Dynamic plc reports a bank overdraft of £13,000 as at 31 December 2011 whereas a year prior to that date it reported a favourable balance at the bank of £10,000.

Directors of the company are unable to make sense of the information conveyed by the Statement of cash flows prepared for the year as shown. They have requested you to:

(a) Advise them on whether depreciation stated on the Statement of cash flows is itself a source of cash inflow.

(b) Explain how a loss made on disposal of a non-current asset could appear as a source of cash.

(c) Comment on whether the liquidity of the company has become worse in the year 2011. Bear in mind that the current liability of the company has been stated at £312,000 on the Statement of financial position as at 31 December 2011.

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Statement of cash flows Year ended 31 December 2011 Cash flow from operating activity: Operating profit Depreciation Loss on asset disposal Inventory increase Receivables increase Payables increase Interest paid Tax paid Dividend paid Cash flow from investing activity: Property, plant and equipment Asset disposal proceeds Investments £'000 £'000 540 62 30 632 (12) (18) 10 (40) (35) (20) (340) 40 (50) 517 (350)