Cash Flow Statements: Topic List

chapter 3
Cash flow statements

Contents
Introduction Examination context Topic List 1 2 3 4 5 6 7 Cash flow information Presentation of a cash flow statement Operating activities Investing activities Financing activities Disclosures Preparing a cash flow statement
Summary and Self-test Technical reference Answers to Self-test Answers to Interactive questions
The Institute of Chartered Accountants in England and Wales, March 2009
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Financial accounting
Introduction
Learning objectives
Prepare the cash flow statement of an individual entity in accordance with BAS 7 Specific syllabus references for this chapter are: 2a, b, c.
Tick of
Practical significance
It has been argued that 'profit' does not always give a useful or meaningful picture of a company's operations. Readers of a company's financial statements might even be misled by a reported profit figure. (a) Shareholders might believe that if a company makes a profit after tax of, say, CU100,000 then this is the amount which it could afford to pay as a dividend. Unless the company has sufficient cash available to stay in business and also to pay a dividend, the shareholders' expectations would be wrong.
(b) Employees might believe that if a company makes profits, it can afford to pay higher wages next year. This opinion may not be correct: the ability to pay wages depends on the availability of cash. (c) Survival of a business entity depends not so much on profits as on its ability to pay its debts when they fall due. Such payments might include 'revenue' items such as material purchases, wages, interest and taxation etc, but also capital payments for new non-current assets and the repayment of loan capital when this falls due (for example on the redemption of debentures).
From these examples, it may be apparent that a company's performance and prospects depend not so much on the 'profits' earned in a period, but more realistically on liquidity or cash flows.
Stop and think

Can you think of some possible disadvantages of cash flow accounting?
Working context
As we will see the preparation of the cash flow statement is very dependent on information contained in the income statement and balance sheet. This is not just an accounting issue however, but will also have an impact on the amount of audit work which will need to be carried out on these balances. Audit work on the cash flow statement can be more limited than that carried out on the income statement and balance sheet as the cash flows are derived from balance sheet and income statement balances which have already been subjected to detailed audit procedures.
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CASH FLOW STATEMENTS
Syllabus links
This is the first time that you will have come across a cash flow statement in your studies. However, as you will see in the rest of the chapter, most of the information needed to produce a cash flow statement is contained in the income statement and balance sheet, both of which you will be familiar with from your Accounting studies. The topic also relates to the underlying assumptions of accounting which were discussed in Chapter 1, in particular the distinction between accrual accounting and cash accounting. In this chapter we introduce the preparation of the cash flow statement of the individual company. Chapter 16 covers the preparation of group cash flow statements. Both of these aspects are also highly relevant in the Financial & Corporate Reporting paper and at the Advanced Stage, where the emphasis will change from preparation to analysis and interpretation.
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Examination context
Exam requirements
As 55% of the syllabus deals with the preparation of single company financial statements, and this includes the cash flow statement, it is likely that this topic will be examined regularly. In an examination you would either be asked to prepare a full cash flow statement or to prepare cash flow statement extracts and/or to answer a number short-form questions. In the examination, candidates may be required to: Prepare and present a cash flow statement for an individual entity in accordance with BAS 7 Cash Flow Statements Prepare extracts from the cash flow statement of an individual entity.
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1 Cash flow information

Section overview
The cash flow statement shows movements in cash and cash equivalents. All entities are required to produce a cash flow statement.
1.1
Objective of BAS 7
The objective of BAS 7 Cash Flow Statements is to provide historical information about changes in cash and cash equivalents, classifying cash flows between operating, investing and financing activities. This will provide information to users of financial statements about the entity's ability to generate cash and cash equivalents, as well as indicating the cash needs of the entity.
Definition
Cash flows: These are inflows and outflows of cash and cash equivalents.
1.2
Scope
A cash flow statement should be presented as an integral part of an entity's financial statements. All types of entity can provide useful information about cash flows as the need for cash is universal, whatever the nature of their revenue-producing activities. Therefore all entities are required by the standard to produce a cash flow statement.
1.3
Benefits of cash flow information

Cash flow statements should be used in conjunction with the rest of the financial statements. Users can gain further appreciation of: The change in net assets The entity's financial position (liquidity and solvency) The entity's ability to adapt to changing circumstances and opportunities by affecting the amount and timing of cash flows
Cash flow statements enhance comparability as they are not affected by differing accounting policies used for the same type of transactions or events. Cash flow information of a historical nature can be used as an indicator of the amount, timing and certainty of future cash flows. Past forecast cash flow information can be checked for accuracy as actual figures emerge. The relationship between profit and net cash flow and the impact of changing prices can be analysed over time.
1.4
Cash and cash equivalents

The cash flow statement shows movements in cash and cash equivalents.
Definitions
Cash: Comprises cash on hand and demand deposits. Cash equivalents: Short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value.
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Financial accounting BAS 7 expands on the definition of cash equivalents: they are not held for investment or other long-term purposes, but rather to meet short-term cash commitments. To fulfil the above definition, an investment's maturity date should normally be within three months from its acquisition date. It would usually be the case then that equity investments (i.e. shares in other companies) are not cash equivalents. An exception would be where preference shares were acquired with a very close maturity date. Points to note: (1) Loans and other borrowings from banks are classified as financing activities. In some countries, however, bank overdrafts are repayable on demand and are treated as part of an entity's total cash management system. In these circumstances an overdrawn balance will be included in cash and cash equivalents. Such banking arrangements are characterised by a balance which fluctuates between overdrawn and credit. In the absence of other information you should assume, in the exam, that bank overdrafts are repayable on demand and should therefore be classed as cash and cash equivalents. (2) Movements between different types of cash and cash equivalent are not included in cash flows. The investment of surplus cash in cash equivalents is part of cash management, not part of operating, investing or financing activities.
2 Presentation of a cash flow statement

Section overview
Cash flows are classified as: Operating activities Investing activities, and Financing activities.
2.1
Presentation
BAS 7 requires cash flow statements to report cash flows during the period classified by: Operating activities: These are primarily derived from the principal revenue-producing activities of the entity and other activities that are not investing or financing activities. Investing activities: These are the cash flows derived from acquisition and disposal of non-current assets and other investments not included in cash equivalents. Financing activities: These are activities that result in changes in the size and composition of the equity capital and borrowings of the entity.
2.2
Example of a cash flow statement

