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FAR 250 ~ FINAN CIAL A C C OUNTIN G 4

At the end of this topic, students should be able to:


1. Define a statement of cash flow
2. Explain the usefulness of statement of cash flow
3. Differentiate between cash and cash equivalent
4. Explain the classification of cash flow activities
5. Prepare a statement of cash flow using direct and indirect
methods

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5.1 DEFINITION OF STATEMENT OF CASH FLOW

A statement of cash flow is a list of the cash inflow from various sources and the
cash outflows during an accounting period. It will form an integral part of the financial
statements of a company.

5.2 USEFULNESS OF STATEMENT OF CASH FLOW

a) Provides useful information as to managements decisions on the companys


cash flow and its effect on the liquidity of the company
b) Provides information on the effect on the cash flow of the enterprise by the
planned activities of management
c) Helps users of financial statement to assess the effectiveness of management to
provide and utilize cash and cash equivalents during a financial period
d) Indicates the reasons why a company has liquidity problems although it is making
profits
e) Provides information which will enable users of financial statements to evaluate a
companys changes in the net assets, its financial structure (including its liquidity
and solvency) and its ability to affect the amounts and timing of cash flows to
adapt to changing circumstances and opportunities
f) Discloses the inflow and outflow of cash during a financial period and will identify
the activities that generated cash and the activities that used cash. It is a useful
indicator of the timing and certainty of the inflow and outflow of cash.

However, a statement of cash flow has several disadvantages such as;

a) Information provided by a statement of cash flow will be historical


b) Analysis and interpretation will be on past decisions and of course there could be
window dressing by management

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5.3 CASH AND CASH EQUIVALENT

Cash is defined as cash in hand and cash at bank

Cash equivalents are short term investments which are


a) Readily convertible to cash.
b) Held for meeting short term commitments rather than for investments or other
purposes
c) Not subject to significant risk of changes in value and the maturity date should
not be more than three months from the acquisition date

5.4 CLASSIFICATION OF CASH FLOW ACTIVITIES


A statement of cash flow indicates the effects of three activities on the cash
resources of the company and the inter-dependency of one activity to the other.

i) Operating activities
It is the principal revenue-producing activity of a company such as sales of goods
and services and all incidental costs incurred to earn that revenue.

Examples of cash inflow from operating activities


a) cash receipts from sales
b) cash receipts from royalties, commissions and other income

Examples of cash outflow from operating activities:


a) cash payments to suppliers
b) cash payments for expenses, tax and interest

ii) Investing activities


Investing activities are transactions which involve non-current assets and
investments.

Examples of cash inflow from investing activities:


a) proceed from sale of non-current assets
b) proceed from sale of investment
c) income received on investment

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Examples of cash outflow from investing activities:


a) purchase of non-current assets
b) purchase of investment

iii) Financing activities


They are transactions that involve the obtaining of financial resources from
owners and other providers of non-current liabilities and the repayments of the
amounts borrowed.

Examples of cash inflow from financing activities:


a) proceeds from issue of shares and debentures
b) cash receipts from loans or other borrowings

Examples of cash outflow from financing activities:


a) payment on redemption of preference shares and debentures
b) repayment of loan or other borrowings including finance lease
c) dividend paid during the year

5.5 PRESENTATION OF STATEMENT OF CASH FLOW

A statement of cash flow can be presented either using direct or indirect method
depending on information given. The difference between both methods is regarding
the cash flow from operating activities. If a statement of comprehensive income is
given, direct method is expected to be used unless the question specifically required
the indirect method to be used. Indirect method is normally used when the details of
statement of comprehensive income account is not given.

