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Analysis Of Cash Flow Statement Of Plato Ltd.

Question

Task: Prepare a comprehensive report on the cash flow statement.

Answer

Introduction
The concept of cash flow positions bears the same relevance as that of the notions entailed in the topic of financial position and profitability in an organization. The aspect of liquidity of concern is estimated by using the concept of cash flow statement and position. The capability of an organization to attain the overhead expenditures daily is the term to be the quality of liquidity. The factor of liquidity also measures the ability of the organization to meet its long term and short-term financial deadlines and commitments. If the organization is lacking the power of liquidity, then it is most probable that it would face the risk of even closing down since it has to take an immense loan to meet the daily expenses. Hence while conducting its business, the organizations should make it certain that the cash flow is effective to meet the liquidity criteria so that the daily business could be carried out without any hindrances. This measure would bring stability to the financial transactions of the company. In this report on the cash flow statement, the context of Plato Ltd company is taken. The company holds a major position in the global market of computer sales and has a large customer base which majorly consists of students. By the implementation of using most modern and cutting-edge technology, Plato Ltd has gained a high reputation and goodwill among the customers and thus enlarging the targeted market. By the use of high-end technologies, the company had made it easy for the students to access easy payment plans. The market is being rushed with many new and small entrants which had weakened the customer basis of the company. Be the reduction and deviation of trustworthy customers, the company is facing a dip in its profit level and is even risking the current existence of the company. By drafting this report, we have intended to investigate and scrutinize the position of cash flow and cash flow statement to provide the company with a better plan to ascertain the persuasive operation of the company.

Definition of Cash Flow Statement as per the norms of IAS 7 (Indirect Method)
By following the IAS 7 guidelines, the cash flow statement of the Plato Ltd company has been drafted. We have provided the cash flow statement of the Plato company in the below section. Let us have a detailed look at it.

Plato Ltd

Statement of Cash Flows

For the Years Ending March 31, 2015, and March 31, 2014

 

2015

2014

Cash Flows from Operating Activities

 

 

Net Income

$430

xxx

Add Expenses Not Requiring Cash:

 

 

Interest Expense

160

 

Depreciation

550

xxx

Loss on machinery

150

 

Revaluation Reserve

0

xxx

Other Adjustments:

 

 

Add Reduction in Accounts Receivable

150

xxx

Add Reduction in Inventory

80

xxx

Subtract Decrease in Accounts Payable

-30

xxx

Increase in bank OD

120

xxx

Subtract Increase in Prepaid Expenses

0

xxx

Other

0

xxx

Cash Generated From Operations

1610

 

Payment of income tax

-300

xxx

Interest Paid

-10

 

Net Cash from Operating Activities

$1,300

$0

Cash Flows from Investing Activities

 

 

Reduction in marketable securities

$0

xxx

Sale of Fixed Assets

50

xxx

Purchase of New Equipment

-1680

xxx

Net Cash Used for Investing Activities

-$1,630

$0

Cash Flows from Financing Activities

 

 

Issue of capital

$250

xxx

Payment of Debentures

-$300

 

Payment of Dividend

-560

xxx

Bank Overdraft

 

xxx

Net Cash from Financing Activities

-$610

$0

NET INCREASE/(DECREASE) IN CASH

-$940

$0

CASH and CASH EQUIVALENTS, BEGINNING OF YEAR

970

0

CASH, END OF YEAR

$30

$0

notes-

  • The denoted denomination of cash and its parallels comprises of the units like bank overdrafts taken from behalf of the company.
  • No other relevant denominations have been traced regarding the organization and hence they are not implied in this report.
  • There have been no study or research conducted regarding this organization and hence the report is drafted using the information gained from various sources.