We will look at the procedure for preparing a cash flow statement later in this chapter, but first, we will look at a proforma adapted from the example given in the standard.
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Cash flow statement Year ended 31 December 20X7 CUm Cash flows from operating activities Cash generated from operations Interest paid Income taxes paid Net cash from operating activities Cash flows from investing activities Purchase of property, plant and equipment Proceeds from sale of property, plant and equipment Interest received Dividends received Net cash used in investing activities Cash flows from financing activities Proceeds from issue of share capital Proceeds from issue of long-term borrowings Dividends paid Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Points to note 1 2 The headings in italics are necessary to comply with the standard. The information to prepare a cash flow statement can be obtained from the figures in the Balance sheet at the start of the period Balance sheet at the end of the period Income statement for the period Supporting notes 2,730 (270) (900) 1,560 CUm
(900) 20 200 200 (480)
250 250 (1,290) (790) 290 120 410
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3 Operating activities
Section overview
Cash flows from operating activities are primarily derived from the principal revenue producing activities of the entity. There are two methods for calculating and analysing cash generated from operations: The direct method The indirect method
Cash generated from operations is adjusted for payments of interest and income tax to arrive at net cash from operating activities.
3.1
Operating activities
This is perhaps the key part of the cash flow statement because it shows whether, and to what extent, companies can generate cash from their operations as other cash inflows may be non-recurring. It is these operating cash flows which must, in the end pay for all cash outflows relating to other activities, i.e. paying loan interest, dividends and so on. Most of the components of cash flows from operating activities will be those items which determine the net profit or loss of the entity, i.e. they relate to the main revenue-producing activities of the entity. The standard gives the following as examples of cash flows from operating activities. Cash receipts from the sale of goods and the rendering of services. Cash receipts from royalties, fees, commissions and other revenue. Cash payments to suppliers for goods and services. Cash payments to and on behalf of employees.
Cash flows from interest paid and income taxes paid are also dealt with here.
3.2
Cash generated from operations

BAS 7 allows two possible layouts for cash generated from operations The indirect method The direct method.
The direct method is preferred by BAS 7 but not required. In practical terms the indirect method is likely to be easier and less time consuming to prepare and is more likely to be examined. In the exam you should use the indirect method unless the question specifies otherwise.
3.3
Indirect method
Using the indirect method, cash generated from operations is calculated by performing a reconciliation between: Profit before tax as reported in the income statement, and Cash generated from operations.
This reconciliation is produced as follows:
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Reconciliation of profit/loss before tax to cash generated from operations for the year ended 31 December 20X7 CU X X (X) X X X/(X) (X)/X (X)/X (X)/X (X)/X (X)/X (X)/X X
Profit/(loss) before tax Finance cost Investment income Depreciation charge Amortisation charge Loss/(profit) on disposal of non-current assets (Increase)/decrease in inventories (Increase)/decrease in trade and other receivables (Increase)/decrease in prepayments Increase/(decrease) in trade and other payables Increase/(decrease) in accruals Increase/(decrease) in provisions Cash generated from operations You should show this reconciliation as a note to the cash flow statement.
3.4
Explanation
It is important that you understand why certain items are added and others are subtracted. Note the following points: Depreciation is not a cash expense, but is deducted in arriving at the profit figure in the income statement. It makes sense, therefore, to eliminate it by adding it back. By the same logic a loss on disposal of a non-current asset (arising through underprovision of depreciation) needs to be added back, and a profit deducted. An increase in inventories means less cash the company has spent cash on buying inventory. An increase in receivables means the company's debtors have not paid as much, and therefore there is less cash. If the entity pays off payables, causing the figure to decrease, again there is less cash.
Worked example: Indirect method

A business has the following balance sheet balances. 30 June 20X7 CU 3,200 2,900 800 30 June 20X6 CU 4,000 2,500 1,000
Inventories Trade and other receivables Trade and other payables For the year ended 30 June 20X7 you also have the following information: Profit before tax Finance cost Investment income
CU 6,100 200 100
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Solution
Cash generated from operations would be calculated and disclosed as follows. Reconciliation of profit before tax to cash generated from operations for the year ended 30 June 20X7 Profit before tax Finance cost Investment income Decrease in inventories Increase in trade and other receivables Decrease in trade and other payables Cash generated from operations CU 6,100 200 (100) 800 (400) (200) 6,400
3.5
Direct method
Using the direct method, cash generated from operations would be analysed as follows and shown as a note to the cash flow statement: Gross operating cash flows for the year ended 31 December 20X7 Cash receipts from customers Cash paid to suppliers and employees Cash generated from operations CU X (X) (X)
Worked example: Direct method

Hail Ltd commenced trading on 1 January 20X7 following a share issue which raised CU35,000. During the year the company entered into the following transactions: Purchases from suppliers were CU19,500, of which CU2,550 was unpaid at the year end. Wages and salaries amounted to CU10,500, of which CU750 was unpaid at the year end. Sales revenue was CU29,400, including CU900 receivables at the year end.
Solution
Cash generated from operations would be calculated and disclosed as follows: Gross operating cash flows for the year ended 31 December 20X7 Cash received from customers (29,400 900) Cash paid to suppliers and employees Cash generated from operations WORKING Cash paid to suppliers (19,500 2,550) Cash paid to and on behalf of employees (10,500 750) Cash paid to suppliers and employees CU 16,950 9,750 26,700 CU 28,500 (26,700) (W) 1,800
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3.6
Payments of interest and tax

The adjustments in the cash flow statement to 'cash generated from operations' to arrive at 'net cash from operating activities' consist of payments of interest and income tax. A similar method can be used to calculate the cash flows for interest paid and income tax paid. For each item, the information available might be: Opening balance at the start of the period (opening balance sheet) Income statement (the amount of the item, as reported) Closing balance at the end of the period (closing balance sheet)
The cash flow is a balancing figure obtained from these three figures. A T account can be used as a working.
Worked example: Interest paid

A company s financial statements show the following information: At 1 Jan 20X2 CU 54,000 At 31 Dec 20X2 CU 63,000 For the year 20X2 CU 240,000
Interest payable Interest charge Interest paid is calculated as follows. INTEREST PAID Cash payment (balancing figure) Balance c/d CU 231,000 63,000 294,000
Balance b/d Income statement
CU 54,000 240,000 294,000
Alternatively, this could be calculated as follows: (54,000 + 240,000 63,000) = CU231,000
A similar technique can be used to calculate payments of income tax in the year. The taxation payment refers to payments of income tax, not to payments of sales tax (VAT) or tax paid by employees. The opening and closing balance sheets will show a liability for income tax. The income tax charge for the year is shown on the face of the income statement. The figure for income taxes paid during the year is derived as a balancing figure.
Interactive question 1: Income tax
[Difficulty level: Easy]
A company had a liability for income tax at 31 December 20X6 of CU940,000 and a liability for income tax at 31 December 20X7 of CU1,125,000. The income tax charge for the year to 31 December 20X7 was CU1,270,000. What amount of income tax was paid during the year? INCOME TAX PAID CU CU
See Answer at the end of this chapter.
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4 Investing activities
Section overview
The cash flows in this section are those related to the acquisition or disposal of any non-current assets, and returns received in cash from investments.
4.1
Investing activities
The cash flows classified under this heading show the extent of new investment in assets which will generate future income and cash flows. The standard gives the following examples of cash flows arising from investing activities. Cash payments to acquire property, plant and equipment, intangibles and other non-current assets, including those relating to capitalised development costs and self-constructed property, plant and equipment Cash receipts from sales of property, plant and equipment, intangibles and other non-current assets Cash payments to acquire equity or debt of other entities Cash receipts from sales of equity or debt of other entities Interest received Dividends received
4.2
Cash receipts from sales of property, plant and equipment

