Chapter 22 Statement of Cash Flows

1.
1.1 1.2 1.3 1.4 1.%

Objectives
Explain the purpose of preparing a statement of cash flows. Define cash, cash equivalents and cash flows. Evaluate the usefulness of a statement of cash flows. Prepare a statement of cash flows with supporting notes in the format as specified in !"# $. &lassif' and report inflows and outflows of cash and cash equivalents under the standard headings( )i* operating activities )ii* investing activities )iii* financing activities. Prepare statement of cash flows for a single compan' using the direct and indirect methods.
#cope

1.+

D e fi n i ti o n

& o n te n t

, p e r a ti n g " c ti v i ti e s

-n v e s tin g " c ti v i ti e s

. in a nc ing " c ti v i ti e s

# p e c i fi c -te m s

/ s e fu ln e s s 0 - n te r p r e ta ti o n

2.

Introduction
12221

2.1

2.2

2.3

2.4

2.%

2.+

1either the statement of comprehensive income nor the statement of financial position provides sufficient information a3out the entit'4s inflows and outflows of cash and cash equivalents. 5he o36ective of the standard is 7to require reporting entities which fall within its scope to prepare a cash flow statement as part of their financial statements setting out on a standard 3asis their cash generation and a3sorption for a period.8 5he purposes of preparing a statement of cash flows are as follows( )i* Proper management cash flow is essential to the survival of an enterprise, and accordingl', the reporting of cash flow information would 3e helpful to the users of financial statements in assessing the liquidit' of the enterprise. )ii* 5he statement of comprehensive income and the statement of financial position, which are prepared using accruals accounting, form a primar' 3asis to pro6ect the future cash flows of an entit'. 5he aim of statement of cash flows is to eliminate the long2term provisions and other allocations associated with accrual accounting and to depict the historical cash generating or cash a3sorption mechanisms of an entit'. 5he cash flow statement, in con6unction with a statement of comprehensive income and a statement of financial position provides information on liquidit', validit' and financial adapta3ilit'. "ll entities that adopt !.9#s will now 3e required to prepare a statement of cash flows in accordance with !"# $ and to present it as an integral part of their financial statements for each period for which financial statements are presented. 5his means that the following exemptions included in ##"P 1% will no longer 3e availa3le( )i* certain entities with revenue of less than !: 2; million per annum< and )ii* charities and non2profit ma=ing entities whose financial statements are prepared on a cash 3asis. 5he standard applies to all financial statements intended to give a true and fair view of the financial position and profit and loss except for the following( )i* &ompanies are exempt under s. 141D of the &ompanies ,rdinance and are therefore exempt from the requirement to give a 7true and fair view8 in their financial statements. )ii* >an=ing and insurance companies which ta=e advantage of exemptions under Part --- of the 5enth #chedule to the &ompanies ,rdinance. )iii* &harities and non2profit ma=ing entities whose accounts are prepared on a cash 3asis.

3.

Definition of erms
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3.1

DEFINITIONS )a* Cash ? &ash in hand and deposits repa'a3le on demand with an' 3an= or other financial institutions. 5hese include cash in hand and deposits denominated in foreign currencies. Cash equivalent ( ) ? #hort2term, highl' liquid investments which are readil' converti3le into a =nown amount of cash without notice and which were within three months of maturit' when acquired< less advances from 3an=s repa'a3le within three months from the date of the advance. &ash equivalents include investments and advances denominated in the foreign currencies, provided the' fulfill the a3ove criteria. Cash flow ? an increase or decrease in an amount of cash or cash equivalent resulting from a transaction. "ccording to these definitions, cash equivalents must 3e highl' liquid and can 3e converted into =nown amount of cash without notice and without incurring and significant ris=s of changes in value owing to changes in interest rate. )d* Operating activities ( ) are the principal revenue2producing activities of the enterprise and other activities that are not investing or financing activities. Investing activities ( ) are the acquisition and disposal of long2term assets and other investments not included in cash equivalents. Financing activities ( ) are activities that result in changes in the si@e and composition of the equit' capital and 3orrowings of the enterprise.

)3*

)c*

)e* )f*

3.2 3.3

3.4

!"# $ adopts three2month maturit' as a cut2off for 3oth cash equivalents and 3an= 3orrowings. "ccording to !"# $, an investment purchased with more than three months to maturit' does not 3ecome a cash equivalent when its remaining maturit' is three months. #imilarl', 3an= 3orrowings with a maturit' of more than three months when drawn down do not 3ecome cash equivalents when their remaining maturit' 3ecomes three months.