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Direct method
XYZ Bhd
Statement of cash flow for the year ended .
RM RM
Cash flow from operating activities:
Cash receipts from customers xxxx
Cash payments to suppliers and employees (xxx)
Cash generated from operations xxxx
Interest paid (xxx)
Tax paid (xxx)
Net cash flows from operating activities xxxx

Cash flow from investing activities:


Purchase of non-current assets/investment (xxxx)
Proceeds from disposal of non-current xxxx
assets/investment
Dividends received xxx
Net cash flows from investing activities xxxx

Cash flow from financing activities:


Proceeds from the issue of shares xxxx
Proceeds from non-current borrowings xxxx
Payment for redemption of preference shares (xxx)
Payment for redemption of debentures (xxx)
Repayment of non-current liabilities (xxx)
Payment of finance lease liabilities (xxx)
Dividend paid (xxx)
Net cash flows from financing activities xxxx
Net increase/(decrease) in cash and cash xxxx
equivalent
Cash and cash equivalent at beginning xxx
Cash and cash equivalent at the end xxxx

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Note:
Cash and cash equivalents consist of :
Beginning End of
period period
RM RM
Cash in hand and cash at bank xxx xxx
Short term investment xx
xxx xxxx

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Indirect Method
XYZ Bhd
Statement of cash flow for the year ended .
RM RM
Cash flow from operating activities:
Operating income before taxation xxxx
Adjustment for:
Depreciation xxxx
Income from investment (xx)
Interest expense xx
Loss on sale of non-current assets xxx
Profit on sale of non-current assets (xxx)
Operating profit before working capital changes xxxx
Increase or decrease in inventory (xx)/xx
Increase or decrease in trade receivables (xx)/xx
Increase or decrease in prepayments (xx)/xx
Increase or decrease in trade payables xx/(xx)
Increase or decrease in acrruals xx/(xx)
Cash generated from operations xxxx
Interest paid (xxx)
Tax paid (xxx)
Net cash flows from by operating activities xxxx

Cash flow from investing activities:


Purchase of non-current assets/investment (xxxx)
Proceeds from disposal of non-current xxxx
assets/investment
Dividends received xxx
Net cash flows from investing activities xxxx

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Cash flow from financing activities:


Proceeds from the issue of shares xxxx
Proceeds from non-current borrowings xxxx
Payment for redemption of preference shares (xxx)
Payment for redemption of debentures (xxx)
Repayment of non-current liabilities (xxx)
Payment of finance lease liabilities (xxx)
Dividend paid (xxx)
Net cash flows from financing activities xxxx
Net increase/(decrease) in cash and cash equivalent xxxx
Cash and cash equivalent at beginning xxx
Cash and cash equivalent at the end xxxx

Note:
Cash and cash equivalents consist of :
Beginning End
of
period period
RM RM
Cash in hand and cash at bank xxx xxx
Short term investment xx
xxx xxxx

Please notice that:


a. Working capital does not include tax payable, dividend payable, cash in hand,
cash at bank and overdraft

b. Only format for cash flow from operating activities is different from that under
direct method but the net amount is still the same.

c. Under both methods, all cash outflows will be shown in bracket.

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Example:

Cash Flow Bhd


Statement of comprehensive income for the year ended 31 Dec 20x1

RM RM
Sales 400,000
Cost of sales 196,000
Gross profit 204,000
Income from investment 4,000
Wages and salaries 50,000
Interest expense 10,000
Administrative and selling expenses 30,000
Depreciation 4,000
Profit on sale of plant and machinery (4,000) 90,000
Profit before tax 118,000
Tax charge for the year 44,000
Profit after tax 74,000
Dividend:
Interim 4,000
Proposed 30,000 34,000
40,000
Retained profit brought forward 100,000
140,000

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Cash Flow Bhd


Statement of Financial Position as at 31 Dec 2001

2001 2000
Non-current assets RM RM RM RM
Land and building 400,000 280,000
Office equipment 60,000 80,000
Accumulated depreciation 10,000 50,000 12,000 68,000
Motor vehicles 40,000 40,000
Accumulated depreciation 6,000 34,000 4,000 36,000
Non-current investment 60,000 80,000

