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Authors:
Anupam Mehta (Institute of Management Technology, Dubai)
Published in:
2011
Length:
14 pages
Data source:
Published sources

Abstract

RAK Properties, listed on the Abu Dhabi Securities Exchange, is a real estate development company, formed in 2005 with the support of the Government of Ras Al Khaimah (RAK), UAE. One of the prospective investors Mohd Huda feels that net income is the only criteria to be considered for making investing decisions. While going through the annual reports of RAK Properties for the year 2009, Mohd Huda noticed that cash from operating activities is negative but the net profit is positive, which is something he could not understand. RAK properties has a net profit of AED 170,085,000 as per income statement, on the contrary the cash from operating activities, as given in the cash flow statement is AED (170,992,000), which is almost the equal number in negative compared to the net profit. The opposite results in the case of RAK properties gives the students an opportunity to explore and evaluate the areas which might have caused such a wide difference in the results of cash from operating activities and net profit of RAK properties and what are its implications?. The students will understand the fundamentals behind the preparation of the cash flow statement and the income statement, which led to the huge difference between these two statements. The case enables them to evaluate and figure out: Which statement should the investors rely on and why? Is negative cash from operating activities, a red alert for the investors regarding the liquidity position of the company? What conclusions can be drawn from a negative balance of cash from Operating Activities? This case can be used to make students understand a cash flow statement particularly cash from operations, its significance and enables the students to understand the reconciliation of cash from operations and the net profit.

Topics

RAK Properties; Real estate; Cash from operating activities; Net profit; Accrual vs cash basis; Abu Dhabi securities market; Preparation of cash flow statement and income statement; Difference of the income statement profit and cash flows; Negative cash from operations; Understanding the cash flow statement; Reconciliation
Size:
AED3 billion total assets, net profit AED170 million
Other setting(s):
2007-2009

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