Splash plc has a number of subsidiaries, one of which, Muck Ltd, was acquired during the year ended 31 December 2009.

The draft consolidated financial statements for the year ended 31 December 2009 are as follows:

Consolidated statement of comprehensive income of Splash plc for the year ended 31 December 2009

..............................................................................€000

Profit from operations....................................................1,210

Interest.........................................................................(100)

.......................................................................................1,110

Share of profits of associates.............................................240

Profit before taxation...................................................1,350

Taxation........................................................................(482)

........................................................................................868

Non-controlling interest................................................(104)

Group profit...................................................................764

Statements of financial position

Additional information:
1. Splash plc issued 400,000 €1 ordinary shares at a premium of 25 cents and paid a cash consideration of €197,500 to acquire 75% of Muck Ltd. At the date of acquisition, Muck Ltd's assets and liabilities were recorded at their fair value with the exception of some plant which had a fair value of €90,000 in excess of its carrying value. Goodwill on acquisition was €120,000.
2. The property, plant and equipment during the year to 31 December 2009 shows plant with a carrying value of €800,000 which was sold for €680,000. Total depreciation for the year was €782,000.
Required:
(a) Prepare a consolidated statement of cash flows in accordance with IAS 7 Statement of Cash Flows for the year ended 31 December 2009.
(b) The Managing Director of Splash plc has asked you to draft a memorandum, briefly explaining the following:
(i) Why is it important to remove unrealised profits arising from transactions between companies in a group?
(ii) Is it possible for a business to make losses year after year but still increase its bank balance?
(iii) Explain the difference between the direct method and indirect methods of calculating the net cash flow from operating activities.

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Muck Ltd Splash plc consolidated at 31/12/2009 €000 at 31/12/2008 at acquisition €000 €000 Assets Non-current assets Property, plant and equipment Intangibles Investment in associates 4,730 2,610 610 350 310 520 5,600 500 3,420 610 Current assets 150 Inventories 740 610 Trade and other receivables 390 350 85 Cash and cash equivalents 40 85 20 Total assets 6,770 4,465 865 Equity and liabilities €l ordinary shares Share premium Retained earnings 1,400 1,000 500 100 300 200 1,615 865 80 3,315 2,065 680 Non-controlling interest 580 3,895 610 2,675 680 Non-current liabilities Long-term loans Current liabilities 1,900 1,100 Trade payables 520 480 75 Taxation 455 210 T10 Total equity and liabilities 6,770 4,465 865