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9706 · 3.1.5

Limited Companies: Financial Statements — practice questions

Practice and worked examples for 9706 Limited Companies: Financial Statements. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

The directors of Z plc review the Statement of Cash Flows for the year. Net cash from operating activities was $420,000; investing outflows $180,000; dividends paid $95,000.

Explain why the Statement of Cash Flows is essential for assessing liquidity.

Show solution outline

Profit per the SoPL can include non-cash items (depreciation, accruals). The SoCF shows actual cash generated ($420,000 from operations), whether the firm can fund investments ($180,000) and dividends ($95,000) without external borrowing, and highlights liquidity risk even when reported profit is higher.

Worked example 2

Alpha Ltd has the following information for the year ended 31 December 2023:

  • Retained earnings at 1 January 2023: $245,000
  • Profit for the year: $112,000
  • Interim ordinary dividend paid: $30,000
  • Final ordinary dividend proposed: $50,000

Calculate the retained earnings balance to be shown in the Statement of Financial Position at 31 December 2023.

Show solution outline

The calculation is performed as part of the Statement of Changes in Equity. The retained earnings column would be as follows:

Step 1: Start with the opening balance. Opening Retained Earnings: $245,000

Step 2: Add the profit for the year. Profit for the year is added as it increases the accumulated profits. $245,000 + $112,000 = $357,000

Step 3: Deduct all dividends for the year. Dividends are a distribution of profit to shareholders and reduce retained earnings. Interim Dividend Paid: ($30,000) Final Dividend Proposed: ($50,000) Total Dividends = $30,000 + $50,000 = $80,000

Step 4: Calculate the closing balance. Closing Retained Earnings = Opening Balance + Profit for the year - Total Dividends $245,000 + $112,000 - $80,000 = $277,000

Final Answer: The closing balance for retained earnings at 31 December 2023 is $277,000.

This would be presented in the SOCIE as:

Retained Earnings at 1 Jan 2023$245,000Profit for the year$112,000Dividends (interim + final)($80,000)‾Retained Earnings at 31 Dec 2023$277,000‾‾\begin{array}{lr} \text{Retained Earnings at 1 Jan 2023} & \text{\textdollar}245,000 \\ \text{Profit for the year} & \text{\textdollar}112,000 \\ \text{Dividends (interim + final)} & \underline{(\text{\textdollar}80,000)} \\ \text{Retained Earnings at 31 Dec 2023} & \underline{\underline{\text{\textdollar}277,000}} \end{array}
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