!.

Contents of a Statement of Cash Flows

12223

4.1

5o facilitate comparisons of the cash flow performance 3etween different 3usiness, !"# $ requires that the inflows and outflows of cash and cash equivalents are classified under certain standard headings and reported accordingl'. 5hese headings are( )i* ,perating activities< )ii* -nvesting activities< and )iii* .inancing activities.

& l a s s i fi c a ti o n

, p e r a ti n g

-n v e s ti n g

. ina n c in g

1. !e' indicator of 1. #eparate disclosure is 1. #eparate disclosure is sufficienc' of cash flow to important ? cash useful in predicting flows represent extent claims on future cash 9epa' loans to which expenditures flows 3' providers of maintain operating capa3ilit' have 3een made for capital resources intended to pa' dividends generate future ma=e new investments income and cash with recourse to external flows sources of finance 2. /seful in forecasting future operating cash flow ( ) 4.2 Operating activities 5he amount of cash flows arising from operating activities is a !e" in#icator of the extent to which the operations of the enterprise have generate# sufficient cash flows to repa' loans, maintain the operating capa3ilit' of the enterprise, pa' dividends and ma=e new investments without recourse to external sources of financing. 1et cash flows resulting from operating and trading activities are reported under this heading. " reconciliation 3etween profit 3efore taxation reported in the statement of
12224

4.3

4.4

4.%

4.+

comprehensive income and the net cash flow from operating activities should 3e given as a note to the cash flow statement. 5his reconciliation should disclose separatel' the movements in stoc=s, de3tors, and creditors relating to operating activities, and other differences 3etween the net cash flow and reported profit. &ash flows from operating activities are primaril' derived from the principal revenue$pro#ucing activities of the enterprise. 5herefore, the' generall' result from the transactions and other events that enter into the determination of net profit or loss. Examples of cash flows from operating activities are( )i* cash receipts from the sale of goods and the rendering of services< )ii* cash receipts from ro'alties, fees, commissions and other revenue< )iii* cash pa'ments to and on 3ehalf of emplo'ees< )iv* cash receipts and cash pa'ments of an insurance enterprise for premiums and claims, annuities and other polic' 3enefits< )v* cash pa'ments or refunds of income taxes unless the' can 3e specificall' identified with financing and investing activities< and )vi* cash receipts and pa'ments from contracts )e.g. securities or loans* held for dealing or trading purposes. 5here are two methods to ascertain the net cash flow from operating activities, namel', the #irect metho# and the in#irect metho#. Direct method 5he direct method reports ma6or classes of gross cash receipts and gross pa'ments )including, in particular, cash receipts from customers, cash pa'ments to suppliers and cash pa'ments to and on 3ehalf of emplo'ees* in the operating section of the statement, the arithmetic sum 3eing net cash flow from operating activities. Indirect method 5he indirect method starts with operating profit )or profit 3efore tax* reported in the profit and loss account and ad6usts this for non2cash charges and credits to ascertain the net cash flow from operating activities. E% &'(E ) "3stracts of the statement of comprehensive income and statement of financial position of ">& Ctd are shown 3elow(
1222%

(a) 4.$

(b) 4.A

4.B

Statement of Comprehensive Income ( *stract) for the +ear En#e# ,) Decem*er -.). :;;; #ales 1,$;; &ost of sales $%; Dross profit Cess( Coss on sale of equipment Depreciation of equipment #alaries ,ther expenses ,perating profit B%; 4% A; 22 1A $A%

Statement of Financial 'osition ( *stract) at ,) Decem*er -.). 2;;B :;;; 1A; 2A% 2;; 21 2;1; :;;; 1BA 34; 3+; 1+

#toc= 5rade de3tors 5rade creditors "ccrued expenses #how the cash flow from operating activities. Solution/ )a* Direct method &ash received from customers &ash pa'ments to suppliers &ash paid to emplo'ees ,ther cash pa'ments 1et cash inflow from operating activities )3* -ndirect method

:;;; 1,+4% )+;A* )22* )23* BB2

:;;;
1222+

,perating profit Depreciation charges Coss on sale of equipment -ncrease in stoc= -ncrease in de3tors -ncrease in creditors Decreased in accrued expenses

$A% A; 4% )1A* )%%* 1+; )%* BB2

4.1;

4.11

5he direct method shows specific sources of cash receipts and specific purposes of cash pa'ments. 5his information ma' 3e useful to the users of financial statements to assess future cash flows 3ecause it provides all the information of gross operating cash receipts and cash pa'ments. !"# $ encourages, 3ut does not require, the use of the direct method. 5he indirect 3asis for statement of cash flows clearl' indicates the changes in wor=ing capital items, for example, de3tors and creditors. "lso, indirect method provides a useful lin=age 3etween the cash flow statement and the profit and loss account and the 3alance sheet. -t was 3elieved that the indirect 3asis would 3e preferred 3' firms which do not want to disclose their ma6or classes of gross operating cash flows and it is less expensive.

