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CHAPTER 11

STATEMENT OF CASH FLOWS (IAS –7)


Objective
The objective of cash flows of an entity is useful in providing users of financial
statements with the basis to assess the ability of the entity to generate cash and
cash equivalents and the needs of the entity to utilize those cash flows.
Scope
An entity shall prepare a statement of cash flows in accordance with the
requirements of this standard and shall present it as an integral part of its
financial statements for each period for which financial statements are
presented.
Benefits of cash flow information
 A statement of cash flows when used along with other financial
statements enables users to evaluate changes in net assets of an entity,
its financial structure and its ability to affect the amounts and timing of
cash flows.
 A statement of cash flows is useful in assessing the ability of the entity to
generate cash and cash equivalents and compare the present value of
the future cash flows of different entities.
 It enhances the comparability of the reporting of operating performance
as it eliminates the effects of using different accounting treatments for the
same transactions and events.
 It is also help full in assessing the accuracy of past assessments of future
cash flows.
Definitions
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 (investments having maturity date less than three months,
bank overdrafts etc.).
Cash flows are inflows and outflows of cash and cash equivalents
Operating activities are the principal revenue producing activities of the entity
and other activities that are not investing or financing activities
Investing activities are the acquisition and disposal of long-term assets and other
investments not included in cash equivalents
Financing activities are activities that result in changes in the size and
composition of the contributed equity and borrowings of the entity.
Presentation of statement of cash flows
The statement of cash flows should present cash flows during the period
classified by operating, investing and financing activities.
Cash Flows from Investing Activities
Investing activities include:
a) Making and collecting loans
b) Acquiring and disposing of debt or equity instruments; property, plant,
and equipment; and other productive assets (assets held for or used in
the production of goods or services by the enterprise other than items
that are part of the enterprise’s inventory).
Cash inflows from investing activities are:
a) Receipts from collections of loans by the enterprise and sale of other
entities’ debt instruments (other than cash equivalents) that were
purchased by the enterprise.
b) Receipts from sales of equity instruments of other enterprises and from
returns of investment in those instruments.
c) Receipts from sales of property, plant, and equipment and other
productive assets
Cash outflows for investing activities are:
a) Disbursements for loans made by the enterprise and payments to acquire
debt instruments of other entities (other than cash equivalents).
b) Payments to acquire equity instruments of other enterprises
c) Payments at the time of purchase, or soon before or after purchase, to
acquire property, plant, and equipment and other productive assets.
a. Generally, only advance payments, the down payment, or other
amounts paid at the time of purchase or soon before or after
purchase of property, plant, and equipment and other productive
assets are investing cash outflows.
b. Generally, principal payments on seller-financed debt directly related
to a purchase of property, plant, and equipment or other productive
assets are financing cash outflows.
Cash Flows from Financing Activities
Financing activities include:
a) Obtaining resources from owners and providing them with a return on,
and a return of, their investment.
b) Borrowing money and repaying amounts borrowed, or otherwise settling
the obligation.
c) Obtaining and paying for other resources obtained from creditors on
long-term credit.
Cash inflows from financing activities are:
a) Proceeds from issuing equity instruments (e.g., ordinary and preference
shares).
b) Proceeds from issuing bonds, notes, and from other short or long-term
borrowing.
Cash outflows for financing activities are:
a) Payments of dividends or other distributions to owners (alternatively may
be classified as operating cash flows)
b) Repayments of amounts borrowed
c) Other principal payments to creditors who have extended long-term
credit.
Cash Flows from Operating Activities
Operating activities generally involve producing and delivering goods and
providing services. Cash flows from operating activities are generally the cash
effects of transactions and other events that enter into the determination of net
income. However, certain items may be included in the net profit or loss for the
period which do not relate to operational cash flows, for example, the profit or
loss on the sale of a plant will be included in net profit or loss, but the cash flows
will be classed as investing.
Operating activities also include all transactions and other events that are not
defined as investing or financing activities.
Cash inflows from operating activities are:
a) Cash receipts from sales of gods or services, including receipts from
collection of receivable balances and both short and long-term notes
