Question

The following information has been compiled from the accounting records of Muddy Ltd for the year ended 30 June 2020.

Final dividend payable $500,000 - (30/06/2019); $650,000 - (30/06/2020)

Retained earnings $7,000,000- (30/06/2019); $8,000,000 - (30/06/2020)

During the year ended 30 June 2020, the company declared and paid interim dividend of $350,000 to all ordinary shareholders and issued 850,000 shares at $2.00 per share in cash in March 2020. The management transferred $500,000 from the retained earnings account on 30 June 2020 to set up a property maintenance reserve account in preparation of some major maintenance work suggested by the Health and Safety department. Muddy Ltd reported $2,500,000 profit for the year ended 30 June 2020.

Required:Identify and report Muddy Ltd’s financing cash flow activities for the year ended 30 June 2020. (3 marks. You must provide each cash flow item’s specification, e.g. interim dividend paid.)

Answer 1

The identification and reporting of financing cash flow activities of Muddy Ltd. for the year ending 30^th June, 2020 are as follows:

· Payment of interim dividend of $350,000;

· Cash proceeds from issue of 850,000 shares @ $2 per share = $17,00,000.

The increase in final dividend payable of $150,000 ($650,000 - $500,000) from June 2019 to June 2020 hasn’t been accounted for as the same is not paid during the year. Moreover, the transfer from retained earnings to property maintenance reserve account is not an outflow of cash and hence not considered under cash flow activities of the entity.