Reference no: EM133114054 , Length: word count:480

Case Scenario - Modupe

Modupe runs a manufacturing business. Some of her products are manufactured under a licence which was granted on 1 January 20X2. Modupe paid £10,000 for the licence which runs for five years. She is amortising the cost of the licence at the rate of 20 per cent each year for five years.

On 1 March 20X4, Modupe bought a new machine for £18,000. The machine replaced another machine which had been fully depreciated, and which was scrapped on 28 February 20X4. Machinery and most other non-current assets are depreciated on a straight-line basis over 10 years.

There were no other purchases or sales of non-current assets.

Modupe tells you, her financial adviser, that she is worried that the cash at bank figure has fallen by such a large amount since the start of her financial year. She wonders if she should have made the investment in buying a new machine.

Modupe's statement of profit or loss for the year ended 31 May 20X4 was as follows:

                                                                                      £                              £

Depreciation of £57,756 is included in expenses. Depreciation of £107,775 is included in cost of goods manufactured. This includes the amount charged to depreciation in respect of the new machine. Amortisation of £2,000 in respect of the patent is also included in cost of goods manufactured.

Modupe's statements of financial position at 31 May 20X4 and 20X3 were as follows:

Question 1: Prepare Modupe's statement of cash flows for the year ended 31 May 20X4.

Question 2: Write a brief report to Modupe explaining the reasons why the cash at bank balance has fallen during the year. Advise her on any actions she could take to improve the cash position.