A T account can be used for calculating the cash receipts from sales of property, plant and equipment (PPE). The company's accounts will include the amount of any profit or loss on disposal. A note to the accounts on non-current assets will show the cost and the accumulated depreciation for property, plant and equipment disposed of during the year. The cash received from the sale is the balancing figure in the T account. PROPERTY, PLANT AND EQUIPMENT DISPOSAL ACCOUNT Cost/valuation of asset disposed of Profit on disposal CU X X X Accumulated depreciation Loss on disposal Cash received (balancing figure) CU X X X X
Worked example: Cash receipts from sale of PPE

A company's balance sheet as at the beginning and the end of the year showed the following. Property, plant and equipment Cost At 1 January 20X7 Disposals At 31 December 20X7 Depreciation At 1 January 20X7 Disposals Charge for year At 31 December 20X7 Carrying amount At 31 December 20X7 At 31 December 20X6 CU 760,000 (240,000) 520,000 270,000 (180,000) (50,000) 140,000 380,000 490,000
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The property, plant and equipment was disposed of at a loss of CU7,000. What was the cash flow from the disposal?
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 CU 240,000 Accumulated depreciation Loss on disposal Cash received (balancing figure) CU 180,000 7,000 53,000 240,000
240,000
4.3
Cash payments for purchase of property, plant and equipment

Purchase of property, plant and equipment during a period can be calculated by means of a T account or a working table. PROPERTY, PLANT AND EQUIPMENT Balance b/d Revaluation reserve Additions (balancing figure) CU X X X X Disposals Balance c/d CU X X X [Difficulty level: Intermediate]
Interactive question 2: Cash payments for PPE
A company's accounts show that at 31 December 20X7, it had property, plant and equipment at cost or valuation of CU6,800,000. During the year, it disposed of assets that had a cost of CU850,000. It also revalued a freehold property upwards by CU300,000. At 31 December 20X6, the company's property, plant and equipment at cost or valuation had been CU5,100,000. What were purchases of property, plant and equipment during the year? PROPERTY, PLANT AND EQUIPMENT CU CU
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4.4
Interest and dividends received

Returns received in cash from investments will include interest and dividends received. The cash flows can be calculated by using an interest received or dividends received T account. Both T accounts are very similar and are prepared as follows: INTEREST/DIVIDENDS RECEIVED Balance b/d (receivable) Income statement CU X X X Cash receipt (balancing figure) Balance c/d (receivable) CU X X X
Interactive question 3: Interest received
[Difficulty level: Easy]
A company had interest receivable of CU35,000 at the start of the year and interest receivable of CU42,000 at the end of the year. The income statement for the year shows interest income of CU90,000. What were the cash receipts for interest received in the year? INTEREST RECEIVED CU CU
5 Financing activities
Section overview
Financing cash flows comprise receipts from or repayments to external providers of finance.
5.1
Financing activities
This section of the cash flow statement shows the share of cash which the entity's capital providers have claimed during the period. This is an indicator of likely future interest and dividend payments. The standard gives the following examples of cash flows which might arise under this heading. Cash proceeds from issuing shares Cash payments to owners to acquire or redeem the entity's shares Cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short or long-term borrowings Repayments of capital of amounts borrowed under finance leases (We will look at this issue in Chapter 16.) Dividends paid
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5.2
Cash received from issuing shares

The amount of cash received from new issues of shares can usually be calculated from the opening and closing balance sheet figures for share capital and share premium. As a general rule: SHARE CAPITAL AND PREMIUM CU Balance c/d X X Balance b/d Cash receipt (balancing figure) CU X X X
This rule does not apply fully when the company makes a bonus issue of shares during the year, and some of the new share capital is obtained by means of reducing a reserve account other than the share premium. To calculate cash receipts from share issues in the year, the amount transferred to share capital from the other reserve account should be subtracted.
Worked example: Cash received from share issue

Rustler Ltd's annual accounts for the year to 31 December 20X7 show the following figures. At 31.12.X7 CU 6,750,000 12,800,000 At 31.12.X6 CU 5,400,000 7,300,000
Share capital: Ordinary shares of 50p Share premium
There were no bonus issues of shares during the year. What amount of cash was raised from shares issued during the year?
Solution
SHARE CAPITAL AND PREMIUM CU Balance b/d (5,400,000 + 7,300,000) Balance c/d (6,750,000 + 12,800,000) 19,550,000 Cash receipt (balancing figure) 19,550,000 6,850,000 19,550,000 CU 12,700,000
Interactive question 4: Bonus issue
[Difficulty level: Intermediate]
Groat Ltd's accounts for the year to 31 December 20X7 show the following figures. At 31.12.X7 CU 22,500,000 900,000 At 31.12.X6 CU 10,000,000 4,800,000
Share capital: Ordinary shares of 10p Share premium
The company made a one for two bonus issue of shares during the year. It used the share premium account and CU200,000 from retained earnings to do this. What amount of cash was raised from share issues during the year?
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Financial accounting SHARE CAPITAL AND PREMIUM CU CU
5.3
Cash from issuing loan stock or raising a loan

The cash derived from obtaining a new loan during the year or from issuing new loan stock or debentures should be apparent from a comparison of the opening and closing balance sheet figures for non-current interest-bearing borrowings. An increase during the year represents new financing, and should be taken as the amount of cash received from financing. It is important that all loans in the balance sheet should be taken into consideration in the calculation. There may be a loan that is within 12 months of repayment. If so, it will be included within current liabilities in the year-end balance sheet as short-term borrowings , when it would have been a noncurrent liability in the balance sheet at the start of the year. The loan has not been repaid during the year, merely re-classified from non-current liability to current liability.
5.4
Repayment of non-current interest-bearing borrowings

In the same way, a reduction in interest-bearing borrowings indicates that a loan has been repaid, or that loan stock or debentures have been redeemed. It should be assumed that the loans are repaid or loan stock is redeemed for cash.
5.5
Dividends paid
Cash flows from dividends paid should be disclosed separately. Dividends paid by the entity can be classified in one of two ways. (a) As a financing cash flow, showing the cost of obtaining financial resources (as in the example cash flow statement in section 2 above). This is the presentation adopted in these Learning Materials.
(b) As a component of cash flows from operating activities so that users can assess the entity's ability to pay dividends out of operating cash flows. Cash flows for dividends paid can be calculated using a T account.
Worked example: Dividends paid

