Whet Brands has some depreciable equipment; and some land which is not depreciated. In 2020, depreciation expense
Question:
Whet Brands has some depreciable equipment; and some land which is not depreciated. In 2020, depreciation expense on its equipment was USD ($) 3,500,000, and this is included in administrative expenses in the Income Statement.
The company also sold some equipment which had been depreciated to a carrying amount of $1,500,000; and it paid dividends of $2,112,000 during the year.
Income Statement for the year ended 31 December 2020 $ '000 | |
Sales revenue | 77,000 |
Cost of sales | (54,000) |
Gross profit | 23,000 |
Administrative expenses | (11,900) |
Operating profit | 11,100 |
Gain on disposal of equipment | 400 |
EBIT | 11,500 |
Interest expense | (148) |
EBT | 11,352 |
Taxation | (6,500) |
Net income | 4,852 |
Balance sheet, year ended 31 December | ||
$ '000 | 2020 | 2019 |
Non-current assets | ||
Land at valuation | 3,000 | 2,500 |
Equipment at cost | 20,000 | 15,000 |
Accumulated depreciation | (10,000) | (7,500) |
Equipment: carrying amount | 10,000 | 7,500 |
13,000 | 10,000 | |
Current assets | ||
Inventory | 5000 | 6,000 |
Trade receivables | 8,500 | 6,600 |
Cash | 1,680 | 600 |
15,180 | 13,200 | |
Current liabilities | ||
Trade payables | 6,660 | 6,970 |
Accrued interest expense | 20 | 30 |
Taxes payable | 6,500 | 5,200 |
8% debentures 2020 | 1,500 | |
13,180 | 13,700 | |
Net current assets | 2,000 | (500) |
Non-current liabilities | ||
6.5% debentures 2025 | 1,000 | |
1,000 | 0 | |
Net assets | 14,000 | 9,500 |
Equity | ||
Share capital | 1,700 | 1,100 |
Share premium | 960 | 300 |
Revaluation surplus | 1,252 | 752 |
Retained earnings | 10,088 | 7,348 |
14,000 | 9,500 |
(a) Based on the information below and on the next page, use the indirect method to construct Whet Brand’s Cash Flow Statement.
(bi) Assess the quality of earnings. What are the main reasons for the difference between operating cash flow and net income?
(bii) Assess the extent to which the operating cash flow is sufficiently strong to fund the company’s objectives.
(biii) What do you think is causing the observed changes in each of the components of working capital? “Tell a story.”
(biv) What reasons are there for believing that Whet Brands is a growing or a maturing company? To what extent does the company need to raise additional funding? Should it give back money to its shareholders? Should it repay its debts?
(bv) Assess the company’s liquidity and solvency.
Auditing a risk based approach to conducting a quality audit
ISBN: 978-1133939153
9th edition
Authors: Karla Johnstone, Audrey Gramling, Larry Rittenberg