Current assets:
Inventory 14,000 10,000
Trade receivables 40,000 34,000
Bank 38,000 30,000
92,000 74,000

Current liabilities:
Accrued wages and
salaries 1,000 2,000
Trade payables 25,000 30,000
Tax payable 40,000 20,000
Proposed dividend 30,000 26,000
96,000 78,000
(4,000) (4,000)
540,000 460,000

Financed by:
Ordinary shares of RM1 280,000 200,000
Retained profits 140,000 100,000
10% Convertible debentures 100,000 120,000
Loan 20,000 40,000
540,000 460,000

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Additional information:
1. RM20,000 of the convertible debentures were converted into 20,000
ordinary shares on 1 Jan 20x1.
2. The increase in the issued share capital is partly due to the issue of
shares at par for cash.
3. Sale of office equipment was for cash. There were no purchase of plant
and machinery during the year.
4. Land and buildings were purchased for cash.
5. Deprecation charge of RM4,000 in the SOCI consists of depreciation of
RM2,000 each for office equipment and motor vehicles.

You are required to prepare the statement of cash flow for Cash Flow Bhd for the
year ended 31 Dec 20x1 using:
a. direct method
b. indirect method

Solution
Using direct method

Workings:

Under operating activities:

1. To find receipts from customers, trade receivables account will be opened.

Trade receivables account


Bal b/d 34,000 Bank* 394,000
Sales 400,000 Bal c/d 40,000
434,000 434,000
* balancing figure

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2. To find payments to suppliers, trade payables account will be opened.

Trade payables account


Bank* 205,000 Bal b/d 30,000
Bal c/d 25,000 Purchases 200,000
230,000 230,000
* balancing figure

To find purchases, we will use to the formula to obtain cost of sales figure.
Cost of Sales = Opening + Purchases - Closing
Inventory Inventory
Purchases = Cost of + Closing - Opening
Sales Inventory Inventory
= 196,000 + 14,000 - 10,000
= 200,000

3. To find payments to employees, wages and salaries account will be opened if


and only if there is accrued wages and salaries in the statement of financial
position.

Wages and salaries account


Bank* 51,000 Bal b/d 2,000
Bal c/d 1,000 SOCI 50,000
52,000 52,000
* balancing figure

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4. To find payment for expenses, expenses account will be opened if and only if
there is accrued or prepaid expenses in the statement of financial position.

In this example, there is no accrued or prepaid expenses besides wages and


salaries. Thus, you do not have to open expenses account. To find payment for
expenses, you must consider only those expenses which need to be paid. Some
expenses such as depreciation and loss on disposal should be ignored because
they do not have to be paid. Similarly, gain on disposal will not be considered as
it is non-cash flow item. Interest expense and investment will also be excluded
since these items will be shown separately from other expense. Therefore,

Payment for other expenses = 30,000

If there is accrued or prepaid expenses (apart from wages and salaries) in the
statement of financial position, the expenses account will be opened as follow:

Expenses account
Prepaid b/d xx Accrued b/d xx
Bank* xxxx SOCI** xxxx
Accrued c/d xx Prepaid c/d xx
xxxx xxxx
* balancing figure
**consider only expenses which need to be paid and exclude
interest expense

5. To find tax paid, normally tax account will be opened

Tax payable account


Bank* 24,000 Bal b/d 20,000
Bal c/d 40,000 SOCI 44,000
64,000 64,000
* balancing figure

6. Interest account will be opened to find interest paid only if there is accrued
interest in the statement of financial position.

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In this example, there is no accrued interest, in the statement of financial position.


Thus, interest paid will be RM 10,000

If there is accrued interest in the statement of financial position, interest account


should be opened as follows:

Interest account
Bank* xxxx Accrued b/d xxxx
Accrued c/d xx SOCI xx
xxxx xxxx
* balancing figure

Under investing activities:

We will find how much assets or investment have been purchased during the year
and how much money has been received from the sale of non-current assets or
investment.

