CPA Ireland Skillnet

CPA Ireland Skillnet, is a training network that is funded by Skillnets, a state funded,
enterprise led support body dedicated to the promotion and facilitation of training and up-
skilling as key elements in sustaining Ireland’s national competitiveness.
The CPA Ireland Skillnet provides excellent value CPE (continual Professional
Education) in accountancy, law, tax and strategic personal development to
accountants working both in practice and in industry. However our attendees are not
limited to the accountancy field as we welcome all interested parties to our events.

The CPA Ireland Skillnet is funded by member companies and the Training Networks Programme, an initiative of
Skillnets Ltd. funded from the National Training Fund through the Department of Education and Skills.

The Institute of Certified Public Accountants in Ireland www.skillnets.ie

Trainee Accountant Webinar

F2 – Financial Accounting
Presented By: Sandra Gleeson
Introduction
• The purpose of this webinar is to give an overview of the topic of the
Statement of Cash Flows as examinable in F2 Financial Accounting.
• This webinar will focus on how to calculate cash flows using T‐
accounts and other reconciling workings and will also focus on the
presentation of the cash flows in the proforma layout for a Statement
of Cash Flows.
Note – The examples used are taken from Question 5 of the April 2017
Formation 2 Financial Accounting exam paper

Why prepare a statement of cash flows?

• One of the statements which form part of the primary financial
statements.
• Statement of Comprehensive Income.
• Statement of Financial Position
• Statement of Cash Flows
• Each statement provides different information needed by users of
financial statements
Layout of the Statement of Cash Flows
Heading Note
Operating Activities These are the main revenue‐producing activities of the entity that are
not investing or financing activities, i.e. cash received from customers
and cash paid to suppliers and employees.
Investing Activities These are the acquisition and disposal of long‐term assets and other
investments (other than cash equivalents) i.e. cash paid to acquire
fixed assets, cash received from disposal of fixed assets.
Financing Activities These are the activities that alter the equity capital and borrowing
structure of the entity i.e. cash received from issue of shares or
debentures, cash paid for redemption of loans.
= Increase or decrease in cash & cash This figure should reconcile to the net difference in cash and cash
equivalents equivalents as per the balance sheet at the current accounting period
to the balance sheet at the end of the previous accounting period.

Operating Activities – Direct Method

• The direct method shows each major class of gross cash receipts and
gross cash payments.

Operating Activities €
Cash receipts from customers X
Cash paid to suppliers (X)
Cash paid to employees (X)
Cash paid for other operating expenses (X)
Interest paid (X)
Income taxes paid (X)
Net cash from operating activities X
Operating Activities – Indirect Method
• The indirect method adjusts the accrual basis net profit or loss for the
effects of non‐cash transactions.
Operating Activities €
Profit before tax X
Add back depreciation & loss on disposal of assets (deduct profit on disposal) X
Add back interest expense X
Increase or Decrease in receivables (X) / X
Increase or Decrease in inventories (X) / X
Increase or Decrease in trade payables X / (X)
Interest paid (X)
Income taxes paid (X)
Net cash from operating activities X

Investing Activities
• Any cash paid or received in relation to investment in long‐term
assets should be presented here.
Investing Activities € €
Cash received from disposal of assets X
Cash paid for acquisition of assets (X)
Interest received (could instead be shown in operating activities) X
Dividends received (could instead be shown in operating activities) X
Net cash from investing activities X/(X)
Financing Activities
• Any cash paid or received in relation to equity and debt should be
presented here.
Financing Activities € €
Cash received from issue of equity X
Cash received from borrowings X
Cash paid for repayment of borrowings (including finance leases) (X)
Dividends paid (could instead be shown in operating activities) X
Net cash from financing activities X/(X)