A company has declared preference dividends for the year of CU7,000 (based on its 7% CU100,000 preference shares in issue). At the start of the year the balance sheet included a liability of CU3,500 for preference dividends payable. At the end of the year no amount was owing to preference shareholders in respect of dividends. The preference dividend paid for the year is not simply the CU7,000 declared and reflected in retained earnings as this amount needs to be adjusted for any opening and closing liabilities.
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DIVIDENDS PAID Cash payment (balancing figure) Balance c/d CU 10,500 0 10,500 Balance b/d Retained earnings CU 3,500 7,000 10,500
The cash paid during the year of CU10,500 is the second half year preference dividend due from last year and the whole of this year s preference dividend (all paid during the year). Point to note: Any dividends for the year will be disclosed in the statement of changes in equity.
6 Disclosures
Section overview
BAS 7 requires certain additional disclosures to accompany the cash flow statement.
6.1
Components of cash and cash equivalents

The following disclosures are required: The components of cash and cash equivalents. A reconciliation showing the amounts in the cash flow statement reconciled with the equivalent items reported in the balance sheet. The accounting policy used in deciding the items included in cash and cash equivalents (BAS 1).
6.2
Other disclosures
All entities should disclose, together with a commentary by management, any other information likely to be of importance, for example: Restrictions on the use of or access to any part of cash equivalents. The amount of undrawn borrowing facilities which are available. Cash flows which increased operating capacity compared to cash flows which merely maintained operating capacity.
6.3
Significant non-cash transactions

Many investing and financing activities do not have a direct impact on current cash flows although they do affect the capital and asset structure of an entity. Significant 'non-cash transactions' should be disclosed. Examples include: The acquisition of assets either by assuming directly related liabilities or by means of a finance lease The acquisition of an entity by means of an issue of equity shares
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6.4
Example: Notes to the cash flow statement

The following shows how the required disclosures would be presented. Note: Cash and cash equivalents Cash and cash equivalents consist of cash on hand and balances with banks, and investments in money market instruments. Cash and cash equivalents included in the cash flow statement comprise the following balance sheet amounts. 20X7 CUm 40 370 410 20X6 CUm 25 95 120
Cash on hand and balances with banks Short-term investments Cash and cash equivalents
The company has undrawn borrowing facilities of CU2,000m of which only CU700m may be used for future expansion. Note: Property, plant and equipment During the period the company acquired property, plant and equipment with an aggregate cost of CU1,250m of which CU900m was acquired by finance lease. Cash payments of CU350m were made to purchase property, plant and equipment.
7 Preparing a cash flow statement

Section overview
This section gives you a step by step approach for preparing a cash flow statement.
7.1
Technique
Worked example: Preparing a cash flow statement
Able Ltd s income statement and statement of changes in equity for the year ended 31 December 20X7 and balance sheets at 31 December 20X6 and 31 December 20X7 were as follows. ABLE LTD Income statement for the year ended 31 December 20X7 CU'000 Revenue Raw materials consumed Staff costs Depreciation Loss on disposal of non-current asset Profit from operations Finance cost Profit before tax Income tax Profit for the period 70 94 118 18 (300) 420 (28) 392 (124) 268 CU'000 720
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ABLE LTD Balance sheets as at 31 December CU'000 ASSETS Non-current assets Cost Depreciation Current assets Inventory Trade receivables Bank Total assets EQUITY AND LIABILITIES Equity Share capital Share premium Retained earnings Non-current liabilities Long-term loans Current liabilities Trade payables Taxation Proposed dividend Total equity and liabilities ABLE LTD Statement of changes in equity (extract) for the year ended 31 December 20X7 Retained earnings CU'000 268 (72) 490 686 20X7 CU'000 CU'000 20X6 CU'000
1,596 318 1,278 24 76 48 148 1,426
1,560 224 1,336 20 58 56 134 1,470
360 36 686 1,082 200 12 102 30 144 1,426
340 24 490 854 500 6 86 24 116 1,470
Profit for the period Dividends on ordinary shares Balance brought forward Balance carried forward During the year, the company paid CU90,000 for a new piece of machinery.
Prepare a cash flow statement for Able Ltd for the year ended 31 December 20X7 in accordance with the requirements of BAS 7, using the indirect method. The reconciliation of profit before tax to cash generated from operations should be shown as a note.
Solution Step 1
Set out the proforma cash flow statement with the headings required by BAS 7 and the reconciliation note. You should leave plenty of space. Ideally, use three or more sheets of paper, one for the main statement, one for the notes and one for your workings. It is obviously essential to know the formats very well.
Step 2
Begin with the cash flows from operating activities as far as possible. You will usually have to calculate such items as depreciation, loss on sale of non-current assets, interest paid and tax paid.
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Step 3
Calculate the cash flow figures for dividends paid, purchase or sale of non-current assets, issue of shares and repayment of loans if these are not already given to you (as they may be).
Step 4
If you are not given the profit figure, open up a working for the income statement. Using the opening and closing balances of retained earnings, the taxation charge and dividends paid and proposed, you will be able to calculate profit for the year as the balancing figure to put in the cash flows from operating activities section.
Step 5
You will now be able to complete the statement by slotting in the figures given or calculated. ABLE LTD Cash flow statement for the year ended 31 December 20X7 CU'000 Cash flows from operating activities Cash generated from operations (see note) Interest paid Tax paid (86 + 124 102) Net cash from operating activities Cash flows from investing activities Purchase of property, plant and equipment Proceeds from sale of property, plant and equipment (W) Net cash used in investing activities Cash flows from financing activities Proceeds from issue of share capital (360 + 36 340 24) Long-term loans repaid (500 200) Dividends paid (72 30 + 24) Net cash used in financing activities Decrease in cash and cash equivalents Cash and cash equivalents at 1.1.X7 Cash and cash equivalents at 31.12.X7 Note to the cash flow statement Reconciliation of profit before tax to cash generated from operations for the year ended 31 December 20X7 Profit before tax Depreciation charges Loss on sale of tangible non-current assets Interest expense Increase in inventories Increase in receivables Increase in payables Cash generated from operations WORKING Non-current asset disposals COST Balance b/d Purchases CU'000 1,560 90 1,650 Balance c/d Disposals (balancing figure) CU'000 1,596 54 1,650 CU'000 392 118 18 28 (4) (18) 6 540 540 (28) (108) 404 (90) 12 (78) 32 (300) (66) (334) (8) 56 48 CU'000
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ACCUMULATED DEPRECIATION Balance c/d Depreciation on disposals (balancing figure) NBV of disposals (54 24) Net loss reported Proceeds of disposals CU'000 318 24 342 Balance b/d Charge for year CU'000 224 118 342 30 (18) 12
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Summary and Self-test
Summary
Cash and Cash equivalents

