Chapter 13

Statement of cash flows

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 Learning outcomes

Prepare and present the statement of financial position,

statement of profit or loss and statement of cash flows (or
extracts) from the accounting records and trial balance in a
format which satisfies the information requirements of the
entity.

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 Statement of cash flows

Topic list

 Statement of cash flows (IAS 7)

 Format of the statement of cash flows
 Preparing a statement of cash flows

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 Statement of cash flows

Objectives of Cash Flow Statement

1. Highlighting cash flow from different activities

2. Short-term Planning
3. Cash Flow information helps to understand liquidity
4. Efficient cash management
5. Prediction of sickness
6. Comparison with budget
7. Cash position

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 Statement of cash flows
Format – Direct method
Cash Flow from Operating Activities: Direct Method
Cash Flow from Operating Activities Amount
(Rs.)
Cash Receipts from :
Sales
Commission & Fees
Interest Received
XXX
Cash Payment for :
Purchases
Payments to and for employees
Operating Expenses
Interest Payments
Direct Taxes Paid XXX

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21 Net Cash
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from Operating – Chapter 13: Statement of cash flow
Activities XXX 5
 Statement of cash flows

Format – Indirect method £

Profit/(loss) before tax X
Using the indirect method, cash
generated from operations is calculated Finance cost X
by performing a reconciliation between: Investment income (X)
• Profit before tax as reported in the
Depreciation charge X
statement of profit or loss
• Cash generated from operations Amortisation charge X
This reconciliation is produced as Loss/(profit) on disposal of non-current assets X/(X)
follows:
(Increase)/decrease in inventories (X)/X
Reconciliation of profit/loss before tax
to cash generated from operations for (Increase)/decrease in trade and other receivables (X)/X
the year ended 31 December 20X7: (Increase)/decrease in prepayments (X)/X
Increase/(decrease) in trade and other payables (X)/X
Increase/(decrease) in accruals (X)/X
Increase/(decrease) in provisions (X)/X
Cash generated from operations X
Tax paid (X)
Interest paid (X)
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cash from/used of cash
in operating flow
activities 6X
 Statement of cash flows

Use of methods
Indirect and Direct Methods
• Companies favor the indirect method
for two reasons:
• It is easier and less costly to prepare,
and
• It focuses on the differences between
net income and net cash flow from
operating activities.

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 Statement of cash flows

Example of direct method

Boggis Co had the following transactions during the year.
(a) Purchases from suppliers were $19,500, of which $2,550 was unpaid at the
year end. Brought forward payables were $1,000.
(b) Wages and salaries amounted to $10,500, of which $750 was unpaid at the
year end. The accounts for the previous year showed an accrual for wages
and salaries of $1,500.
(c) Interest of $2,100 on a long-term loan was paid in the year.
(d) Sales revenue was $33,400, including $900 receivables at the year end.
Brought forward receivables were $400.
(e) Interest on cash deposits at the bank amounted to $75.
Calculate the cash flow from operating activities using the direct method.

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 Statement of cash flows

Example of direct method

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 Statement of cash flows

Indirect method

The Cash Flow Statement

The cash flow statement provides information about:
• Cash Receipts (cash inflows)
• Uses of Cash (cash outflows)
• During a Period of Time
Inflows and outflows are reported for:
• Operating activities
• Investing activities
• Financing activities

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 Statement of cash flows
Indirect method
Cash Inflows and Outflows

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 Statement of cash flows

Indirect method
Classification of Business Activities : Inflow and Outflow of Cash

Operating Activities

Cash Inflow Cash Outflow

1) Cash Sales 1) Cash Purchases
2) Received from Debtor 2) Payment to Creditors
3) Commission & Fees 3) Cash Operating Expenses
4) Royalty 4) Payment of Wages
5) Income Tax
6) Manufacturing Expenses

Cash effects the transaction on Net Income

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 Statement of cash flows

Indirect method
Classification of Business Activities : Inflow and Outflow of Cash

Investing Activities

Cash Inflow Cash Outflow

1) Sale of Fixed Assets 1) Purchase of Fixed Assets

2) Sale of investments 2) Purchase of Investments
3) Interest Received 3) Working Capital
4) Dividend Received
5) Working Capital Recovery

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 Statement of cash flows

Indirect method
Classification of Business Activities : Inflow and Outflow of Cash

Financing Activities

Cash Inflow Cash Outflow

1) Issue of Shares in Cash 1) Payment of Loans

2) Issue of Debentures in 2) Redemption of Preference
Cash Shares
3) Proceeds from long-term 3) Payment of Dividends
borrowings 4) Interest Paid
5) Repayment of Finance/
Lease Liability

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 Statement of cash flows

Indirect method
Preparing a Statement of Cash Flows
• Use net operating income as the starting point to get net operating
cash flow
• Add back any non-cash expense
(Example - Depreciation)
Net Cash Flow = Cash Inflow - Cash Outflow