Q5 April 2017 – Total Assets

Q5 April 2017 ‐ Equity

Q5 April 2017 – Total Liabilities

Q5 April 2017 – Notes

Operating Activities – April 2016 Q5

Let’s start by inserting the information readily available in the question
Operating Activities €
Profit before tax (given in note (i)) 1,476,000
Add back depreciation (working required)
Add back loss on disposal (given in note (iii)) 40,000
Add back interest expense (given in note (iv)) 92,000
Increase or Decrease in receivables (working required)
Increase or Decrease in inventories (working required)
Increase or Decrease in trade payables (working required)
Interest paid (given in note (iv)) (92,000)
Income taxes paid (working required)
Net cash from operating activities X
Operating Activities – April 2016 Q5
Calculation of depreciation
The company’s depreciation policy is to depreciate all assets at 20%
straight line on cost from the date of purchase to the date of sale.
€

Cost of assets held for the full year (B/f 4,860,000 – Disposals 1,000,000) x 20% 772,000

Disposal 1 July (1,000,000 x 20% x 6/12) 100,000

Acquisition 31 December – (no depreciation for one day) 0

Depreciation charge for year 872,000

Operating Activities – April 2016 Q5

Insert the depreciation amount
Operating Activities €
Profit before tax (given in note (i)) 1,476,000
Add back depreciation 872,000
Add back loss on disposal (given in note (iii)) 40,000
Add back interest expense (given in note (iv)) 92,000
Increase or Decrease in receivables (working required)
Increase or Decrease in inventories (working required)
Increase or Decrease in trade payables (working required)
Interest paid (given in note (iv)) (92,000)
Income taxes paid (working required)
Net cash from operating activities X
Operating Activities – April 2016 Q5
Calculation of increases/decreases in working capital
• This is done by comparing the balance from the statement of financial
position from 2015 to 2016
2016 2015 Increase/Decrease
Inventories 1,380,000 1,220,000 Increase 160,000
Trade Receivables 780,000 680,000 Increase 100,000
Trade Payables 1,470,000 1,500,000 Decrease 30,000

Operating Activities – April 2016 Q5

How to remember what to do with increases and decreases in
working capital
• Receivables – an increase in credit given to customers means less
cash is received
• Inventory – an increase in inventory means goods were purchased
which were not sold, so less cash received
• Payables – an increase in payables means creditors were paid sooner
and more cash is spent
Operating Activities – April 2016 Q5
How to remember what to do with increases and decreases in
working capital
Illustration of receivables using a T‐Account
Receivables
Balance b/f 100,000 Bank 540,000
Sales 560,000 Balance c/f 120,000
660,000 660,000

The increase in receivables is €20,000. Note also that this is the same
as the difference between Sales and Bank.

Operating Activities – April 2016 Q5

How to remember what to do with increases and decreases in
working capital

Increase Decrease
Inventories Deduct Add
Trade Receivables Deduct Add
Trade Payables Add Deduct
Operating Activities – April 2016 Q5
Insert working capital movement
Operating Activities €
Profit before tax (given in note (i)) 1,476,000
Add back depreciation 872,000
Add back loss on disposal (given in note (iii)) 40,000
Add back interest expense (given in note (iv)) 92,000
Increase in receivables (160,000)
Increase in inventories (100,000)
Decrease in trade payables (30,000)
Interest paid (given in note (iv)) (92,000)
Income taxes paid (working required)
Net cash from operating activities X

Operating Activities – April 2016 Q5

Calculation of income taxes paid
Illustration using a T‐Account
Insert the information given in the question i.e. balances at 2015 and
2016 and the expense for the year
Current Taxes Payable
Bank (missing figure) ?????? Balance b/f 2015 60,000
Balance c/f 2016 110,000 Income tax expense (note (ii)) 80,000
140,000 140,000
Operating Activities – April 2016 Q5
Calculation of income taxes paid
Illustration using a T‐Account
The ‘missing figure’ is the amount of tax paid

Current Taxes Payable

Bank (missing figure) 30,000 Balance b/f 2015 60,000
Balance c/f 2016 110,000 Income tax expense (note (ii)) 80,000
140,000 140,000