Cash comprises cash on hand and on demand deposits Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value
BAS 7 requires cash flows to be classified as follows
Self-test
Answer the following questions 1 Which one of the following options best describes the objective of BAS 7 Cash Flow Statements? A B C D 2 To aid comparison of cash flows between entities To assist users to understand the cash management and treasury practices of an entity To assist users to confirm the going concern of an entity To enable entities to report cash inflows and outflows analysed under standard headings
Which one of the following statements gives the best definition of cash equivalents as set out in BAS 7 Cash Flow Statements? A B C D Cash equivalents are cash, overdrafts, short-term deposits, options and other financial instruments and equities traded in an active market Cash equivalents are short-term highly liquid investments subject to insignificant risks of change in value Cash equivalents are readily disposable investments Cash equivalents are investments which are traded in an active market
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In a company's cash flow statement prepared in accordance with BAS 7 Cash Flow Statements, a revaluation of non-current assets during the year will be: A B C D Entirely excluded Shown under cash flows from operating activities Disclosed under investing activities Shown as a cash inflow
Information concerning the non-current assets of Ealing Ltd is detailed in the table. During the year non-current assets which had cost CU80,000 and which had a net book value of CU30,000 were sold for CU20,000. Net cash from operating activities for the year was CU300,000. Start of year CU 180,000 (120,000) 60,000 End of year CU 240,000 (140,000) 100,000
Cost Aggregate depreciation Carrying amount
There was no other cash activity. As a result of the above, cash increased over the year by A B C D 5 CU240,000 CU260,000 CU320,000 CU180,000
Waterloo Ltd acquired a freehold building for cash, financed in full by issuing for cash 166,000 CU1 ordinary shares at a premium of CU2 per share. In its cash flow statement prepared in accordance with BAS 7 Cash Flow Statements this transaction should be stated as: A B C D Inflow CU498,000, outflow nil Inflow nil, outflow nil Inflow CU498,000, outflow CU498,000 Inflow nil, outflow CU498,000
Information from the cash flow statement and related notes of Gresham Ltd for the year ended 31 December 20X1 can be found in the table below. Depreciation Profit on sale of property, plant and equipment Proceeds from sale of property, plant and equipment Purchase of property, plant and equipment CU 30,000 5,000 20,000 25,000
If the net book value of property, plant and equipment was CU110,000 on 31 December 20X0, what was it on 31 December 20X1? A B C D 7 CU85,000 CU90,000 CU70,000 CU80,000
In a cash flow statement prepared under BFRS under which category of cash flow would interest paid usually be classified? A B C D Cash flows from operating activities Cash flows from financing activities Returns on investments and servicing of finance Financing
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Financial accounting 8 ROXY LTD (Note: this question is included to provide practice of basic techniques)
The financial statements of Roxy Ltd at 30 June were as follows. Balance sheet at 30 June 20Y8 20Y8 CU ASSETS Non-current assets Property, plant and equipment Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets EQUITY AND LIABILITIES Capital and reserves Ordinary share capital Accumulated profits/losses Non-current liabilities Interest-bearing borrowings Current liabilities Bank overdrafts Trade and other payables Accruals Tax liabilities CU CU 20Y7 CU
20,750
14,000
16,000 9,950 25,950 46,700
11,000 2,700 1,300 15,000 29,000
3,000 16,200 19,200 6,000
3,000 3,800 6,800 10,000
11,000 8,000 700 1,800 21,500 46,700
11,000 200 1,000 12,200 29,000
Income statement (extracts) 20Y8 CU 15,400 (1,000) 14,400 (2,000) 12,400 20Y7 CU 5,900 (1,400) 4,500 (1,500) 3,000
Profit from operations Finance cost Profit before tax Tax Net profit for the year Additional Information (1) An analysis of property, plant and equipment shows the following. 20Y8 CU Building Cost Depreciation Plant and machinery Cost Depreciation 22,000 (4,000) 18,000 5,000 (2,250) 2,750 20,750 CU
20Y7 CU 12,000 (1,000) 11,000 5,000 (2,000) 3,000 14,000 CU
(2) Machinery with a net book value of CU250 was sold at the beginning of 20Y8 for CU350. This machinery had originally cost CU1,000. (3) No dividends have been declared or paid in recent years.
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(4) The accruals are in respect of interest payable. Requirement Under the indirect method, prepare a clash flow statement, together with a note reconciling profit before tax to cash generated from operations for the year ended 30 June 20Y8. 9 MIDDLESEX LTD (Note: this question is included to provide practice of basic techniques) 20Y8 CU ASSETS Non-current assets Property, plant and equipment Less Depreciation Investment Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets EQUITY AND LIABILITIES Capital and reserves Ordinary share capital (CU1 shares) Share premium Revaluation reserves Accumulated profits CU CU 20Y7 CU
The balance sheet of Middlesex Ltd as at 30 June 20Y8, including comparative figures, is given below.
333,000 (70,000) 263,000 50,000 313,000 12,000 29,000 20,000 61,000 374,000 11,000 27,000 10,000
311,000 (69,000) 242,000 242,000
48,000 290,000
95,000 15,000 12,000 149,000 271,000
50,000 10,000 12,000 115,000 187,000
Non-current liabilities Interest-bearing borrowings (12% debentures 20Z1) Current liabilities Provisions Trade and other payables Tax liabilities Accruals Total equity and liabilities 27,000 7,000 19,000
50,000
60,000
2,000 19,000 3,000 19,000 53,000 374,000 43,000 290,000
You are also given the following information which is already reflected correctly in the accounts. (1) During the year a bonus issue of 1 for 10 was made on the ordinary shares in issue at 30 June 20Y7, utilising available profits. (2) New shares were issued on 1 July 20Y7. Part of the proceeds was used to redeem CU10,000 12% debentures 20Z1 at par. (3) During the year certain tangible non-current assets were disposed of for CU20,000. The assets had originally cost CU40,000 and had a net book value at the disposal date of CU18,000. (4) Trade and other payables include CU5,000 for 20Y8 relating to the fixed asset purchases. (5) The corporation tax charge for the year is CU7,000.
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Financial accounting Requirement Prepare a cash flow statement for the year ended 30 June 20Y8 and the note reconciling profit before tax with cash generated from operations. 10 Set out below are the financial statements of Emily Ltd. You are the financial controller, faced with the task of implementing BAS 7 Cash Flow Statements. EMILY LTD Income statement for the year ended 31 December 20X7 Revenue Cost of sales Gross profit Distribution costs Administrative expenses Profit from operations Investment income Finance cost Profit before tax Income tax expense Profit for the period Balance sheets as at 31 December ASSETS Non-current assets Property, plant and equipment Intangibles Investments Current assets Inventories Receivables Short-term investments Cash in hand Total assets EQUITY AND LIABILITIES Equity Share capital (CU1 ordinary shares) Share premium Revaluation reserve Retained earnings Non-current liabilities Long-term loan Current liabilities Trade payables Bank overdraft Taxation Dividends proposed Total equity and liabilities 20X7 CU'000 380 250 150 390 50 2 1,222 20X6 CU'000 305 200 25 102 315 1 948 CU'000 2,553 (1,814) 739 (125) (264) 350 25 (75) 300 (140) 160
200 160 100 160 170 127 85 120 100 1,222
150 150 91 100 50 119 98 110 80 948
Statement of changes in equity for the year ended 31 December 20X7 (extract) Retained earnings CU'000 160 (100) 100 160
