ADDITIONAL NOTES: STATEMENT OF CASH FLOW

Malaysia Financial Reporting Standard 107 Statement of cash flow requires all
company to present the statement of cash flow as part of their financial statements. It is
a statement showing the cash inflow and cash outflow of a company.

Statement of cash flow is used to assess the ability of a company to generate cash and
cash equivalents. It is also can be used to evaluate the needs of a company to utilize
cash flows.

The preparation of statement of cash flow is in accordance with FRS 107.

Benefits of statement of cash flow

1. Liquidity
It provides information that enable users to evaluate the liquidity of an enterprise,
changes in net assets (current assets-current liabilities) and timing of cash flow. With
cash on hand, business will be able to handle fluctuations in the day-to-day business
needs.

2. Ready for any opportunities or challenges ahead

Knowing the business have available cash enable the business to finance whatever
opportunities or challenges lie ahead. It is use as an indicator of the amount, timing and
certainty of future cash flow.

3. Productivity
When cash flow is under control, business will actually spend less time managing
business finances such as accounts receivable, accounts payable, and bank deposits.
This can free up more time to devote to key accounts, customer service, and new
business development opportunities.

4. Re-invest in Your Business

Improved cash flow can help the business to put more of the hard-earned money back
into the business. The business will have more opportunities to add employees, expand
current assets, build new facilities, and invest in new processes and technologies to
make the business more productive, profitable and competitive.

5. Reduce Debt
When the business has enough cash on hand, it allows the business to pay down debt,
thus reducing monthly financial commitments such as high-interest rates and potential
late-payment fees.

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Definitions

Cash comprises cash on hand and demand deposits (A bank deposit that can be
withdrawn without advance notice).

Cash equivalents are short term , highly liquid investments that are readily convertible
to cash. (maturity date of three months or less from the date of acquisition ).

Bank overdraft that are repayable on demand are cash equivalents.

Operating activities are the ordinary activities of an enterprise such as cash receipts
from cash sales, cash receipts from customers, payment of salaries.

Investing activities are the purchase (acquisition) and disposal (sale) of long-term assets
(non- current assets). E.g cash received from the sale of equipment.

Financing activities are activities of acquisition of share capital, long term borrowings
and also repayment of long term borrowing of an enterprise. E.g proceeds from the
issue of shares, issue of debentures.

Presentation of a statement of cash flow

All cash receipts and payments must be disclosed in a Statement of cash flow. The
receipts and payments of cash will be reported according to operating , investing and
financing activities.

The reporting of cash receipts and cash payments for operating activity can be
presented either in direct method or indirect method. However, MFRS 107 encourages
company to use direct method.

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REPORTING STATEMENT OF CASH FLOW

Direct method
RM RM
Cash flow from operating activities.
Cash receipts from customers xx
Cash paid to suppliers (xx)
Cash paid to employees (xx)
Cash paid for other expenses (xx)
---
Cash generated from operation xx
Interest paid (xx)
Tax paid (xx)
---
Net cash flows from operating activities xx

Cash flows from investing activities

Purchased of assets(including investment) (xx)
Proceeds from sale of assets(including investment) xx
Interest received xx
Dividend received xx
---
Net cash flows from investing activities xx

Cash flows from financing activities

Proceeds from the issuance of shares xx
Proceeds from long term borrowings xx
Repayment of long term borrowings (xx)
Dividends paid (xx)
---
Net cash flows from financing activities xx
---
Net increase in *cash and cash equivalents xx
*Cash and cash equivalents at begin. of period xx
*Cash and cash equivalents at end of period xx

*cash and cash equivalents consist of

beginning end
• Cash in hand and bank xx xx
• Short term investment xx xx
• Bank overdraft (xx) (xx)
---- ----
Cash and cash equivalents xx xx
---- ----

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Indirect method
RM RM RM
Cash flows from operating activities
Net profit before interest and tax :
Differences in the retained profits (xx)/xx
Any transfers to reserves xx
Dividend expenses xx
Interest expenses xx
Tax expenses xx
Adjustments for income not affecting operating activities:
Investment income (xx)
Interest income (xx)
Adjustments for expenses that do not affect cash flows:
Depreciation xx
Bad debts xx
Gain on disposal (xx)
Loss on disposal xx xx
Adjustments to recognize cash inflows/outflows in the
Increase/decrease in working capital:
Increase/decrease : inventories xx
Increase/decrease : trade receivables xx
Increase/decrease : accrued revenues xx
Increase/decrease : prepaid expenses xx
Increase/decrease : trade payables xx
Increase/decrease : accrued expenses xx
Increase/decrease : prepaid revenues xx xx

Cash generated from operation xx

Less: Interest paid (xx)
Less: Taxation paid (xx)
---
Net cash flows from operating activities xx

Cash flows from investing activities – ( use format of direct method)

Net cash flows from investing activities xx

Cash flows from financing activities – ( use format of direct method)