(c) 4.12

Interest and dividends &ash flows from interest an# #ivi#en#s receive# an# pai# should each 3e #isclose# separatel". Each should 3e classified in a consistent manner from period to period as either operating, investing or financing activities. Interest pai# an# interest an# #ivi#en#s receive# are usuall' classifie# as operating cash flows for a financial institution. owever, there is no consensus on the classification of these cash flows for other enterprises. Interest pai# an# interest an# #ivi#en#s receive# ma" 3e classifie# as operating cash flows 3ecause the' enter into the determination of net profit or loss. "lternativel', interest pai# an# interest an# #ivi#en# receive# ma" 3e classifie# as financing cash flows an# investing cash flows respectivel', *ecause the' are costs of o*taining financial resources or returns on investments. Divi#en#s pai# ma" *e classifie# as a financing cash flow *ecause the' are a cost
1222$

4.13

4.14 4.1%

4.1+

of o*taining financial resources. "lternativel', #ivi#en#s pai# ma" *e classifie# as a component of cash flows from operating activities in order to assist users to #etermine the a*ilit" of an enterprise to pa" #ivi#en#s out of operating cash flows. (d) 4.1$ Tax on income &ash flows arising from ta0es on income should 3e separatel" #isclose# as part of operating activities unless the' can 3e specificall' identified with financing and investing activities. -t is reasona3le to include income taxes as part of operating activities unless a question gives a clear indication to the contrar'. -f income tax pa'ments are allocated over more than one class of activit', the total should 3e disclosed 3' note. Investing activities 5hese relate to the acquisitions or #isposals of assets held as fixed assets or as a long2term or as a short2term investments )other than assets identified as cash equivalents*. &ash inflows from investing activities include( )i* receipts from sales of fixed assets< )ii* sales of investments in other entities, su3sidiaries and associates< )iii* receipts from repa'ments or sales of loans made to other entities< )iv* interest received on investments or loans< )v* dividends received on investments. &ash outflows from investing activities include( )i* pa'ments to acquire fixed assets< )ii* pa'ments to acquire investments in su3sidiaries or other entities< )iii* loans made to acquire de3ts of other entities< )iv* pa'ments to acquire equit' or de3t instruments of other enterprises and interests in 6oint venture. Financing 2eceipts from or repa"ments to e0ternal provi#ers of finance such as shareholders or de3enture holders in respect of principal amounts of finance are classified as financing cash flows. .inancing cash inflows include( )i* receipts from issuing shares or other entit' instruments<
1222A

4.1A

(1) 4.1B

4.2;

4.21

(C) 4.22

4.23

)ii*

4.24

4.2%

receipts from issuing de3entures, loans, notes and 3onds and from other long2 and short2term 3orrowings )other than those included within cash equivalents, e.g. overdrafts*. .inancing cash outflows include( )i* repa'ments of amounts 3orrowed )other than those included within cash equivalents*< )ii* the capital element of finance lease rental pa'ments< )iii* pa'ments to re2acquire or redeem the entit'4s shares< )iv* pa'ments of expenses or commissions on an' issue of shares, de3entures, loans, notes, 3onds or other financing. "s required 3' the #tandard, a reconciliation of the amounts shown in the 3alance sheet of the reporting entit' in respect of items reported within the financing section of the cash flow statement with the equivalent figures in the previous 'ear4s 3alance sheet, disclosing separatel' the movements resulting from cash flows, differences arising from changes in foreign currenc' exchange rates and other movements, should also 3e given as a note to the cash flow statement, as follows( "nal'sis of changes in financing during the 'ear #hare capital De3enture loan )including premium* : : >alance at 3eginning of the 'ear E E &ash inflowF)outflow* from financing E E Exchange difference E E >alance at end of the 'ear E E