1. To find purchase of non-current assets during the accounting year, the non-
current assets account should be opened.
2. If there is a disposal during the accounting year, accumulated depreciation
and disposal account may be opened in addition to non-current assets
account in order to obtain proceeds from the sale of non-current assets.

Based on the example above, there are;

a. sale of office equipment during the year. Thus, we want to find the proceed
from the sale of office equipment

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Office equipment account


Bal b/d 80,000 Disposal 20,000
Bal c/d 60,000
80,000 80,000

Disposal account
Office equipment 20,000 Acc. depreciation 4,000
Gain on sale 4,000 Bank* 20,000
24,000 24,000
* balancing figure

Accumulated Depreciation office equipment


Disposal* 4,000 Bal b/d 12,000
Bal c/d 10,000 Depreciation 2,000
14,000 14,000
* balancing figure

b. purchase of land and buildings during the year. Since there is no disposal of
land and building, the changes in land and buildings account are due to
purchase of land and building during the year

Purchase of land and building = Bal c/d - Bal b/d


= 400,000 - 280,000
= 120,000

c. decrease in investment. Since there is no information regarding purchase of


investment, it is assumed that there is no purchase of investment during the
year. Thus,

Sale of non-current investment = Bal b/d - Bal c/d + gain on sale


( - loss on sale)
= 80,000 - 60,000
= 20,000

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Under financing activities:

Here, we will look at changes in share capital, liabilities (both current and non-
current) and also dividend paid.

Based on the example given, there are:


a. increase in share capital
b. decrease in convertible debentures
c. decrease in loan

Increase in share capital


This may be due to issue of shares for cash. However from additional information no
(1), some of debentures have been converted into cash. Conversion of debentures
does not involve cash inflow. To find proceeds from the issue of shares, share capital
and application and allotment accounts may be opened.

Ordinary share capital


Bal b/d 200,000
10% Conv. Debentures 20,000
Bal c/d 280,000 Appln. & Allotment 60,000
280,000 280,000

Application and Allotment


Ordinary share 60,000 Bank* 60,000
60,000 60,000
* balancing figure

Decrease in convertible debentures


This may be due to repayment of debentures or conversion of debentures into
ordinary shares. Again, from information (1), 20,000 of the convertible debentures
were converted into ordinary shares. Since debentures have been decreased by
RM20,000, it indicates that the decrease in debentures is due to conversion of
debentures into ordinary shares. Thus, there no cash outflow from the company.

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Decrease in loan.
The decrease in loan may be caused by repayment of loan. Since there is no other
information regarding loan, there is an outflow of money to repay the loan of
RM20,000.

In addition, we have to find the amount of dividend paid during the year. We will open
dividend payable account.
Dividend payable account
Bank* 30,000 Bal b/d 26,000
Bal c/d 30,000 IS 34,000
60,000 60,000
* balancing figure

Now, you can prepare the statement of cash flow :

Direct method

Cash Flow Bhd


Statement of cash flow for the year ended 31 Dec 2001

RM RM
Cash flow from operating activities:
Cash receipts from customers 394,000
Cash payments to suppliers and employees (286,000)
Cash generated from operations 108,000
Interest paid (10,000)
Tax paid (24,000)
Net cash flow from operating activities 74,000

Cash flow from investing activities:


Purchase of land and building (120,000)
Proceeds from disposal of office equipment 20,000
Proceeds from disposal of investment 20,000
Dividends received 4,000
Net cash flow from investing activities (76,000)

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Cash flow from financing activities:


Proceeds from the issue of shares 60,000
Repayment of loan (20,000)
Dividend paid (30,000)
Net cash flow from financing activities 10,000
Net increase/(decrease) in cash and cash
equivalent 8,000
Cash and cash equivalent at beginning 30,000
Cash and cash equivalent at the end 38,000