 Machinery Account

Particulars

Amount

Particulars

Amount

To Balance

2500

By Sale of Machinery

400

To revaluation

100

 

 

To Purchases

1680

Depreciation

550

 

 

By Balance

3330

 

4280

 

4280 


Tax Expense 

Particulars

Amount

Particulars

Amount

To Bank

300

By Balance

300

To Balance

260

By PL

260

 

560

 

560

Strategy
The management of Plato Ltd. The company had implied currently the strategy to liquidate or discharge the assets held by the company at the existing period since it is the only way in which the company could withstand the situation. The crucial off-putting factor in the progression is the fact that the lion share of funding is assimilated from the operating division of the company itself. The company has been a disaster in collecting money from the department of finance, sales or investment and the sole source of income was from the department of operations (Kemp, 2003). As the figures provided in the cash flow statement, it could be observed that the company is planning and conducting its process by keeping in mind the future consequences. The reduction in the figures of debentures makes it clear that whatever additional money rather expenses are made by the company is allotted to clear the long-term loans and debts. The management of the company has decided to improve the relationship with the loan providers by depositing the required money within the mentioned deadline. This move has been evident in the figures by the drop in the sum of trade payables. The Managing Director of the company has also stated that the company has to take much more overdraft from the loan providers to sustain the existence of the company. Although the money acquired only from the overdraft would not be sufficient for the current scenario and hence the board members should move on with the strategy of disinvestment to acquire more money. To sustain the level of competency in the market and to gain long term profit from the business, the company had installed some of the most modern technologies in the system (Shim, Siegel, & Shim, 2012). The installment of high-end technique has also helped in augmenting the quality of the manufactured products. This context had helped the company in creating novel interest among the customers towards its products and services.