Net Operating Cash Flow = Income after Taxes + Depreciation

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 Statement of cash flows

Indirect method
Preparing a Statement of Cash Flows

Order of Presentation:
Direct Method
1. Operating activities.
2. Investing activities. Indirect Method

3. Financing activities.

Three Sources of Information:

1. Comparative balance sheets
2. Current income statement
3. Additional information
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 Statement of cash flows
Payment of interest and income tax
Worked example: interest paid
A company’s financial statements show the following information:
At 1 Jan 20X2 At 31 Dec 20X2 For the year 20X2
£ £ £
Interest payable 54,000 63,000
Interest charge 240,000
Interest paid is calculated as follows
INTERESDT PAID
£ £
Cash payment (balancing figure) 231,000 Balance b/d 54,000
Balance c/d 63,000 Statement of profit of loss 240,000
294,000 294,000
Alternatively, this could be calculated as follows:
(54,000 + 240,000 – 63,000) = £231,000

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 Statement of cash flows
Cash receipts from sales of property, plant and equipment
Worked example: Cash receipts from sale of PPE
A company’s statement of financial position as at the beginning and the end of the year showed the
following:
Property, plant and equipment:
Cost £
At 1 Jan 20X7 760,000
Disposals (240,000)
At 31 Dec 20X7 520,000
Depreciation
At 1 Jan 20X7 270,000
Disposals (180,000)
Charge for year 50,000
At 31 Dec 20X7 140,000
Carrying amount
At 31 Dec 20X7 380,000
At 31 Dec 20X6 490,000
The property, plant and equipment was disposed of at a loss of £7,000. What was the cash flow from
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21disposal?
the 201109 – Chapter 13: Statement of cash flow 18
 Statement of cash flows
Solution:
The balancing figure can be obtained by constructing a disposal of property,
plant and equipment account as a working

PROPERTY, PLANT AND EQUIPMENT – DISPOSAL ACCOUNT

£ £
Cost 240,000 Accumulated depreciation 180,000
Loss on disposal 7,000
Cash received (balancing figure) 53,000
240,000 240,000

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 Statement of cash flows

Cash payment for purchase of property, plant and equipment

Interactive question:
A company’s accounts show that at 31 December 20X7, it had property, plant and
equipment at cost of £6,800,000. During the year, it disposed of assets that had a cost of
£850,000. At 31 December 20X6, the company’s property, plant and equipment at cost
had been £5,100,000
What were purchases of property, plant and equipment during the year?
PROPER TY, PLAN AND EQUIPMENT
£ £
Balance b/d 5,100,000 Disposals 850,000
Additions (balance) 2,550,000 Balance c/d 6,800,000
7,650,000 7,650,000
The company started the year with PPE at cost of £5,100,000. It bought a further
£2,550,000 of PPE, giving a total of £7,650,000 at cost. However, there were disposals
of PPE with a cost of £850,000, bringing the year-end figure down to £6,800,000
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 Statement of cash flows

Interest and dividends received

(a) Interest classifies as an operating cash flow or a financing
cash flow.
(b) Interest received and dividends received should be classified
as operating cash flows or as investing cash flows.
(c) Dividends paid is classified as an operating cash flow or, more
usually, as a financing cash flow, showing the cost of
obtaining financial resources.

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 Statement of cash flows
Cash received from issuing shares
Worked example: Cash received from share issue
Rustler plc’s annual accounts for the year to 31 Dec 20X7 show the following figures
At 31.12.X7 At 31.12.X6
£ £
Share capital: Ordinary shares of 50p 6,750,000 5,400,000
Share premium 12,800,000 7,300,000
There were no bonus issues of shares during the year.
What amount of cash was raised from shares issued during the year?

SHARE CAPITAL AND PREMIUM

£ £
Balance b/d 12,700,000
(5,400,000 + 7,300,000)
Balance c/d 19,550,000 Cash receipt (balancing 6,850,000
(6,750,000 + 12,800,000) figure)
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19,550,000 19,550,000
22
 Statement of cash flows

Raising loan
- Increasing during the year represents new financing  cash receipt
- Repayment of non-current interest-bearing borrowings  loan has
been repaid or redeemed

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 Statement of cash flows
Preparing a statement of cash flow
Worked example: Preparation of a statement of cash flows
Kane Plc’s statement of profit or loss for the year ended 31 Dec 20X2 and statement of
financial position at 31 Dec 20X1 and 31 Dec 20X2 were as follows:
KANE PLC
STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DEC 20X2
£
Revenue 720
Cost of sales (188)
Gross profit 532
Distribution costs (18)
Administrative expenses (94)
Profit from operations 420
Finance costs (28)
Profit before tax 392
Income tax expense (124)
Profit for -the
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 Statement of cash flows

KANE PLC
STATEMENT OF FINANCIAL POSTION AS AT 31 DEC
20X2 20X1
£’000 £’000 £’000 £’000
Non-current assets
Cost 1,596 1,596
Depreciation (318) (224)
1,278 1,336
Current assets
Inventory 24 20
Trade receivables 66 50
Recoverable corporation tax 10 8
Bank 48 56
Total assets 148 134