Note:
Cash and cash equivalents consist of :
Beginning End of
period period
RM RM
Cash in hand and cash at bank 30,000 38,000
Short term investment - -
30,000 38,000

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Indirect Method
Cash Flow Bhd
Statement of cash flow for the year ended 31 Dec 20x1
RM RM
Cash flow from operating activities:
Operating income before taxation 118,000
Adjustment for:
Depreciation 4,000
Income from investment (4,000)
Interest expense 10,000
Profit on sale of non-current assets (4,000)
Operating profit before working capital changes 124,000
Increase in inventory (4,000)
Increase in trade receivables (6,000)
Decrease in trade payables (5,000)
Decrease in accruals (1,000)
Cash generated from operations 108,000
Interest paid (10,000)
Tax paid (24,000)
Net cash flow from operating activities 74,000

Cash flow from investing activities:


Purchase of land and building (120,000)
Proceeds from disposal of office equipment 20,000
Proceeds from disposal of investment 20,000
Dividends received 4,000
Net cash flow from investing activities (76,000)

Cash flow from financing activities:


Proceeds from the issue of shares 60,000
Repayment of loan (20,000)
Dividend paid (30,000)
Net cash flow from financing activities 10,000
Net increase/(decrease) in cash and cash equivalent 8,000
Cash and cash equivalent at beginning 30,000
Cash and cash equivalent at the end 38,000

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Note:
Cash and cash equivalents consist of :
Beginning End of
period period
RM RM
Cash in hand and cash at bank 30,000 38,000
Short term investment - -
30,000 38,000

Sometimes, profit before tax figure is not given. In that situation, students can find the
figure using this formula.

Retained profit c/f 140,000


Less; Retained profit b/f (100,000)
40,000
Add:
Transfer to reserve
Dividend charged in SOCI 34,000
Tax charged in SOCI 44,000
118,000

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COMPREHENSIVE EXERCISE

QUESTION 4 (NOVEMBER 2006)

Sidam Bhd is a public listed company with a registered capital of RM50 million. The balance
sheet and income statement of the company for the year ended 30 June 2006 are given
below:

Sidam Bhd

Balance sheet as at 30 June 2006

2006 2005
RM000 RM000
Non-current assets
Freehold land 3,600 3,200
Freehold buildings (NBV) 596 416
Plant and machinery (NBV) 360 440
Motor vehicles (NBV) 40 80
Research and development 300 300
Investments: Quoted 140 440
Unquoted 100 100

Current assets
Inventories 2,400 1,600
Accounts receivable 1,800 1,360
Bank 60 20
9,396 7,956
Equity and reserves
Ordinary share capital 2,000 1,860
8% Preference share capital 2,000 2,000
Share premium 400 200
General reserve 340 340
Revaluation reserve 400 200
Unappropriated profits b/f 700 700
Profit for the year 164.8 -

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Non-current liability
10% debentures 300 400

Current liabilities
Accounts Payable 1,360 1,080
Tax payable 340 380
Dividends payable - 140
Bank Overdraft 1,391.2 656
9,396 7,956

Sidam Bhd
An extract of Income statement for the year ended 30 June 2006

RM RM
000 000

Turnover 6,000
Cost of sales (4,000)
Gross profit 2,000
Selling and distribution expenses 600
Administrative expenses 360 (960)
1,040
Interest paid 40
Profit before tax 1,000
Taxation (400)
Profit after tax 600

Additional information:

1. Dividends paid for the year ended 30 June 2006:


i) Interim dividend 2006: preference dividends RM115,200
ordinary dividends RM320,000
ii) Final dividend 2005 RM140,000

2. Included in the administrative expenses are the current years depreciation of non-
current assets, profit or loss on disposal of non-current assets and investments.