Functions of Accounting

Administrative Director,
Plato Ltd
25th December 2019

Subject: Analysis of the Cash flow statement

Memo No: PL / 158 / 2019

Respected Sir,
Before getting into the analysis of the Cash Flow Statement of Plat Ltd. The company I would personally like to thank you for allowing me to observe and analyze the sensitive and crucial data (including the financial statements) spanning from the period from 2014 to 2015. As a part of drafting the report on the cash flow statement, I have also analyzed the trend of the financial performance of the company. I should separately say that the cash position data of the company was given the highest position since you have demanded the analysis of the Cash flow statement Plato Ltd. Company. Since the company is finding it hard to sustain in the market because of the lack of liquidity we have taken the issue very seriously (Coyle, 2000). We have found out in our analysis that the processes of Plato Ltd. The company lacks an efficient control of the internal environment. The company needs to imply a strong control unit so that all the processes in the company should be controlled efficiently so that the performance should be pushed to a higher limit. To bring forward the significance of accounting in front of you we have presented this memo. An effective way to supervise and control the overall operation and output of the company, a very effective accounting system should be implied.
We here again insist you to imply a very efficient accounting system since the absence of it would even risk the existence of the company. We are repeating it again and again because of the observation that an efficient accounting system would change the overall performance of your company in a very drastic way. The accountants of the company should be specially trained to efficiently carry out the duty like collection and classification of the sensitive data and responsibly keep all the records of financial transactions. The financial accounts of the company would help in ascertaining the current position and performance of the company if the accountants would complete their task in a very responsible and impeccable manner (Mulford & Comiskey, 2005). The basic norms and international standards of performance could be ensured by the reliable and meticulous upkeeping of the company accounts. By the dint of the above-provided move, the organization could save a lot of money since the unusual expenditure could be checked. Along with with it the following guidelines and different laws laid down by the controlling organization could be ensured. It is the major responsibility of a manger to draft a very efficient business decision, and also this liability to maintain a very amiable and motivating environment in the office. The managers should be very rational and they should take actions by referring to the official and statistical data. The experience of the manager in dealing with the crucial situation would also turn out to be a major asset for the company (Robinson, 2009). The process of accounting would help in providing the figures and trends very accurately by referring to which the manager could take a very relevant and authentic decision. If taken an example of installing high end or subordinate technique in the company, the manager could check its need and implacability by checking the accounting details on how many modern units the company already possesses and the degree of the positive impact it had made on the production system. If the accounting details are accurate, the manager could take a very significant decision that could impact the whole future of the company. If the accounting system is absent the manager would only have to make the significant choices and decisions by relying on his intuitions and assumptions which would be considered as a dumb move (Christy, 2009).
The requirement of accounting units is not only related to the performance parameter of the organization but is also linked to the payroll of human resources, efficient allocation of the company resources, etc. The accounting unit would also help in ascertaining and estimating the trends by keeping in mind the profit made and expenditure committed. The strict abidance of the company with the international standards and other laws could be ensured by implementing strict accounting laws (Platt, 2010). It is only the recommendations and suggestions made by the accounting department that would provide a basis for the strategies made for eradicating the financial problems prevailing in the organization.
I have discussed the cash flow statement or the level of liquidity prevailing in the organization since it is a very significant component of the operation department. It is the cash position of Plato Ltd. The company would make an impact on the dimensions of the accounting profit. (Donleavy, 1994). While checking the accounts and financial statements of Plato Ltd. Company regarding the year 2015 we have observed that the profit obtained from the respective year as £430,000 but after considering other unexpected dimensions and overdrafts the resultant cash balance has become £30,000. By this figure, it could be ascertained that the issue of liquidity is the major factor, which is drawing back the performance of the company. The problem of liquidity has raised to such a level that the reduced rate of cash flow has even risked the existence of the company. If the company had installed or followed a valid accounting since its inception, the present situation and the risk of being insolvent would have been avoided (Dickey, 2010). If the calculated figures by the accountants were available to the managers, they would have decided on leasing the required pieces of machinery instead of buying it. Occupying the pieces of machinery by the means of hire purchase would have also been revealed in front of the managers. There is no supervision or any sort of check measures of the expenditures incurred since we have not traced any evidence of monthly cash budgeting system. The company could only progress if it could ascertain its current situation. It is by considering the current position as the basis that the companies build their future strategies and later the comparison is done between the incurred result and previous result. The absence of an accounting system has created an environment of havoc in the company and it is now turned out that there no unknit which could check or supervise the processes of the company.
The major benefit of maintaining accounts from the perspective of a manager is that he could analyze the trends followed in the sensitive and financial issues before delivering any sort of crucial decisions. If taken into consideration the context of revenue ratio or the CGOS, its figures are increasing with the progress of each financial year. Similar to this there are many ratios and aspects which should be brought under the consideration of higher officials like boards so that future strategies should be made for the progressive development of the company. Although there are some positive ratios in support of the company's better future, the factors which are bringing down the current performance of the company could be highlighted and special pressure could be given on improving it separately by the means of ratio analysis (Plewa & Friedlob, 1995). The ratios in the correct dimension could only be attained by the correct form of bookkeeping and following strict accounting principles. If we turned our focus on the ratios of receivable turnover and payable turnover, it could be observed that by referring to it the officials could estimate the trends in expenditure and revenue. By following the accurate norms of accounting, the company could hold control throughout the company and any sort of manipulation of funds by the officials (Dayananda, 2002).

Regards
Henry Jenkins

Monthly Cash Budget It should be mentioned specifically that the determining and vital factor in between a thriving company and a hopeless one is the influence and presence of cash budgeting and cash flow statements. In the aforementioned context of this report on the cash flow statement, we have discussed the significance and scope of the monthly cash budget in an organization. We have already discussed that any sort of reduction or lack in money would lead to the deficiency in the degree of liquidation that would be turned out to be a great hindrance in carrying out the day to day financial activities of the company. Apart from this if there is extra money lying with the money, it would also turn out to be a negative factor. The instance of extra money would imply the presence of idle and inoperative fund which is a loss since even in the case of investment it would have borne some interest (MOSSO, 2006). On the contrary, the lack of funds would risk the acquisition of coming opportunities since the cost of possession would be much higher. If the purchase is very urgent then the company could have to borrow some money from some sources and eventually have to pay heavy interest for it which would worsen the existing situation (Steyn & Hamman, 2003). Hence the existence of both the additional money and dearth in money should be considered as a drawback and urgent measures should be taken in the prevalence of either case. In this scenario, the significance of budgeting becomes highly evident and hence the process of budgeting should be conducted every month (Beutler & Mason, 1987).

