Below is Ahoy Ltd's income statement and balance sheet.[table]
Ahoy Ltd | | Ahoy Ltd Income Statement for | | Balance Sheet year ending 30 June (millions) | | as at 30 June (millions) | 2024 | | | 2024 | 2023 | | | | | Operating revenue | 700 | | Inventory | 55 | 62 Operating expenses | -423 | | Accounts receivable | 10 | 8 Depreciation | -10 | | Net property, plant and equipment | 600 | 500 EBIT | 267 | | Total assets | 665 | 570 Interest expense | -27 | | Accounts payable | 55 | 50 Pre-tax profit | 240 | | Short-term debt | 30 | 20 Tax expense at 30% | -72 | | Long-term debt | 90 | 90 Net profit after tax | 168 | | Total liabilities | 175 | 160 | | | Share capital | 90 | 120 | | | Retained earnings | 400 | 290 | | | Total equity | 490 | 410
[/table]Which of the following statements about the financial year from 30 June 2023 to 30 June 2024 is NOT correct?

Question

Below is Ahoy Ltd's income statement and balance sheet.[table]
Ahoy Ltd |  | Ahoy Ltd Income Statement for |  | Balance Sheet year ending 30 June (millions) |  | as at 30 June (millions) | 2024 |  |  | 2024 | 2023 |  |  |  |  |  Operating revenue | 700 |  | Inventory | 55 | 62 Operating expenses | -423 |  | Accounts receivable | 10 | 8 Depreciation | -10 |  | Net property, plant and equipment | 600 | 500 EBIT | 267 |  | Total assets | 665 | 570 Interest expense | -27 |  | Accounts payable | 55 | 50 Pre-tax profit | 240 |  | Short-term debt | 30 | 20 Tax expense at 30% | -72 |  | Long-term debt | 90 | 90 Net profit after tax | 168 |  | Total liabilities | 175 | 160 |  |  | Share capital | 90 | 120 |  |  | Retained earnings | 400 | 290 |  |  | Total equity | 490 | 410
[/table]Which of the following statements about the financial year from 30 June 2023 to 30 June 2024 is NOT correct?

BlackTom AI · Accepted Answer

First, let's restate the core of the question and the choices to ensure we’re evaluating the right statements about the financial year from 30 June 2023 to 30 June 2024.

Options:
- a. The change in net operating working capital was likely negative because in net terms, more inventory was bought rather than sold.
- b. The change in net operating working capital was -$10m.
- c. Free cash flow to the Firm (FCFF) represents cash that is available for distribution to debt and equity holders.
- d. Net capital expenditure was $110m.

Now, analyze each option in turn:

Option a:
- This statement asserts that NOCW change was negative due to more inventory being bought than sold. To assess this, compute NOCW for both years. Net operating working capital (NOCW) typically uses operating current assets (inventory and accounts receivable) minus operating current liabilities (accounts payable; excludes interest-bearing debt).
- For 2024: operating current assets = inventory 55 + accounts receivable 10 = 65. Operating current liabilities = accounts payable 55. NOCW 2024 = 65 - 55 = 10.
- For 2023: operating current assets = inventory 62 + accounts receivable 8 = 70. Operating current liabilities = accounts payable 50. NOCW 2023 = 70 - 50 = 20.
- Change in NOCW = 2024 − 2023 = 10 − 20 = −10. So the change is negative, matching the magnitude given in option b. However, the reason given in option a attributes the negative change to “more inventory was bought rather than sold,” which is inconsistent with the data: inventory actually decreased (62 to 55), suggesting more inventory was sold than bought. So the rationale in option a is not supported by the numbers presented.

Option b:
- This option states the change in NOCW was −$10m. As shown above, NOCW declined from 20 to 10, a −$10m change. Numerically, this is accurate given the figures for 2023 and 2024. The result follows from the observed shifts in inventory, receivables, and payables. No alternative interpretation in this dataset contradicts that −$10m figure, assuming the standard NOCW definition used above.

Option c:
- FCFF stands for Free Cash Flow to the Firm. By standard financial theory, FCFF measures the cash generated by operations after taxes and reinvestment that is available to all providers of capital, i.e., debt and equity holders, before any payments to them are made. This description aligns with the conventional definition of FCFF, so the statement is conceptually correct.

Option d:
- Net capital expenditure (net capex) is typically calculated as gross capital expenditure minus depreciation, or as the change in net PPE adjusted for disposals if data are provided. Here, net PPE increased from 500 in 2023 to 600 in 2024, an increase of 100. Depreciation for 2024 is given as 10. In many analyses, net capex would be gross capex minus depreciation, which in this case would be 100 − 10 = 90. If one instead interprets net capex as the year’s investment in PPE after accounting for depreciation already factored in within the PPE figures, some presentations might show a different figure, but the standard calculation based on the given numbers yields 90, not 110. Therefore stating net capex as 110m does not align with the data provided.

In summary of the analyses above:
- Option a presents a rationale for a negative NOCW change that contradicts the observed inventory trend (inventory decreased, not bought more). This makes the stated reasoning questionable given the data.
- Option b correctly states the numerical change in NOCW as −$10m, which matches the computed change from 2023 to 2024.
- Option c accurately describes FCFF in conventional financial terms.
- Option d claims net capex of $110m, which clashes with the PPE numbers and the common interpretation of net capex as gross capex minus depreciation, yielding a figure around $90m rather than $110m.

These assessments rely on standard definitions of net operating working capital, FCFF, and net capital expenditure, and on the specific figures presented for Ahoy Ltd in 2023 and 2024.

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