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 Statement of cash flows

KANE PLC
STATEMENT OF FINANCIAL POSTION AS AT 31 DEC
20X2 20X1
£’000 £’000 £’000 £’000
EQUITY
Share capital 360 340
Share premium 36 24
Retained earnings 716 514
Non current liabilities
Borrowings 200 500
Current liabilities
Trade payables 12 6
Taxation 102 86
114 92

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26
 Statement of cash flows

Dividends totaling £66,000 were paid during the year

During the year, the company paid £90,000 for a new piece of machinery
Included in the cost of sales is depreciation of £118,000. A loss on disposal of
£18,000 has been included in distribution costs
Requirement
Prepare a statement of cash flows for Kane Plc for the year ended 31
December 20X2 in accordance with the requirement of IAS 7

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 Statement of cash flows

Preparing a statement of cash flow

Question: Set out below are the financial statements of Shabnum Co. You are the
financial controller, faced with the task of implementing IAS 7 Statement of cash flows.
SHABNUM CO
STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 20X2

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 Statement of cash flows

Preparing a statement of cash flow

SHABNUM CO
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER

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 Statement of cash flows

Preparing a statement of cash flow

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 Statement of cash flows

Preparing a statement of cash flow

The following information is available.
(a) The proceeds of the sale of non-current asset investments amounted to $30,000.
(b) Fixtures and fittings, with an original cost of $85,000 and a carrying amount of $45,000, were sold for
$32,000 during the year.
(c) The following information relates to property, plant and equipment

(d) 50,000 $1 ordinary shares were issued during the year at a premium of 20c per share.
(e) Dividends totalling $80,000 were paid during the year.
Required
(a) Prepare the net cash flows from operating activities for the year to 31 December 20X2 using the format laid
out in IAS 7.
(b) Prepare the net cash flows from investing activities for the year to 31 December 20X2 using the format laid out
in IAS 7.
(b) Which one of the following options gives the net cash flows from financing activities for the year?
A $180k inflow
B $189k outflow
C $350k outflow
D $360k inflow
(d) Prepare the note to the statement of cash flows for the year to 31 December 20X2 using the format laid out in
21 –IAS
Sep7.- 23 201109 – Chapter 13: Statement of cash flow 31
 Solution

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 Statement of cash flows

Practice question
A company has the following information about property, plant and equipment.

Plant with a carrying amount of $75,000 (original cost $90,000) was sold for $30,000
during the year.
What is the cash flow from investing activities for the year?
A $95,000 inflow
B $210,000 inflow
C $210,000 outflow
D $95,000 outflow

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 Statement of cash flows

Practice question
A company has the following extract from a statement of financial position.

If there had been a bonus issue of 500,000 shares of $1 each during the year, what is
the cash flow from financing activities for the year?
A $1,250 inflow
B $750 inflow
C $750 outflow
D $1,250 outflow

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 Statement of cash flows

Practice question
In the course of preparing a company's statement of cash flows, the following figures are
to be included in the calculation of net cash from operating activities.

What will the net effect of these items be in the statement of cash flows?
$
A. Addition to operating profit 890,000
B. Subtraction from operating profit 890,000
C. Addition to operating profit 1,070,000
D. Addition to operating profit 990,000

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 Statement of cash flows

Practice question
Part of a company's draft statement of cash flows is shown below:

The following criticisms of the above extract have been made:

1 Depreciation charges should have been added, not deducted.
2 Increase in inventory should have been added, not deducted.
3 Increase in accounts payable should have been deducted, not added.
4 Proceeds of sale of non-current assets should not appear in this part of the
statement of cash flows.
Which of these criticisms are valid?
A 2 and 3 only
B 1 and 4 only
B Depreciation should be added back as it not a cash
C 1 and 3 only flow and proceeds of sale of non-current assets
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'investing' of cashflows.
flow 40
 Statement of cash flows

Practice question
In preparing a company's statement of cash flows complying with IAS 7
Statements of Cash Flows, which, if any, of the following items could form
part of the calculation of cash flow from financing activities?
1 Proceeds of sale of premises
2 Dividends received
3 Bonus issue of shares
A 1 only
B 2 only
C 3 only
D None of them

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 Statement of cash flows

Practice question
Which of the following assertions about statement of cash flows is/are
correct?
1 A statement of cash flows prepared using the direct method produces a
different figure for operating cash flow from that produced if the indirect
method is used.
2 Rights issues of shares do not feature in statements of cash flows.
3 A surplus on revaluation of a non-current asset will not appear as an item in
a statement of cash flows.
4 A profit on the sale of a non-current asset will appear as an item under Cash
Flows from Investing Activities in a statement of cash flows.
A 1 and 4
B 2 and 3
C 3 only
D 2 and 4
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 End of chapter 13

Study Manual - Read, read and read all

chapter 13 (p. 336 - 360)
Question Bank – Complete all questions in
Chapter 13

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