The income and expenditure of a company could be marked and patterned by the process of cash budgeting. The shaken and induced level of income made from the sales of the products by the company is the major component of revenue (Bjandari & Iyer, 2013). The revenue also includes the components like the cash obtained from the accessory retailing process done by the sales department, interest obtained from the investment, dividends of shares possessed, and profits accrued from additional obtains. Apart from this the expenditure or the flow of the cash towards the exterior of the organization includes the major financial transactions like the acquisition of machinery and high-end technology, ongoing cash purchases, expenses accrued for conducting daily office activities, payroll expenses, existing cash purchases, etc. (Peter van der Hoek, 2005). By the provision of implementing the cash budget, the inward and outward flow of the cash could be measured at every smallest interval. The figures and the estimated trend in financial transactions would help in effectively calculating the future coming opportunities and risks. The good calculation of the financial statements would also help in determining whether the company is going through a positive or negative course of business. This would also provide the officials with some warning regarding the lending of funds in the contingency period or the case of a prospective deficit. Monthly budgets would provide the periodic analysis of the company performance along with the negative facts which are pulling back the efficiency of the company. A very comprehensive comparison could be done between the preset calculated data and the previous data. If the data obtained at regular intervals could be linked with each other, the ongoing trend could be analyzed (Apreda, n.d).

As per the observations made by the economist Nordmeyer, the imminent shortfall in the fund or the requirement of the fund could be predicted by the means of the cash budget. This could be inflicted in the annual financial statement or the budget where the required money should be covered by loans or another sort of liabilities. As a part of pulling up the current situation to the estimation made in the budget, the company would require to rely on short term small loans. Acquiring the short-term loans are much suited for satisfying the monthly financial needs. As per the financial needs of the organization, the periodical budgeting would also help in discerning between the long term and short-term cash requirements. It would be a very critical and unfortunate condition if the company has to sell its permanent assets to meet the deadlines of its small term debts and loans (Kahraman Ruan, & Tolga, 2002). It would be considered a better plan and strategy if by the force of it the company could predict its requirement of money whether it is short term or long-term way before the point of incidence. In the current case of Plato Ltd. The company, there existed a situation when the company had to make the purchase of the pieces of machinery on a very urgent basis and had to make the transaction for it at a very outright basis using the available cash (Dimitrijevic, 2015). The shortage of 30000 pounds would not have happened if there had been any sort of planning or provision of periodic budgeting in the organization. In the presence of a valid accounting system, the company would have taken some measures like taking a loan or hiring the technology on an annual basis beforehand to meet the unforeseen expenditure (Turner, 2016). Around 70% of the incurred expenditure could have been saved if the managers had decided to hire the pieces of machinery from the sellers. Hence the company is highly recommended to adopt a high-end accounting system in the process so that further loss to the company should be avoided. The aforementioned situation in the company shoot outs the importance of cash budgeting in the system (LUFT, 2010).

As per the afore mentioned context in this report on Cash Flow Statement, the act of decision making is very significant for the person who is working as the manager. In the matters and context like distribution of profit with respect to the shares, cash and credit policy acquired with respect to the suppliers of the institute, parameter set to hire the employees, etc. the manager would have taken the solitary decision. For each and ever actions and decisions made by the manager, there should be a good reference or proof. For this purpose, the tools like cash budgeting would turn out to be very handy for the managers since it provides the right reason and ground for his every activity (Giaccotto, 1990). This phenomenon was also clear in the incident when it had to put aside high denomination for giving out bonuses and payments for the shareholders although it had possessed a weak cash position. The institute has a lot of extra money in its account which would have been used to conduct the outright purchase of pieces of machinery. The fact should be noted that the company is under high debt when this incident had happened (Pavlovic & Bogdanovic, 2013). Thus, a chain of miss happenings could happen if any sort of wrong decision is taken by the manager. To avoid this the officials should practice strict accounting policies. In the same context, the significance of the tool of cash budgeting system arises which is very crucial for sustaining a ratio of cash with respect to the stocks in hand which is kept on behalf of the institute. (Francis, 2010).