".
%.1

Specific Items
-n the preparation of a cash flow statement, the treatment of the following items deserves special mention( )i* Discontinued activities< )ii* Exchange differences< )iii* .inance leases. Discontinue# activities &ash flows relating to discontinued activities should 3e shown separatel', either on the
1222B

( ) %.2

face of the cash flow statement or 3' note. (C) %.3 E0change #ifferences Exchange differences arise when an enterprise enters into foreign currenc' transactions. -n the accounts of an individual compan', the' ma' arise due to( )i* claims arising from the purchase or sale fixed assets denominated in a foreign currenc'< )ii* trading with a foreign entit'< )iii* engaging in investing or financing activities involving foreign currencies. 5he exchange profits or losses arising from such transactions would form part of the normal profits for the period. Exchange gains )losses* on settled transactions have alread' 3een reflected in cash inflows )outflows* from operating activities. 1o ad6ustments are required in respect of these. -n case of translation gains )losses* arising from monetar' wor=ing capital, if the exchange difference is ignored, the movements in the respective asset and lia3ilit' accounts will 3e distorted to the extent of the exchange differences. -n calculating the additions and disposals of the respective asset and lia3ilit', the movements arising due to exchange differences should 3e eliminated. .or example, exchange differences arising from unsettled de3tors and creditors need to 3e eliminated in computing net cash flows from operating activities. #imilarl', the translation gains )losses* on a long2term loan denominated in foreign currenc' do not involve cash flows, and should 3e deducted )added 3ac=* to the net profit in calculating the net cash inflow from operating activities. 5he differences should also 3e ad6usted against the loan and excluded from this section as cash flows. 5he translation difference should appear in the note to the cash flow statement 7"nal'sis of changes in finance during the 'ear8 in order to reconcile the opening and closing 3alances of long2term lia3ilities. E% &'(E 5he profit 3efore tax of D - Ctd for the 'ear ended 31 Decem3er 2;1; was :+%;,;;;. D - Ctd had the following de3tors and loans on 31 Decem3er( 2;;B : 42;,;;; AB;,;;;
12221;

%.4

%.%

%.+

%.$

%.A

%.B

De3tors Coans

2;1; : %1;,;;; B%;,;;;

-ncluded in the 2;;B and 2;1; figures are de3tors and loans denominated in foreign currenc'. 5he profit in retranslating de3tors was :12,;;; while the loss in retranslating the loans was :2;,;;;. 5he computing of net cash inflows from operating activities is as follows( : +%;,;;; )12,;;;* 2;,;;; )$A,;;;* %A;,;;;

,perating profit Exchange gains on translating de3tors Exchange losses on translating loans -ncrease in de3tors )%1;,;;; ? 12,;;; ? 42;,;;;* 1et cash inflow from operating activities

5he financing cash outflows in the cash flow statement is reported as( .inancing -ssue of loan )B%;,;;; ? 2;,;;; ? AB;,;;;* : 4;,;;;

(C) %.1; %.11 %.12

Finance lease "cquisition of fixed assets 3' finance lease does not result in cash flows and should not 3e reported in the cash flow statement. (ease# assets should 3e e0clu#e# from the total a##itions to fi0e# assets , which will 3e shown as cash outflows under 7investing activities8. 5he rental pa"ments for a finance lease are allocated 3etween two components( interest and capital. -n the cash flow statement, 3oth the repa'ment of interest and capital element are classifie# un#er the hea#ing of 3financing activities4.

122211

#.
+.1

Comprehensive $%ercise
E%E2CISE ) 5he draft statement of financial position of ">& Ctd as at 31 Decem3er are as follows(
2;;$ :;;; .ixed assets -ntangi3le assets )net* Plant and machiner' 2 cost 2accumulated depreciation -nvestments &urrent assets #toc= 5rade de3tors &ash &urrent lia3ilities 5ax pa'a3le Deferred tax 5rade creditors Dividends ,3ligation under finance lease 1et current assets 323 21; $;A 1BA 2 1,2B$ 4,3BB 2;;$ :;;; ,rdinar' share capital ):1 each* #hare premium 9etained earnings 1;G de3entures ,3ligation under finance lease :;;; 2,+;; 4;; 1,1BB 2;; 2 4,3BB :;;; 2;;A :;;; 2,A+; +3A 1,$14 2B; 22; %,$22 22% 3;; ++4 21; 1+; 2,2$% %,$22 1,44; 1,2%2 44 2,$3+ 1,+;; 1,+2; +14 3,A34 1,BB; )+$A* 1,312 44; 3,1;2 2,44; )+B3* 1,$4$ %;; 3,44$ 1,3%; 1,2;; :;;; :;;; 2;;A :;;;