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3. During the year, land costing RM600,000 was disposed for RM680,000

4. Plant costing RM240,000 with a net book value of RM56,000 was sold during the
year at a loss of RM2,000.

5. The non-current assets schedule showed the following movements:-

Freehold Buildings Plant and Motor Total


land machinery vehicles
RM000 RM000 RM000 RM000 RM000
Cost
Balance at 1/7/05 3,200 800 840 200 5,040
Additions 800 200 120 - 1,120
Revaluation 200 - - - 200
4,200 1,000 960 200 6,360
Disposals (600) - (240) - (840)
Balance at 30/6/06 3,600 1,000 720 200 5,520

Accumulated
Depreciation
Balance at 1/7/05 - 384 400 120 904
Charge for the year - 20 144 40 204
- 404 544 160 1,108
Disposal - - (184) - (184)
Balance at 30/6/06 - 404 360 160 924

Net book value 3,600 596 360 40 4,596

6. New ordinary shares were issued at a premium.

7. The 10% debentures were redeemed at par during the year.

8. Quoted investment was sold at a profit of RM100,000

Required:

Prepare a cash flow statement of Sidam Bhd using the direct method for the year ended 30
June 2006. Show the note on cash and cash equivalent and all relevant workings.

(22 marks)

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SOLUTION
Sidam Bhd
Cash Flow Statement for the year ended 30 June 2006
RM RM
000 000
Cash Flow from Operating Activities:
W1 Cash receipt from customers 5,560
W2 Cash payment to suppliers (4,520)
Selling and Distribution expenses (600)
W3 Administrative expenses (334)
Cash generated from operations 106
Interest paid (40)
W4 Tax paid (440)
Net Cash Outflow from Operating Activities (374)

Cash Flow from Investing Activities:


W5 Purchase of land (800)
W6 Sale of land 680
W7 Purchase of building (200)
W8 Purchase of plant and machinery (120)
W9 Sale of plant and machinery 54
W10 Sale of investments 400
Net Cash Inflow from Investing Activities 14

Cash Flow from Financing Activities:


W11 Issue of ordinary shares 140
W12 Premium on shares issued 200
W13 Redemption of debentures (100)
Preference dividend paid (115.2)
Ordinary dividend paid (320)
Ordinary dividend payable (140)
Net Cash Outflow from Financing Activities (335.2)

Net decrease in Cash and Cash Equivalent (695.2)


Cash and Cash Equivalent at beginning (636)
Cash and Cash Equivalent at end (1331.2)

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Note:
Cash and Cash Equivalent
Cash and Cash Equivalent consist of cash at bank and bank overdraft.

Beginning of period End of period


RM000 RM000
Cash at bank 20 60
Bank Overdraft (656) (1391.2)
(636) (1331.2)

Workings (All figs. in RM000)


Debtors
W1 B/d 1360 Cash 5560
Sales 6000 c/d 1800

Creditors
W2 Cash 4520 b/d 1080
c/d 1360 Purchases 4800

W3 Administrative Expenses 360


+ Profit on sale of land 80
_ Dep: Building (20)
_ Dep: Plant and machinery (144)
_ Dep: Motor vehicles (40)
_ Loss on sale of plant and (2)
machinery
+ Profit on sale of 100
investments
334

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Tax
W4 Bank 440 b/d 380
c/d 340 P+L 400

Land
W5 b/d 3200 Disposal 600
Bank 800
ARR 200 c/d 3600

Disposal of Land
W6 Land 600 Bank 680
P+L 80

Building
W7 b/d 416 P+L 20
Bank 200 c/d 596

Plant and Machinery


W8 b/d 440 P+L 144
Disposal 184 Disposal 240
Bank 120 c/d 360

Disposal Plant and Machinery


W9 P+M 240 P+M 184
P+L 2
Bank 54

Investments
W10 b/d 440 Bank 400
P+L 100 c/d 140

OSC
W11 b/d 1860
c/d 2000 Bank 140

Share Premium
W12 b/d 200
c/d 400 Bank 200

10% Debentures
W13 Bank 100 b/d 400
c/d 300

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