Conclusion
The matter elaborated on the above mentioned of this report on Cash Flow Statement makes it clear that the factor of liquidity should be taken by the company for its day to day sustenance. If the company lacks the strategies to keep in check the liquidity of cash, then it is evident that the company would face the imminent risk of being shut down or being insolvent, no matter what is the magnitude of the company. Hence it is the collective responsibility of the stakeholders of the company to keep in check the ratio of liquidity so that the processes and transactions in the company could be carried out in a very sustainable way by keeping in mind its future debts or liabilities. To keep in check the level of outflow and inflow of cash in an institute, the higher officials should practice the creation of cash budgets every month. The further strategies of the team should be according to the inferences and guidelines laid down in the cash budget. We have explored the impact of implementing the cash budgeting system in this report on Cash Flow Statement and hence have recommended the officials to implement this ideology in the institute. Because of the lack of liquidity, the company is facing a high risk of carrying out its daily transactions. TO somehow meet the requirement of the fund, the organization has heavily banked upon the short term loans and quick overdrafts provided by the investing banks. This condition of incompetence could not have happened if the company had taken care of the cash flow statement in its process. Cash flow statement assignments are being prepared by our management assignment help experts from top universities which let us to provide you a reliable assignment help online service.

Reference List
Apreda, R. The Governance Slack Model: A Cash Flow Approach for the Budgeting and Accountability of Some Corporate Governance Issues.

Beutler, I. & Mason, J. (1987). Family Cash-Flow Budgeting. Home Economics Research Journal,16(1), 3-12.

Bhandari, S. & Iyer, R. (2013). Predicting business failure using cash flow statement based measures.Managerial Finance, 39(7), 667-676.

Christy, G. (2009). Free cash flow. Hoboken, N.J.: Wiley.

Coyle, B. (2000). Cash flow control. Chicago: Glenlake Pub. Co.

Dayanada, D. (2002). Capital budgeting. Cambridge, UK: Cambridge University Press.

Dickey, T. (2010). Basics of budgeting. [New York?]: Axzo Press.

Dimitrijevic, D. (2015). The detection and prevention of manipulations in the balance sheet and the cash flow statement. Ekon Horizonti, 17(2), 137-153.

Donleavy, G. (1994). Cash flow accounting. London: Routledge.

Francis, R. (2010). The relative information content of operating and financing cash flow in the proposed cash flow statement. Accounting & Finance, 50(4), 829-851.

Giaccotto, C. (1990). Cash Flow Modelling and Forecasting in Capital Budgeting Under Uncertainty.Decision Sciences, 21(4), 825-841.

KAHRAMAN, C., RUAN, D., & TOLGA, E. (2002). Capital budgeting techniques using discounted fuzzy versus probabilistic cash flows. Information Sciences, 142(1-4), 57-76.

Kemp, S. (2003). Budgeting for managers. New York: McGraw-Hill.

LUFT, J. (2010). Discussion of “The Effects of Financial Statement Information Proximity and Feedback on Cash Flow Forecasts” *. Contemporary Accounting Research, 27(1), 135-142.

MOSSO, D. (2006). Social Security: Reliance on Cash Flow Accounting and Projections Disguises an Inherent Upside Cash Flow Bias. Public Budgeting & Finance, 26(1), 143-156.

Mulford, C. & Comiskey, E. (2005). Creative cash flow reporting. Hoboken, N.J.: J. Wiley.

Pavlovic, M. & Bogdanovic, J. (2013). Cash flow statement. Skola Biznisa, (3-4), 129-147.

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