122212

5he statement of comprehensive income of ">& Ctd for the 'ear ended 31 Decem3er 2;;A is shown 3elow(
:;;; #ales &ost of sales Dross profit #elling and distri3ution expenses "dministrative expenses -nterest pa'a3le 2 on de3entures 2 on finance lease Dividend received from investment Profit 3efore taxation 5axation Dividend 9etained profit for the 'ear )3;* )3;* 2; 1,2A% )3%;* B3% )42;* %1% 4;% 2$; )+$%* 1,32% :;;; +,;;; )4,;;;* 2,;;;

5he following information is availa3le for the 'ear ended 31 Decem3er 2;;A( 1. 2. " machine costing :22;,;;; on which depreciation of :A3,;;; had 3een provided was sold during the 'ear at a profit of :1;,;;;. " new machine was acquired during the 'ear for :%;;,;;; through a finance agreement. 5he rental paid during the 'ear amounted to :1%;,;;;, of which interest element was :3;,;;;. 1o additions to intangi3le assets were made during the 'ear. " rights issue was made during the 'ear of one new ordinar' share of :1 each for ever' ten shares held.

3. 4.

2equire#/ Prepare a statement of cash flows for ">& Ctd for the 'ear ended 31 Decem3er 2;;A under !"# $. Solution/

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122214

12221%

12221+

&.
( ) $.1

'sefulness of the Statement of Cash Flows

#vantages of the statement of cash flows " statement of cash flows can provide information which is not availa3le from 3alance sheet and income statements. )i* -t ma' assist users of financial statements in ma=ing ad6ustments on the amount, timing and degree of certaint' of future cash flows. )ii* -t gives an indication of the relationship 3etween profita3ilit' and cash generating a3ilit', and thus of the qualit' of the profit earned. )iii* "nal'sts and other users of financial information often, formall' or informall', develop models to assess and compare the present value of the future cash flow of entities. istorical cash flow information could 3e useful to chec= the accurac' of past assessments. )iv* " cash flow statement in con6unction with a 3alance sheet provides information on liquidit', via3ilit' and adapta3ilit'. 5he 3alance sheet is often used to o3tain information on liquidit', 3ut the information is incomplete for this purpose as the 3alance sheet is drawn up at a particular point in time. )v* &ash flow cannot easil' 3e manipulated and is not affected 3' 6udgement or 3'
12221$

accounting policies. (1) $.2 (imitations of the statement of cash flows #tatement of cash flows should normall' 3e used in con6unction with income statements and 3alance sheets when ma=ing an assessment of future cash flows. )i* )ii* #tatement of cash flows are 3ased on historical information and therefore do not provide complete information for assessing future cash flows. 5here is some scope for manipulation of cash flows. .or example, a 3usiness ma' dela' pa'ing suppliers until after the 'ear2end, or it ma' structure transactions so that the cash 3alance is favoura3l' affected. -t can 3e argued that cash management is an important aspect of stewardship and therefore desira3le. owever, more deli3erate manipulation is possi3le )e.g. assets ma' 3e sold and then immediatel' repurchased*. &ash flow is necessar' for survival in the short term, 3ut in order to survive in the long term a 3usiness must 3e profita3le. -t is often necessar' to sacrifice cash flow in the short term in order to generate profits in the long term )e.g. 3' investment in non2current assets*. " huge cash 3alance is not a sign of good management if the cash could 3e invested elsewhere to generate profit.

)iii*

(C) $.3 $.4

The a#vantages an# #isa#vantages of the #irect an# in#irect metho#s 5he two methods which can 3e used to prepare the cash flow statement are the direct )gross* and indirect )net* methods as we have seen. 5he advantages of the direct method are as follows( )i* -nformation is shown which is not shown elsewhere in the financial statements. 5his is therefore of advantage to the user of the information. )ii* 5he method does show the true cash flow involved in the trading operations of the entit'. 5he disadvantage is the significant cost that there ma' 3e in preparing the information. Diven that the information is not revealed elsewhere in the financial statements, it follows that there must 3e some cost in o3taining the information. 5he advantages of the indirect method are as follows( )i* >' examining the reconciliation 3etween reported profit and net cash flow from operating activities, the user can easil' relate trading profits to cash flow and thus understand the 7qualit'8 of earnings made 3' the entit' in the accounting period. Earnings are of a good qualit' if the' are represented 3'
12221A

$.%

$.+

$.$

real cash flows now or in the near future. )ii* 5here is a low cost in preparing the information. 5he disadvantage is the lac= of information on the significant elements of trading cash flows.