receivable from customers arising from those sales.
b) Cash receipts from returns on loans, other debt instruments other entities,
and equity securities – interest and dividends (alternatively may be
classified as investing cash flow).
c) All other cash receipts that do not stem from transactions defined as
investing or financing activities.
Cash outflows for operating activities are:
a) Cash payments to acquire materials for manufacture or goods for resale,
including principal payments on accounts and both short-and long-term
notes payable to suppliers for those materials or goods.
b) Cash payments to other suppliers and employees for other goods or
services.
c) Cash payments to governments for taxes should be classified as cash
flows from operating activities unless they can be specifically identified
with financing and investing activities. Taxation cash flows are often
difficult to match to the originating underlying transaction, so most of the
time and all tax cash flows are classified as arising from operating
activities.
d) Cash payments to lenders and other creditors for interest (alternatively
these may be classified as financing cash flows).
e) Al other cash payments that do not stem from transactions defined as
investing or financing activities.
CONTENTS AND FORM OF THE STATEMENT
A statement of cash flows should report:
a) Net cash provided or used by operating, investing, and financing
activities
b) The net effect of those flows on cash and cash equivalents during the
period in a manner that reconciles beginning and ending cash and cash
equivalents.
Reporting cash flows from operating activities
The standard offers a choice of method for this part of the statement of cash
flows.
a) Direct method: disclose major classes of gross cash receipts and gross
cash payments.
b) Indirect method: net profit or loss is adjusted for the effects of transactions
of a non-cash nature, any deferrals or accruals of past or future operating
cash receipts or payments, and items of income or expense associated
with investing or financing cash flows.
The direct method is the preferred method because it discloses information, not
available elsewhere in the financial statements, which could be of use in
estimating future cash flows.
Direct method – Under this method, enterprises are encouraged to report major
classes or gross cash receipts and gross cash payments and their arithmetic sum-
the net cash flow from operating activities. At a minimum, the following classes
of operating cash receipts and payments should be separately reported:
 cash collected from customers;
 interest and dividends received;
 other operating cash receipts, if any;
 cash paid to employees and other suppliers of goods or services,
including suppliers of insurance, advertising, an the like;
 interest paid;
 income taxes paid;
 other operating cash payments, if any;
Enterprises are encouraged to provide further breakdown of operating
cash receipts and payments that they consider meaningful; for example,
a retailer or manufacturer might decide to further divide cash paid to
employees and suppliers into payments for costs of inventory and
payments for selling, general, and administrative expenses.
Indirect method-Net cash flow from operating activities may also be reported
under the indirect method by adjusting net income to reconcile it to net cash
flow from operating activities. This requires adjusting net income to remove the
effects of:
a) all deferrals of past operating cash receipts and payments, such as
changes during the period in inventory and deferred income;
b) all accruals of expected operating cash receipts and payments, such as
changes during the period in receivables and payables;
c) items whose cash effects are investing cash flows, such as depreciation,
amortization of goodwill, and gains and losses on sales of property, plant,
and equipment and discontinued operations; and
d) items whose cash effects are financing cash flows, such as gains and
losses on extinguishments of debt.
The reconciliation of net income to net cash flow from operating activities
should separately report all major classes of reconciling items. The
reconciliation may be either reported within the statement of cash flows
or provided in a ‘separate schedule, with the statement of cash flows
reporting only the net cash flow from operating activities. In addition, if
the indirect method is used, amounts of interest paid (net of amounts
capitalized) and income taxes paid during the period should be provided
in related disclosers.
It is important to understand why certain items are added and others
subtracted. Note the following points:
a) Depreciation is not a cash expenses, but is deducted in arriving at the
profit figure in the statement of comprehensive income. I make sense,
therefore, to eliminate it by adding it back.
b) By the same logic, a loss on a disposal of a non-current asset (arising
through under provision of depreciation) needs to be added back and a
profit deducted.
c) An increase in inventories means less cash – you have spent cash on
buying inventory.
d) An increase in receivables means the company’s debtors have not paid
as much, and therefore there is less cash.
e) If we pay off payables, causing the figure to decrease, again we have
less cash.
Format of Statement Cash Flows