Profit for the period Dividends on ordinary shares Balance brought forward Balance carried forward
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The following information is available. (a) The proceeds of the sale of non-current asset investments amounted to CU30,000.
(b) Fixtures and fittings, with an original cost of CU85,000 and a net book value of CU45,000, were sold for CU32,000 during the year. (c) The following information relates to property, plant and equipment. 31.12.20X7 CU'000 720 340 380 31.12.20X6 CU'000 595 290 305
Cost Accumulated depreciation Net book value
(d) 50,000 CU1 ordinary shares were issued during the year at a premium of 20p per share. (e) The short-term investments are highly liquid and are close to maturity.
Requirement Prepare a cash flow statement for the year to 31 December 20X7 using the indirect method laid out in BAS 7 Cash Flow Statements. The reconciliation of profit before tax to cash generated from operations should be shown as a note. Your answer should also include an analysis of cash and cash equivalent balances. 11 HATCHBACK MOTOR COMPONENTS LTD Hatchback Motor Components Ltd has prepared the summarised accounts as set out below. Income statements for the years ended 30 April 20X7 CU'000 74,680 (51,595) 23,085 (17,681) 5,404 (2,634) 2,770 20X7 CU'000 20X6 CU'000 69,937 (47,468) 22,469 (16,920) 5,549 (1,093) 4,456 20X6 CU'000
Revenue Cost of sales Gross profit Distribution and administrative costs Profit before tax Tax Net profit for the period Balance sheets at 30 April CU'000 ASSETS Non-current assets Property, plant and equipment Investments
CU'000
30,946 7,100 38,046
25,141 25,141
Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets
16,487 12,347 863 29,697 67,743
15,892 8,104 724 24,720 49,861
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Financial accounting 20X7 CU'000 13,000 12,500 7,450 24,776 57,726 3,250 6,767 67,743 20X6 CU'000 10,000 5,000 2,650 22,856 40,506 4,250 5,105 49,861
EQUITY AND LIABILITIES Capital and reserves Ordinary share capital (CU1 ordinary shares) Share premium Revaluation reserve Retained earnings Non-current liabilities Current liabilities Total equity and liabilities Notes relating to the accounts (1) Analysis of property, plant and equipment
Freehold buildings Fixtures and fittings
20X7 CU'000 25,100 5,846 30,946
20X6 CU'000 19,780 5,361 25,141
(2) Depreciation has not been provided on freehold buildings. During the year a professional revaluation taking account of additions during the year has been incorporated into the books of account. There were no disposals during the year. (3) Additions to fixtures and fittings during the year totalled CU1,365,000 at cost. There were no disposals. (4) Current liabilities 20X7 CU'000 2,771 1,200 2,796 6,767 20X6 CU'000 2,632 1,235 1,238 5,105
Trade and other payables Accruals Tax liability
Taxation provided at 30 April 20X6 was settled at a figure lower than the amount provided. (5) During the year the company made a rights issue of shares on the basis of three new shares for every ten shares held at a price of CU3.50 per share. Pending the purchase of new plant part of the proceeds of the issue has been invested in shares in other UK companies. Requirement Prepare a cash flow statement in accordance with BAS 7 Cash Flow Statements under the indirect method, for the year ended 30 April 20X7. Now go back to the Learning Objectives in the Introduction. If you are satisfied you have achieved these objectives, please tick them off.
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Technical reference
Point to note: All of BAS 7 is examinable with the exception of paragraphs 24-28, 38 and Appendix B. The paragraphs listed below are the key references you should be familiar with. (Paragraph references relating to the treatment of leased assets in the cash flow statement and consolidated cash flow statements are dealt with in Chapter 16). 1 Objective of the cash flow statement The cash flow statement should show the historical changes in cash and cash equivalents. Cash comprises cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value.
BAS 7(6) BAS 7(6)
2 Presentation of a cash flow statement Cash flows should be classified by operating, investing and financing activities. Cash flows from operating activities are primarily derived from the principal revenue-producing activities of the entity. There are two methods of presentation for cash flows from operating activities Direct method Indirect method
Appendix A BAS 7(10) BAS 7(13 14)
BAS 7(19) BAS 7(20)
Cash flows from investing activities are those related to the acquisition or disposal of any non-current assets, or trade investments together with returns received in cash from investments (i.e. dividends and interest received). Financing activities include: Cash proceeds from issuing shares Cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short or long-term borrowings Cash repayments of amounts borrowed Repayment of capital of amounts borrowed under finance leases Dividends paid to shareholders
BAS 7(50) Appendix A BAS 7(16)
3 Disclosures Components of cash and cash equivalents. Reconciliation of the amounts in the cash flow statement with the equivalent balance in the balance sheet. Information (together with a commentary) which may be relevant to the users. The cash flow statement does not record non-cash transactions. Significant noncash transactions should be disclosed.
BAS 7(43)
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Answers to Self-test
1 2 3 4 D B A D To enable entities to report cash inflows and outflows analysed under standard headings. (BAS 7). Cash equivalents are short-term highly liquid investments subject to insignificant risks of changes in value. A revaluation of non-current assets during the year will be entirely excluded. Revaluations have no cash flow implications. The correct answer is CU180,000. NON-CURRENT ASSETS COST Balance b/d Therefore purchases CU 180,000 140,000 320,000 Disposals Balance c/d CU 80,000 240,000 320,000
DEPRECIATION CU Disposals Balance c/d 50,000 140,000 190,000 DISPOSALS Cost CU 80,000 Accumulated depreciation Proceeds Therefore loss CU 50,000 20,000 10,000 80,000 CU 300,000 20,000 320,000 (140,000) 180,000 Balance b/d Therefore charge CU 120,000 70,000 190,000
80,000 Cash from operations Cash inflow: Disposal proceeds Cash outflow: purchases of non-current assets Therefore net cash increase
Note that adjustments for depreciation and loss on disposal will already be included in net cash from operating activities. 5 C Inflow CU498,000, outflow CU498,000. The outflow is classified under 'Purchase of property, plant and equipment'. The inflow is classified under 'Proceeds from issuance of share capital'.
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CU90,000 PROPERTY (NBV) Balance b/d Additions CU 110,000 25,000 135,000 Depreciation Disposals (NBV) Balance c/d CU 30,000 15,000 90,000 135,000
7 8
(BAS 7) ROXY LTD Cash flow statement for year ended 30 June 20Y8 CU Cash flows from operating activities Cash generated from operations Interest paid (W5) Tax paid (W4) Net cash from operating activities Cash flows from investing activities Purchase of property, plant and equipment (W1) Proceeds from sale of property, plant and equipment (W3) Net cash used in investing activities Cash flows from financing activities Redemption of non-current interest-bearing borrowings Net cash used in financing activities Net change in cash and cash equivalents Cash and cash equivalents brought forward Cash and cash equivalents carried forward CU 4,050 (500) (1,200) 2,350 (11,000) 350 (10,650) (4,000) (4,000) (12,300) 1,300 (11,000)