Net cash flows from financing activities xx
---
Net increase in *cash and cash equivalents xx
*Cash and cash equivalents at begin. of period xx
*Cash and cash equivalents at end of period xx

*Cash and cash equivalents consist of

Beginning End
• Cash in hand and bank xx xx
• Short term investment xx xx
• Bank overdraft (xx) (xx)
---- ----
Cash and cash equivalents xx xx
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Workings:

Trade receivables
Balance b/d xxx Bank xxx
Sales xxx balance c/d xxx
xxx xxx

Trade payable
Bank xxx Balance b/d xxx
Balance c/d xxx Purchases xxx
xxx xxx

Inventories
Balance b/d xxx Cost of sales xxx
Purchases xxx Balance c/d xxx
xxx xxx

Wages and salaries/other expenses

Bank xxx as per statement of comprehensive xxx
income
Accrued c/d xxx Accrued b/d xxx
Prepaid b/d xxx Prepaid c/d xxx
xxx xxx

Interest payable/tax payable

Bank xxx Balance b/d xxx
Balance c/d xxx as per statement of comprehensive xxx
income
xxx xxx

Property, plant and Equipment/ Investment

Balance b/d xxx Disposal xxx
Bank xxx Balance c/d xxx
xxx xxx

Disposal of Property, Plant and Equipment

PPE xxx Acc. depreciation xxx
Gain on disposal xxx Bank xxx
Loss on disposal xxx
xxx xxx

Disposal of Investment
Investment xxx Bank xxx
Gain on disposal xxx Loss on disposal xxx
xxx xxx

Accumulated depreciation of PPE

Disposal of PPE xxx Balance b/d xxx
Balance c/d xxx as per statement of comprehensive xxx
income(current year depreciation)
xxx xxx

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 Interest received/dividend received
Balance b/d xxx
Bank xxx SOPL xxx
Balance c/d xxx
xxx xxx

Share capital
Balance b/d xxx
Balance c/d xxx Bank xxx
xxx xxx

Share premium
Balance b/d xxx
Balance c/d xxx Bank xxx
xxx xxx

Long-term borrowings/debentures
Balance b/d xxx
Balance c/d xxx Bank xxx
xxx xxx

Dividend payable
Bank xxx Balance b/d xxx
Balance c/d xxx as per statement of comprehensive xxx
income(dividend expenses)
xxx xxx

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 EXAMPLE 1 (DIRECT METHOD)

BB Bhd’s financial statements are as follows:

Statement of Profit or Loss for the year ended 31 December 2011

RM RM
Sales 400,000
Cost of sales (196,000)
Gross profit 204,000
Income from investment 4,000
Profit on sale of plant and machinery 4,000 8,000

Wages and salaries 50,000

Interest expense 10,000
Other operating expenses (including depreciation of RM4,000) 34,000 (94,000)
Profit before tax 118,000
Taxation (44,000)
Profit for the year 74,000

Statements of Financial Position as at

31 December 2010 31 December 2011

RM RM RM RM
Assets
Land and buildings 280,000 400,000
Plant and machinery 80,000 60,000
Less: Accumulated dep. 12,000 68,000 10,000 50,000
Motor Vehicles 40,000 40,000
Less: Accumulated dep. 4,000 36,000 6,000 34,000
Investments 80,000 60,000
Inventories 10,000 14,000
Trade receivables 34,000 40,000
Bank 30,000 38,000
538,000 636,000

Share capital 200,000 280,000

Retained profits 100,000 140,000
10% Convertible debentures 120,000 100,000
Long-term bank loan 40,000 20,000
Accrued wages and salaries 2,000 1,000
Trade payable 30,000 25,000
Tax payable 20,000 40,000
Dividend payable 26,000 30,000
538,000 636,000

Additional information:

1. RM20,000 of the Convertible Debentures were converted into 20,000 Ordinary

Shares on 1 January 2011.
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 2. The increase in the issued share capital is due to the issue of shares at par, for
cash and the conversion of Debentures into Ordinary Shares.

3. Sale of plant and machinery was for cash. There was no purchase of plant and
machinery during the year. Land and buildings were purchased for cash.

4. RM2,000 of the depreciation charged to the Statement of Comprehensive

Income is for plant and machinery.

5. 40% of the Investments qualified as cash equivalent.

6. Dividend for the year amounted to RM34,000.

Required:

Prepare the Statement of Cash Flow using the direct method in accordance with
FRS107: Statement of Cash Flow.