Operating Activities – April 2016 Q5

Insert the income tax expense and calculate net cash flow
Operating Activities €
Profit before tax (given in note (i)) 1,476,000
Add back depreciation 872,000
Add back loss on disposal (given in note (iii)) 40,000
Add back interest expense (given in note (iv)) 92,000
Increase in receivables (160,000)
Increase in inventories (100,000)
Decrease in trade payables (30,000)
Interest paid (given in note (iv)) (92,000)
Income taxes paid (30,000)
Net cash from operating activities 2,068,000
Investing Activities – April 2016 Q5
• Let’s start by inserting the information readily available in the
question
Investing Activities € €
Cash received from disposal of assets (working required)
Cash paid for acquisition of assets (working required)
Interest received (none) 0
Dividends received (none) 0
Net cash from investing activities X/(X)

Investing Activities – April 2016 Q5

Calculation of cash received from disposal of assets
• On 1 July 2016, the company sold PPE which originally had cost
€1,000,000. On the date this PPE was sold, its carrying value was
€600,000 and the firm made a loss on the sale of the PPE of €40,000.
Disposal Account
Carrying value at disposal 600,000 Loss on disposal 40,000
______ Bank (missing figure) 560,000
600,000 600,000
Investing Activities – April 2016 Q5
Insert the cash received from disposal of assets

Investing Activities € €
Cash received from disposal of assets 560,000
Cash paid for acquisition of assets (working required)
Net cash from investing activities X/(X)

Investing Activities – April 2016 Q5

Calculation of cash paid to acquire assets
To calculate the cash paid to acquire assets (PPE), we can construct a T‐
account, inserting all of the information given in the question about
movements in the carrying value of PPE for the year. The missing figure
will be the cash paid.
PPE (Carrying Value)
Balance b/f 2015 X Disposal (carrying value) X
Revaluation increase X Depreciation for year X
Cash paid to acquire assets ????? Balance c/f 2016 X
X X
 Investing Activities – April 2016 Q5
Calculation of cash paid to acquire assets

PPE (Carrying Value)

Balance b/f 2015 3,940,000 Disposal 600,000
(carrying value given in note (iii))

Revaluation increase 40,000 Depreciation 872,000

(from operating activities workings)

Cash paid to acquire assets ????? Balance c/f 2016 5,120,000

6,592,000 6,592,000

Investing Activities – April 2016 Q5

Calculation of cash paid to acquire assets

PPE (Carrying Value)

Balance b/f 2015 3,940,000 Disposal 600,000
(carrying value given in note (iii))

Revaluation increase 40,000 Depreciation 872,000

(from operating activities workings)

Cash paid to acquire assets 2,612,000 Balance c/f 2016 5,120,000

6,592,000 6,592,000
Investing Activities – April 2016 Q5
Insert the cash paid for acquisition of assets and calculate net cash flow

Investing Activities € €
Cash received from disposal of assets 560,000
Cash paid for acquisition of assets (2,612,000)
Net cash from investing activities (2,052,000)

Financing Activities – April 2016 Q5

• Let’s start by inserting the information readily available in the
question.
Financing Activities € €
Cash received from issue of equity (working required)
Cash received from borrowings (working required)
Cash paid for repayment of borrowings (working required)
Dividends paid (working required)
Net cash from financing activities X/(X)
Financing Activities – April 2016 Q5
Calculation of cash received from issue of shares
• This is done by comparing the balance from the statement of financial
position from 2015 to 2016 for share capital and share premium
2016 2015 Increase
Share capital 240,000 200,000 Increase 40,000
Share premium 60,000 50,000 Increase 10,000

• Therefore, cash received from issue of shares €50,000

Financing Activities – April 2016 Q5

• Insert the cash received from issue of shares.

