(b) Daveed is a car retailer who leases vehicles to customers under operating leases and often sells the cars to third parties when the lease ends.

Net cash generated from operating activities for the year ended 31 August 20X8 for the Daveed Group is as follows:

Net cash flows generated from investing activities included interest received of $10 million and net capital expenditure of $46 million excluding the business acquisition at (iii) below.

There were also some errors in the presentation of the statement of cash flows which could have an impact on the calculation of net cash generated from operating activities.

The directors have provided the following information as regards any potential errors:

(i) Cars are treated as property, plant and equipment when held under operating leases and when they become available for sale, they are transferred to inventory at their carrying amount. In its statement of cash flows for the year ended 31 August 20X8, cash flows from investing activities included cash inflows relating to the disposal of cars ($30 million).

(ii) On 1 September 20X7, Daveed purchased a 25% interest in an associate for cash. The associate reported a profit after tax of $16 million and paid a dividend of $4 million out of these profits in the year ended 31 August 20X8. The directors had incorrectly included a figure of $12 million in cash generated from operating activities as cash generated from the investment in the associate. The associate was correctly recorded at $23 million in the statement of financial position at 31 August 20X8 and profit for the year of $4 million was included in the statement of profit or loss.

(iii) Daveed also acquired a digital mapping business during the year ended 31 August 20X8. The statement of cash flows showed a loss of $28 million in net cash inflow generated from operating activities as the effect of changes in foreign exchange rates arising on the retranslation of this overseas subsidiary. The assets and liabilities of the acquired subsidiary had been correctly included in the calculation of the cash movement during the year.

(iv) During the year to 31 August 20X8, Daveed made exceptional contributions to the pension plan assets of $33 million but the statement of cash flows had not recorded the cash tax benefit of $6 million.

(v) Additionally, Daveed had capitalised the interest paid of $25 million into property, plant and equipment ($18 million) and inventory ($7 million).

(vi) Daveed has defined operating free cash flow as net cash generated by operating activities as adjusted for net capital expenditure, purchase of associate and dividends received, interest received and paid. Any exceptional items should also be excluded from the calculation of free cash flow.

Required:

(iii) an explanation of the adjustments made in parts (i) and (ii) above. (5 marks)

Professional marks will be awarded in question 4(b) for clarity and quality of discussion. (2 marks)