2009 2008
(Rupees) (Rupees)
Cash Flow from Operating Activities
Profit before tax X X
Adjustments for: -
Depreciation x x
(Gain)/Loss on sale of fixed assets x (x)
Increase/(decrease) in provision for doubtful debts (x) (x)
Amortization of Government Grant (x) (x)
Amortization of deferred cost x x
Interest expense x x
Increase/(decrease) in provision for warranties x (x)
xx xx
Operating profit before working capital changes XX XX
Adjustment for working capital changes
(Increase)/Decrease in current assets
(Increase)/Decrease in inventory x x
(Increase)/Decrease in debtors (x) x
(Increase)/Decrease in prepayments x (x)
Increase/(Decrease) in current liabilities
Increase/(Decrease) in creditors x x
Increase/(Decrease) in accrued expenses (x) x
Working capital changes x x
Cash generated from operations XX XX
Less:
Interest paid (x) (x)
Taxes paid (x) (x)
Dividend paid (x) (x)
(x) (x)
Net cash inflow/(outflow) from operating activities –A (XXX) XXX

Cash flow from Investing Activities


Purchase of fixed assets (x) (x)
Sale proceeds from disposal of fixed assets x x
Dividend income x x
Interest income x x
Net cash inflow/(outflow) from investing activities –B XXX (XXX)

Cash Flow from Financing Activities


Issue of share capital x x
Issue/(payment) of long term loans (Debentures) (x) x
Lease liabilities raised /(paid) x (x)
Net cash inflow/(outflow) from financing activities –C XXX XXX
Net cash increase / (decrease) in cash and cash equivalents XXX (XXX)
(A+B+C)
Add: Opening balance of cash and cash equivalents (XX) XX
Closing balance of cash and cash equivalents XXX (XXX)

Direct Method
Receipts from customers x X
Payments to suppliers (x) (x)
Payments for expenses (x) (x)
XX XX
CONSOLIDATION OF STATEMENT OF CASH FLOWS

Consolidated Statement of Cash Flows


There was no change in group
structure during the year

3 Additional Working Notes: There was a change in group



 Investment in associate structure during the year

 Goodwill (Disposal or Acquisition)

Non-Controlling Interest

A new Subsidiary was


acquired during the year An Existing Subsidiary was
disposed off during the year

Investment in Subsidiary – The outflow made to Inflow from disposal – the consideration received for
acquire the subsidiary will be shown in Investing the equity share given up
Activities Will be shown in Investing Activities

Regarding the balances of assets, liabilities, & equity – Regarding the balances of assets, liabilities, & equity –
the balances of assets and liabilities appearing on the The subsidiary has been disposed off and the closing
date of acquisition of the subsidiary have been balances of assets and liabilities of group do not
incorporated into Group FS but these were purchased include subsidiary assets and liabilities but the opening
by subsidiary at the time when that was not part of balances of group does include subsidiary disposed
group. So these are not group cash outflows. off.
Additional Working Notes: Additional Working Notes:

 Cost of Control 
 Disposal Account

 Business Purchase Account 
 Business Sale Account

Impairment charged in
Investment in associate Goodwill P&L
B/F xxx xxx Cash B/F xxx xxx P & – Adjustment in cash flow
from operating activities
L
P&L xxx Dividend paid by associate
xxx C/D - Inflow in cash flow from xxx C/D
investing activities
Share of profit in P&L
- Adjustment in cash flow
from operating activities

Non- Controlling Interest Disposal


Cash xxx xxx B/F Investm xxx xxx Cash
ent
xxx P&L
C/D xxx P&L xxx xxx P&L

Dividend paid to NCI Gain or loss booked in P&L


- Outflow in cash flow - Adjustment in cash flow
from financing activities from operating activities
Business Purchase and Sale accounts incorporate the effect of the purchase or
disposal:

 Dr. Asset & Cr. Business Purchase Account OR Dr. Business Sale
Account & Cr. Asset With FV of asset on DOA

 Dr. BPA & Cr. Liability OR Dr. Liability & Cr.
BSA With FV of liability on DOA

 The balancing figure will be the net assets of the subsidiary on the Date
Of Acquisition (DOA) and are to be allocated to NCI and CRE.

