayment of a large mortgage has also resulted in a net cash outflow from financial activities.
The overall net cash outflows from investing and financing has resulted in an overall net cash outflow of $47,000,which has increased her bank overdraft for the year.
Interest paid at $35,000 is quite high,and part of this may be due to the high ending bank overdraft.
c The net profit is quite a bit higher than the net cash flow from operations.This suggests that Lilly is not collecting her sales amounts from customers in total,and perhaps some of her sales are 'paper sales',i.e.sales to customers who have struck financial difficulties and will not be able to pay.
d Reduce drawings if possible to free up more cash for use in the business,especially to repay the bank overdraft and avoid high interest costs.
If possible,borrow short- or medium-term funds to pay off the overdraft,and avoid high overdraft interest charges.
Consider taking out a larger long-term mortgage (at more favourable rates than the bank overdraft)to replace some or all of the interest facility.

The Following Is a List of Amounts Taken from the Records