Financing Activities € €
Cash received from issue of equity 50,000
Cash received from borrowings (working required)
Cash paid for repayment of borrowings (working required)
Dividends paid (working required)
Net cash from financing activities X/(X)
Financing Activities – April 2016 Q5
Calculation of cash received from issue of borrowings or cash paid to
repay borrowings
• This is done by comparing the balance from the statement of financial
position from 2015 to 2016 for long‐term loans
2016 2015 Increase/Decrease
Long‐term loan 1,500,000 1,600,000 Decrease 100,000

• Therefore, cash paid to repay borrowings €100,000

Financing Activities – April 2016 Q5

• Insert cash paid to repay borrowings.

Financing Activities € €
Cash received from issue of equity 50,000
Cash paid for repayment of borrowings (100,000)
Dividends paid (working required)
Net cash from financing activities x
Financing Activities – April 2016 Q5
Calculation of dividends paid
• This is done by comparing the increase or decrease in retained
earnings to the profit after tax for the year. The difference, if any, is
dividends paid.
2016 2015 Increase/Decrease
Retained Earnings 3,798,000 2,402,000 1,396,000
Profit after tax (1,476,000 – 80,000 (note 2)) 1,396,000

• Therefore, no dividends were paid during the year.

Financing Activities – April 2016 Q5

• Calculate net cash flow.

Financing Activities € €
Cash received from issue of equity 50,000
Cash paid for repayment of borrowings (100,000)
Net cash from financing activities (50,000)
Reconciling Cash & Cash Equivalents – April
2016 Q5
Calculation of the increase or decrease in cash for the year
Statement of cash flows for year ended 31 December 2016 €
Net cash flow from operating activities 2,068,000
Net cash used for investing activities (2,052,000)
Net cash flow from financing activities (50,000)
Decrease in cash for the year (34,000)
Cash & cash equivalents 1 January 2016
Cash & Cash equivalents 31 December 2016

The decrease in cash for the year can be reconciled to the difference
between cash & cash equivalents at the beginning and end of the year

Reconciling Cash & Cash Equivalents – April

2016 Q5
Calculation of the cash & cash equivalents
This is done by comparing the balance of cash, bank, overdraft
balances on each SOFP
2016 2015
Cash & cash equivalents (from current assets on SOFP) 50,000 112,000
Bank overdraft (from current liabilities on SOFP) (32,000) (60,000)
Net cash & cash equivalents 18,000 52,000

The difference in cash & cash equivalents at the beginning and end of
the year is a decrease of €34,000 i.e. reduced from €52,000 to €18,000.
Reconciling Cash & Cash Equivalents – April
2016 Q5
Insert cash & cash equivalent balances
Statement of cash flows for year ended 31 December 2016 €
Net cash flow from operating activities 2,068,000
Net cash used for investing activities (2,052,000)
Net cash flow from financing activities (50,000)
Decrease in cash for the year (34,000)
Cash & cash equivalents 1 January 2016 52,000
Cash & Cash equivalents 31 December 2016 18,000

Conclusion
The key skills required to prepare a statement of cash flows are:
• Know the proforma layout of the statement of cash flows
• Understand the difference between the increase or decrease in cash
and the profit or loss calculated on an accruals basis
• Don’t miss the easy marks
• Practice the different techniques used to calculate the ‘missing
figures’ (this really tests you understanding of double entry book‐
keeping)
• Best of luck!
 CPA Ireland Skillnet

CPA Ireland Skillnet, is a training network that is funded by

Skillnets, a state funded, enterprise led support body dedicated to
the promotion and facilitation of training and up-skilling as key
elements in sustaining Ireland’s national competitiveness.
The CPA Ireland Skillnet provides excellent value CPE (continual
Professional Education) in accountancy, law, tax and strategic
personal development to
accountants working both in practice and in industry. However our
attendees are not limited to the accountancy field as we welcome
all interested parties to our events.

The CPA Ireland Skillnet is funded by member companies and the Training Networks
Programme, an initiative of Skillnets Ltd. funded from the National Training Fund
through the Department of Education and Skills.

www.skillnets.ie