Reconciliation of profit/loss before tax to cash generated from operations fro the year ended 30 June 20Y8 Profit/loss before tax Finance cost Property, plant and equipment depreciation charge (W2) Profit/loss on disposal of property, plant and equipment (W3) Change in inventories (W6) Change in trade and other receivables (W6) Change in trade and other payables Cash generated from operations WORKINGS (1) PROPERTY, PLANT AND EQUIPMENT COST OR VALUATION B/f (5,000 + 12,000) Additions ( ) CU 17,000 11,000 28,000 Disposal C/f (5,000 + 22000) CU 1,000 27,000 28,000 CU 14,400 1,000 4,000 (100) (5,000) (7,250) (3,000) 4,050
(2)
PROPERTY, PLANT AND EQUIPMENT ACCUMULATED DEPRECIATION Disposal (1,000 250) C/f (4,000 + 2,250 CU 750 6,250 7,000 B/f (1,000 + 2000 Depreciation charge for the year ( ) CU 3,000 4,000 7,000
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(3)
PROPERTY, PLANT AND EQUIPMENT DISPOSAL ACCOUNT Cos Profit on sale CU 1,000 100 1,100 Accumulated depreciation Proceeds CU 750 350 1,100
(4)
PROPERTY, PLANT AND EQUIPMENT COST OR VALUATION Cash paid ( ) C/f CU 1,200 1,800 3,000 B/f Income statement CU 1,000 2,000 3,000
(5)
PROPERTY, PLANT AND EQUIPMENT COST OR VALUATION Cash paid ( ) C/f CU 500 700 1,200 B/f Income statement CU 200 1,000 1,200
(6) Changes in current items Inventories (16,000 11,000) Receivables (9,950 2700) Payables (11,000 8,000) 9 MIDDLESEX LTD Cash flow statement for the year ended 30 June 20Y8 CU Cash flows from operating activities Cash generated from operations Interest paid Tax paid (W2) Net cash from operating activities Cash flows from investing activities Purchase of property, plant and equipment (W3) Proceeds from sale of property, plant and equipment (W3) Purchase of investments Net cash used in investing activities Cash flows from financing activities Issues of ordinary shares (W4) Redemption of non-current interest-bearing borrowings Net cash used in financing activities Net change in cash and cash equivalents Cash and cash equivalents brought forward Cash and cash equivalents carried forward CU 71,000 (6,000) (3,000) 62,000 CU (5,000) (7,250) (3,000)
(57,000) 20,000 (50,000) (87,000)
45,000 (10,000) 35,000 10,000 10,000 20,000
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Reconciliation's of profit/loss before tax to net cash generated from operations for the year ended 30 June 20Y8 Profit/loss before tax (W7) Finance cost (W6) Property, plant and equipment depreciation charge (W1) Profit/loss on disposal of property, plant and equipment Change in inventories (W5) Change in trade and other receivables (W5) Change in trade and other payables (W5) Change in provision Cash generated from operations WORKINGS (1) CU 46,000 6,000 23,000 (2,000) (1,000) (3,000) (2,000) (2000) 71,000
PROPERTY, PLANT AND EQUIPMENT ACCUMULATED DEPRECIATION CU 22,000 70,000 92,000 B/f Charge for year ( ) CU 69,000 23,000 92,000
Disposal (40,000 18,000) C/f
(2) Cash ( ) C/f
TAX PAID CU 3,000 7,000 10,000 B/f Charge for year CU 3,000 7,000 10,000
(3)
PROPERTY, PLANT AND EQUIPMENT COST OR VALUATION B/f Additions ( ) C/f CU 311,000 57,000 5,000 373,000 Disposal C/f CU 40,000 333,000 373,000
(4)
SHARE CAPITAL AND PREMIUM CU B/f (50,000 + 10,000) Accumulated profit/losses (bonus issue) (50,000 10) Cash ( ) CU 60,000 5,000 45,000 110,000
C/f (95,000 + 15,000)
110,000 373,000
(5) Changes in current items Inventories (12,000 11,000) Receivables (29,000 27,000) Payables (27,000 5,000 19,000) (6) Finance cost CU50,000 x 12% = CU6,000 CU (1,000) (2,000) 3,000
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Financial accounting (7) Bonus issue Corporation tax C/f 10 EMILY LTD Cash flow statement for the year ended 31 December 20X7 CU'000 Cash flows from operating activities Cash generated from operations Interest paid Tax paid (110 + 140 120) Net cash from operating activities Cash flows from investing activities Purchase of property, plant and equipment (W2) Purchase of intangible non-current assets Proceeds from sale of property, plant and equipment Proceeds from sale of non-current asset investments Interest received Net cash used in investing activities Cash flows from financing activities Proceeds from issue of share capital Long-term loan Dividends paid (100 + 80 100) Net cash from financing activities Increase in cash and cash equivalents (Note) Cash and cash equivalents at 1.1.X7 (Note) Cash and cash equivalents at 31.12.X7 (Note) Notes to the cash flow statement Reconciliation of profit before tax to net cash generated from operations for the year ended 31 December 20X7 CU'000 Profit before tax 300 Depreciation charge (W1) 90 Loss on sale of property, plant and equipment (45 32) 13 Profit on sale of non-current asset investments (5) Investment income (25) Finance cost 75 Increase in inventories (48) Increase in receivables (75) Increase in payables 8 Cash generated from operations 333 Analysis of the balances of cash and cash equivalents as shown in the balance sheet 20X7 CU'000 2 50 (85) (33) 20X6 CU'000 1 (98) (97) Change in year CU'000 1 50 13 64 333 (75) (130) 128 (201) (50) 32 30 25 (164) 60 120 (80) 100 64 (97) (33) CU'000 ACCUMULATED PROFIT/LOSS CU 5,000 7,000 149,000 161,000 B/f Net profit for the period ( ) CU 115,000 46,000 161,000
Cash in hand Short term investments Bank overdraft
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WORKINGS (1) Depreciation charge ACCUMULATED DEPRECIATION CU 000 Depreciation on assets sold (85 45) Balance c/d 40 340 380 Balance b/d Charge for year (balancing figure) CU 000 290 90 380
(2) Purchase of property, plant and equipment PROPERTY, PLANT AND EQUIPMENT (COST) 1.1.X7 Balance b/d Revaluation (100 91) Purchases (balancing figure) 11 CU'000 595 9 201 805 Disposals 31.12.X7 Balance c/d CU'000 85 720 805
HATCHBACK MOTOR COMPONENTS LTD Cash flow statement for the year ended 30 April 20X7 Cash flows from operating activities Cash generated from operations Tax paid (W4) Net cash from operating activities Cash ows from investing activities Purchase of property, plant and equipment (W3) Purchase of investments Net cash used in investing activities Cash ows from financing activities Proceeds from issue of ordinary shares (W2) Redemption of non-current interest-bearing borrowings Dividends paid (W5) Net cash from financing activities Net change in cash and cash equivalents Cash and cash equivalents brought forward Cash and cash equivalents carried forward Note to the cash flow statement Reconciliation of profit before tax to cash generated from operations for the year ended 30 April 20X7 CU Profit before tax 5,404,000 Property, plant and equipment depreciation charge (W1) 880,000 Increase in inventories (W6) (595,000) Increase in trade and other receivables (W6) (4,243,000) Increase in trade and other payables (W6) 139,000 Decrease in accruals (35,000) Cash generated from operations 1,550,000 WORKINGS (1) Balance b/d Additions FIXTURES AND FITTINGS (AT NBV) CU 5,361,000 1,365,000 6,726,000 Balance c/d Depreciation charge () CU 5,846,000 880,000 6,726,000 CU CU 1,550,000 (1,076,000) 474,000
(1,885,000) (7,100,000) (8,985,000) 10,500,000 (1,000,000) (850,000) 8,650,000 139,000 724,000 863,000
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Financial accounting (2) SHARE CAPITAL AND PREMIUM CU Balance c/d (13,000,000 + 12,500,000) (3) Balance b/d Revaluation surplus (7,450 2,650) Additions () Balance b/d (10,000,000 + 5,000,000) Cash received () CU 15,000,000 10,500,000 25,500,000
25,500,000 25,500,000
FREEHOLD BUILDINGS CU 19,780,000 4,800,000 520,000 25,100,000 Balance c/d CU 25,100,000
25,100,000
Total additions = 520,000 + 1,365,000 = CU 1,885,000 (4) Cash paid () Balance c/d (5) Dividends paid () Balance c/d (6) Changes in current items Inventories (16,487 15,892) Receivables (12,347 8,104) Payables (2,771 2,632) Accruals (1,235 1,200) CU (595,000) (4,243,000) 139,000 (35,000) TAX PAID CU 1,076,000 2,796,000 3,872,000 Balance b/d Income statement CU 1,238,000 2,634,000 3,872,000
RETAINED EARNINGS CU 850,000 24,776,000 25,626,000 Balance b/d Net profit for the period CU 22,856,000 2,770,000 25,626,000
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Answers to Interactive questions
Answer to Interactive question 1