PRACTICE QUESTIONS
Question #1 Investment acquired during the year

Following is the information concerning the Investor Group for the year ended
December 31, 20X3
Consolidated Income statement
20X3 20X3
Rs. Rs.
(000) (000)
Profit from operations
Group 16,600
Associates 980 17,580
Income tax expense
Group 7,900
Associates 420 (8,320)
Profit after tax 9,260
Non controlling interest (1550)
Group profit for the year 7,710
Consolidated statement of changes in equity
20X3
Rs.
(000)
Opening balance at 1-1-20X3 21,845
Profit for the year 7,710
Dividend paid (2,100)
New shares issued 2,000
29,455
Consolidated balance sheet
20X3 20X3 20X2 20X2
Rs. Rs. Rs. Rs.
(000) (000) (000) (000)
Non-current assets
Investment in associates 6,200 5,700
Goodwill on acquisition 680 280
Property, plant and 21,200 28,080 16,900 22,880
equipment
Current assets
Inventories 16,600 12,200
Receivables 15,000 9,300
Cash 50 31,650 1,445 22,945
59,730 45,825
Capital and reserves
Issued capital 14,000 13,000
Share premium 2,645 1,645
Accumulated profits 12,810 29,455 7,200 21,845
Non controlling interest 8,200 6,600
Long term loans 1,655 5,280
Current liabilities
Trade payables 7,700 5,800
Taxation 9,100 4,900
Bank overdraft 3,620 20,420 1,400 12,100
59,730 45,825
Notes
1 On July 01, 20X3 the Investor Group acquired 80% of the issued share
capital of Vulnerable Limited, whose net assets at the date were as
follows:
Rs.
(000)
Property, plant and equipment 2,600
Inventories 900
Receivables 980
Cash 200
Trade payables (1,380)
Tax (300)
3,000

2 The purchase consideration was Rs.2.8 million in cash


3 Depreciation charged in the year amounted to Rs. 2,200,000. There were
no disposals of property, plant and equipment during the year.
Required: - Prepare Cash flow statement for the Investor Group

Question #2-Investment disposed off during the year

Following is the information concerning the JCN Group for the year ended
December 31, 20X0
Consolidated Income statement
20X0
Rs. (000)
Profit from operations
Group 20,000
Finance cost (1,400)
Gain on disposal 700
Profit before tax 19,300
Tax expense (6,500)
Profit after tax 12,800
Non controlling interest (1,000)
Group profit for the year 11,800
Consolidated statement of changes in equity
20X0
Rs. (000)
Opening balance at 1-1-20X0 49,500
Profit for the year 11,800
Dividend paid (3,000)
58,300