(.
A.1

Interpretation of Cash Flow Data

5he estimation of the future cash flows in ver' important in determining the solvenc' or otherwise of a 3usiness. 5he financial statements are, of course, historical records, 3ut the' can provide some evidence of solvenc'. Interpretation of the cash flow statement 5he cash flow statement should 3e the initial data to review. Points to watch for within the various headings in the cash flow statement include( Cash generation from trading operations 5he figure should 3e compared to the profit from operations. 5he reconciliation with which the cash flow statement opens if the indirect method is used is useful in this regard. ,vertrading ma' 3e indicated 3'( )i* high profits and low cash generation )ii* large increases in inventor', receiva3les and pa'a3les. Dividend and interest payouts 5hese can 3e compared to cash generated from trading operations to see whether the normal operations can sustain such pa'ments. -n most 'ears the' should. Capital expenditure and financial investment 5he nature and scale of a compan'4s investment in non2current assets is clearl' shown. Cash flow 5he statement clearl' shows the end result in cash terms of the compan'4s operations in the 'ear. Do not overstate the importance of this figure alone however. " decrease
12221B

( ) A.2

(a) A.3

(b) A.4

(c) A.%

(d) A.+

in cash in the 'ear ma' 3e for ver' sound reasons )e.g. there was surplus cash last 'ear* or ma' 3e mainl' the result of timing )e.g. a new loan was raised 6ust after the end of the accounting period*. (1) A.$ Cash requirements 5here are four areas to consider when identif'ing whether or not the compan' has sufficient cash. Repayment of existing loans "ll loans to 3e repaid in the next couple of 'ears should 3e considered including an' converti3le loans if the conversion rights are unli=el' to 3e exercised. Increase in working capital -f the 3usiness is expanding )ma=ing more sales* wor=ing capital will also need to increase. 5he extra cash needed to finance the expansion can easil' 3e calculated 3' comparing wor=ing capital to sales -nventor' H 9eceiva3les ? Pa'a3les #ales A.1; #uppose this is 2;G and sales are currentl' :%m, a 1;G increase in sales requires finance of :;.1m ):%m x 1;G x 2;G* to increase the wor=ing capital. Capital expenditure re uirements 5he notes to the financial statements ma' disclose capital expenditure contracted for. -t is necessar' to consider if the compan' will have sufficient cash to meet this capital expenditure. !ther commitments &ontingent lia3ilities ? Iost contingent lia3ilities do not cr'stallise, 3ut if the lia3ilities are ver' high, their cr'stallisation can cause real pro3lems for the compan'. #ome anal'sts compare the contingent lia3ilities with total shareholders4
12222;

(a) A.A

(b) A.B

x 1;;G

(c) A.11

(d) A.12

A.13

funds to assess the materialit' of those commitments. -n particular an' sharp increases in the amounts involved should act as a warning. Ceasing commitments ? -t these are material, the' should 3e carefull' monitored in relation to the cash availa3le. 5he financial statements should disclose 3oth finance lease commitments and also operating lease commitments. Cash shortfall -f there appears to 3e a cash shortfall, the compan' ma' have to ta=e one or more of the following steps( )i* increase its overdraft )if it is not alread' at the limit*< )ii* increase its longer term 3orrowings. 9emem3er that the articles or other founding documents often restrict the 3orrowings 3' reference to shareholders4 funds, which ma' need to 3e artificiall' increased, for example 3' revaluing assets. "lternativel' the compan' ma' as= the shareholders to pass a resolution changing the 3orrowing restriction. )iii* raising mone' through a share issue )the compan' must have a good record of profita3ilit' and of dividend growth, and the share price must 3e high*< )iv* tightening credit and inventor' control, pa'ing suppliers later< )v* limiting capital expenditure< )vi* entering into sale and lease3ac= arrangements )it will need some assets which are not alread' charged*< )vii* selling some assets< and )viii* purchasing a cash2rich compan' 3' issuing shares in consideration. 5he compan' should consider most measures in preference to( )i* reducing dividends< )ii* reducing its level of activit'.

(C) A.14

A.1%

122221