Kumba Palm Ltd: Profit, Overdraft and Cash Flow
Kumba Palm Ltd reports profit before tax of 18,000,000 FCFA for 2024. The following information is available: depreciation 6,000,000 FCFA; profit on disposal of plant 1,500,000 FCFA; interest expense 2,400,000 FCFA, with interest payable increasing by 400,000 FCFA; tax paid 3,000,000 FCFA; inventory increased by 2,500,000 FCFA; receivables decreased by 1,200,000 FCFA; payables decreased by 900,000 FCFA; plant purchased 30,000,000 FCFA; plant sold for 3,500,000 FCFA; a 10% loan of 5,000,000 FCFA was received; dividends paid 4,000,000 FCFA. Cash and cash equivalents at 1 January 2024 were 1,000,000 FCFA. The directors are alarmed that the bank balance at 31 December 2024 is an overdraft of 6,800,000 FCFA. Interest paid is classified as an operating cash flow.
1. Calculate net cash from operating activities using the indirect method.
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| Operating cash flow | FCFA |
|---|---|
| Profit before tax | 18,000,000 |
| Add depreciation | 6,000,000 |
| Less profit on disposal | (1,500,000) |
| Add interest expense | 2,400,000 |
| Operating profit before working capital changes | 24,900,000 |
| Increase in inventory | (2,500,000) |
| Decrease in receivables | 1,200,000 |
| Decrease in payables | (900,000) |
| Cash generated from operations | 22,700,000 |
| Interest paid: 2,400,000 − 400,000 | (2,000,000) |
| Tax paid | (3,000,000) |
| Net cash from operating activities | 17,700,000 |
Depreciation and the disposal profit are non-cash items. The interest expense is added back to reach operating cash flow before interest, then the actual interest paid is deducted.
2. Prepare the investing and financing sections and reconcile the net movement to the closing overdraft.
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| Investing activities | FCFA |
|---|---|
| Purchase of plant | (30,000,000) |
| Proceeds from sale of plant | 3,500,000 |
| Net cash used in investing | (26,500,000) |
| Financing activities | FCFA |
|---|---|
| Loan received | 5,000,000 |
| Dividends paid | (4,000,000) |
| Net cash from financing | 1,000,000 |
| Reconciliation | FCFA |
|---|---|
| Net cash from operating activities | 17,700,000 |
| Net cash used in investing | (26,500,000) |
| Net cash from financing | 1,000,000 |
| Net decrease in cash | (7,800,000) |
| Cash at 1 January 2024 | 1,000,000 |
| Closing cash / (overdraft) | (6,800,000) |
The closing figure agrees with the reported overdraft.
3. Comment on why a profitable company can report an overdraft, and suggest one action the directors could take.
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Profit is an accounting measure, not a cash measure. Kumba Palm Ltd earned 18,000,000 FCFA before tax, but cash was absorbed by a 2,500,000 FCFA inventory increase, a 900,000 FCFA reduction in payables, tax and interest payments, and especially the 30,000,000 FCFA plant purchase. The 3,500,000 FCFA disposal proceeds and 5,000,000 FCFA loan were not enough to cover the investment and dividends.
The overdraft is therefore a liquidity problem caused by heavy investment and working-capital movements, not necessarily a profitability problem. The directors could delay part of the plant purchase, negotiate a long-term loan or equity injection to fund expansion, reduce dividends, or tighten inventory and receivables control. They should also check whether the overdraft is within agreed bank limits.