INCOME TAX PAID Cash payment (balancing figure) Balance c/d CU 1,085,000 1,125,000 2,210,000 Balance b/d Income statement CU 940,000 1,270,000 2,210,000
Alternatively this could be calculated as follows: (CU940,000 + CU1,270,000 CU1,125,000) = CU1,085,000

PROPERTY, PLANT AND EQUIPMENT Balance b/d Revaluation reserve Additions (balance) CU 5,100,000 300,000 2,250,000 7,650,000 Disposals Balance c/d CU 850,000 6,800,000 7,650,000
The company started the year with PPE at cost or valuation of CU5,100,000 and revalued an asset upward by CU300,000. It bought a further CU2,250,000 of PPE, giving a total of CU7,650,000 at cost or valuation. However, there was disposals of PPE with a cost of CU850,000, bringing the year-end figure down to CU6,800,000.

INTEREST RECEIVED Balance b/d Income statement CU 35,000 90,000 125,000 Cash received (balancing figure) Balance c/d CU 83,000 42,000 125,000

SHARE CAPITAL AND PREMIUM CU Balance b/d 23,400,000 23,400,000 Balance b/d Accumulated profits/losses Cash received (balance) CU 14,800,000 200,000 8,400,000 23,400,000
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Cash Flow Statements: Topic List

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chapter 3

Cash flow statements

The Institute of Chartered Accountants in England and Wales, March 2009

Stop and think

The Institute of Chartered Accountants in England and Wales, March 2009

CASH FLOW STATEMENTS

The Institute of Chartered Accountants in England and Wales, March 2009

The Institute of Chartered Accountants in England and Wales, March 2009

CASH FLOW STATEMENTS

1 Cash flow information

Benefits of cash flow information

Cash and cash equivalents

The Institute of Chartered Accountants in England and Wales, March 2009

2 Presentation of a cash flow statement

Example of a cash flow statement

The Institute of Chartered Accountants in England and Wales, March 2009

CASH FLOW STATEMENTS

(900) 20 200 200 (480)

250 250 (1,290) (790) 290 120 410

The Institute of Chartered Accountants in England and Wales, March 2009

Cash generated from operations

This reconciliation is produced as follows:

The Institute of Chartered Accountants in England and Wales, March 2009

CASH FLOW STATEMENTS

Worked example: Indirect method

CU 6,100 200 100

The Institute of Chartered Accountants in England and Wales, March 2009

Worked example: Direct method

The Institute of Chartered Accountants in England and Wales, March 2009

CASH FLOW STATEMENTS

Payments of interest and tax

Worked example: Interest paid

Balance b/d Income statement

CU 54,000 240,000 294,000

Alternatively, this could be calculated as follows: (54,000 + 240,000 63,000) = CU231,000

Interactive question 1: Income tax

[Difficulty level: Easy]

See Answer at the end of this chapter.

The Institute of Chartered Accountants in England and Wales, March 2009

Cash receipts from sales of property, plant and equipment

Worked example: Cash receipts from sale of PPE

The Institute of Chartered Accountants in England and Wales, March 2009

CASH FLOW STATEMENTS

Cash payments for purchase of property, plant and equipment

Interactive question 2: Cash payments for PPE

See Answer at the end of this chapter.

The Institute of Chartered Accountants in England and Wales, March 2009

Interest and dividends received

Interactive question 3: Interest received

[Difficulty level: Easy]

See Answer at the end of this chapter.

The Institute of Chartered Accountants in England and Wales, March 2009

CASH FLOW STATEMENTS

Cash received from issuing shares

Worked example: Cash received from share issue

Share capital: Ordinary shares of 50p Share premium

Interactive question 4: Bonus issue

[Difficulty level: Intermediate]

Share capital: Ordinary shares of 10p Share premium

The Institute of Chartered Accountants in England and Wales, March 2009

Financial accounting SHARE CAPITAL AND PREMIUM CU CU

See Answer at the end of this chapter.

Cash from issuing loan stock or raising a loan