Suggested Solution:

BB Bhd
Statement of Cash Flow for the year ended 31 December 2011
RM RM
Cash Flow from Operating Activities
Cash receipt from customer 394,000
Cash paid to supplier (205,000)
Cash paid to employees (50+2-1) (51,000)
Cash paid for other expenses (34-4) (30,000)

Interest paid (10,000)

Taxes paid (44+20-40) (24,000)
Cash Flow From Operating Activities 74,000

Cash Flow from Investing Activities

Purchase of Land and Building (120,000)
Cash receipt from disposal of Plant and Machinery 20,000
Cash receipt from sale of long-term investment 12,000
Income from investment 4,000
Net cash Used by Investing Activities (84,000)

Cash Flow from Financing Activities

Proceeds from issue of OS at par 60,000
Repayment of bank loan (20,000)
Payment of dividend (26+34-30) (30,000)
Net cash provided by financing activities 10,000
Net increase in cash and cash equivalent 0
Cash and cash equivalent at the beginning (32k+30k) 62,000
Cash and cash equivalent at the end (24k + 38k) 62,000
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Workings:

Trade Receivables
Bal b/d 34,000 Bal c/d 40,000
Sales 400,000 Bank 394,000
434,000 434,000

Trade Payables
Bal c/d 25,000 Bal b/d 30,000
Bank 205,000 Purchases 200,000
230,000 230,000

Purchases=196,000-10,000+14,000=200,000

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EXAMPLE 2 (INDIRECT METHOD)

The following are the statements of financial position of Peektures Bhd as at 31

December 2011 and 2012.

2011 2012
RM RM
Share capital
Ordinary shares of RM1 each 660,000 720,000

Reserves
Share premium 28,000 23,000
General reserve - 60,000
Retained profits 224,500 138,000
Asset revaluation reserve - 150,000

Non-current liabilities
10% convertible debentures 140,000 100,000
5% redeemable preference shares 110,000 60,000

Current liabilities
Bank overdraft 28,200 7,000
Tax payable 23,000 25,000
Dividend payable 29,500 40,000
Accounts payable 107,500 129,000
1,350,700 1,452,000

Non-current assets
Freehold land 410,000 450,000
Motor vehicle 130,000 190,000
Accumulated depreciation-motor vehicle (58,000) (64,000)
Furniture 90,500 120,000
Accumulated depreciation-furniture (30,125) (42,200)

Current assets
Inventory 82,825 64,500
Accounts receivable 188,500 361,000
Short-term investments 347,000 161,400
Cash and bank balances 190,000 211,300
1,350,700 1,452,000

Additional information:

1. Freehold land costing RM110,000 was sold for RM185,000. The increase in
freehold land was due to revaluation.

2. The preference shares were redeemed at RM1.10 per share. The share premium
was utilised for the premium on redemption.

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3. The increase in the share capital was due to the issue of shares at par and
conversion of 10% convertible debentures.

4. A motor vehicle at a cost of RM40,000 (carrying value of RM28,000) was sold at

a loss of RM11,000.

5. Tax charged in the statement of profit or loss and other comprehensive income
was RM15,000.

6. Last year’s proposed dividend was paid together with the current year’s interim
dividend of RM28,500.

7. Interest expense amounting to RM3,000 was paid during the year.

8. The short-term investments have a maturity period of two (2) months.

Required:

i. Prepare the statement of cash flows for the year ended 31 December 2012 using
the indirect method, showing the cash flows from operating activities only.
Show all relevant workings.

ii. Comment whether Peektures Bhd is facing liquidity problem. Support your
answer by showing a note on cash and cash equivalent.

Suggested Solution:

i. Peektures Bhd
Statement cash flows for the year ended 31 December 2012
Cash flows from operating activities RM RM
Profit before tax (W3) 57,000
Adjustment for:
Gain on disposal-Freehold land (185,000-110,000) (75,000)
Loss on disposal-MV 11,000
Depreciation-MV (W1) 18,000
Depreciation-Furniture (42,200 - 30,125) 12,075
Interest expense 3,000
Operating profit before working capital changes 26,075
Decrease in inventories (82,825-64,500) 18,325
Increase in receivable (361,000-188,500) (172,500)
Increase in payable (129,000-107,500) 21,500
Cash Generated From Operation (106,000)
(-) Interest paid (3,000)
(-) Tax paid (W2) (13,000)
Net cash flows from operating activities (122,600)

ii. Peektures Bhd is not facing any liquidity problem since the cash flows still shows a net
cash inflows at the beginning and end of the year, even though the cash flows at the
beginning is higher than at the end of the year. √√√√

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Note:
Beginning Ending
Cash and Bank 190,000 211,300
Bank Overdraft (28,200) (7,000)
Short term Investment 347,000 161,400
508,800 365,700
(Total: 15 marks)

W1 Accumulated Depreciation
Disposal 12,000 Bal b/d 58,000
Bal c/d 64,000 IS-Depreciation 18,000

W2 Taxation
Bank 13,000 Bal b/d 23,000
Bal c/d 25,000 IS 15,000

W3 Retained Profit
Taxation 15,000 Bal b/d 224,500
Dividend 68,500 NPBT 57,000
General Reserve 60,000
Bal c/d 138,000
281,500 281,500

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