Consolidated balance sheet


20X0 20X0 20W9 20W9
Rs. (000) Rs. (000) Rs. (000) Rs. (000)
Non-current assets
Property, plant and 51,350 50,000
equipment
Current assets
Inventories 25,000 23,000
Receivables 21,000 19,000
Cash 6,000 52,000 2,000 44,000
103,350 94,000
Capital and reserves
Issued capital 20,000 20,000
Accumulated profits 38,300 58,300 29,500 49,500
Non controlling interest 5,050 5,750
Long term loans 9,500 12,500
Current liabilities
Trade payables 18,500 16,250
Taxation 6,000 5,000
Bank overdraft 6,000 30,500 5,000 26,250
103,350 94,000
Notes
1 On June 30, 20X0 the JCN disposed off its investment in Pear a
subsidiary in which it had a shareholding of 80%. The proceeds were
Rs. 5.5 million. Details of disposal were as follows: -
Rs.
(000)
Property, plant and equipment 4,000
Inventories 2,000
Receivables 2,500
Trade payables (1,500)
Bank overdraft (200)
Tax (300)
Long term loan (500)
6,000
2 JCN had acquired its investment on June 30, 20V8 for Rs.1.9 million
when the net assets of Pear were Rs. 2 million. Goodwill was found to
be impaired several years ago and so was fully written off before the
start of current year.
3 Depreciation charged during the year in the consolidated income
statement amounted to Rs. 10.1 million. There were no disposal of
property, plant and equipment by the group other than those
effectively made upon disposal of the investment in the Pear.
Required: - Prepare Cash flow statement for the Investor Group
Answers to Examples
E-1
INVESTOR GROUP
CONSOLIDATED STATEMENT OF CASHFLOWS
FOT R THE YEAR ENDED DECEMBER 31, 20X3

Cash flow from Operating Activities Rs.


Profit before tax 17,580
Adjustment for:
Profit from Associate (980)
Depreciation 2,200 1,220
Operating profit before working capital charges 18,800
Working Capital Charges
Increase in inventory (3,500)
Increase in Receivable (4,720)
Increase in Payable 520 (7,700)
Cash generated from operations 11,100
Taxes paid (4,000)
Net cash flow from operating activities 7,100

Cash flow from investing activities


Sub. Com. Acquisition (+200 – 2,800) (2,600)
Dividend – Associate (W-1) 60
PPE – Acquired (3,900)
6,440

Cash flow from financing activities

Dividend – paid (2,100)


Share capital (1,000 + 1,000) 2,000
Long term loan (5,280 – 1,655) (3,625)
Dividend – NCI (550)
(4,275)
Increase/(Decrease) in cash & cash equivalents (3,615
Opening cash & cash equivalents 45
Closing cash & cash equivalents (3,570)

W-1 Investment in Associates


Rs. Rs.
b/f 5,700 Cash/dividend receipts 60
P&L 980 Tax 420
c/d 6,200
____ ____
6,680 6,680

W-2 Tax Expenses A/c.

Cash 4,000 b/f 4,900


c/d 9,100 B.P. 300
P&L 7,900
_____ _____
13,100 13,100

W-3 NCI
b/f 6,600
Dividend 550 P&L 1,550
c/f 8,200 B.P. 1,600
8,700 8,700

W-4 CRE
b/f 7,200
Dividend 2,100 P&L 7,710
c/d 12,810
_____ _____
14,910 14,910

W-5 Goodwill
b/f 280
COC 400 c/f 680
___ ___
680 680

W-6 PPE
b/f 16,900 Dep. 2,200
B.P. 2,600
Cash 3,900 c/d 21,200
23,400 23,400

W-7 Inventories
b/f 12,200
B.P. 900
Cash 3,500 c/d 16,600
16,600 16,600

W-8 Receivables
b/f 9,300
B.P. 980
Cash 4,720 c/d 15,000
15,000 15,000

W-9 Cash & Cash equivalents


C/B O/B
Cash 50 1,445
Bank O.D. (3,620) (1,400)
3,570 3,570

W-10 Trade Payables


b/f 5,800
B.P. 1,380
c/f 7,700 Cash 520
____ ____
7,700 7,700
W-11 Business Purchase Account
Payable 1,380 PPE 2.600
Tax 300 Inventory 900
COCA 2,400 REC 980
NCI 600 Cash 200
____ ____
4,680 4,680

W-12 Cost of Control Account


Investment 2,800 Business Purchase 2,400
Goodwill 400
____ ____
2,800 2,800

E-2
JCN GROUP
CONSOLIDATED STATEMENT OF CASHFLOWS
FOR THE YEAR ENDED JUNE 30, 20X0
Cash flow from operating activities Rs.(000)
Profit before tax 19,300
Adjustment for: Rs. (000)
Gain on disposal (700)
F. Cost 1,400
Depreciation 10,100 10,800
O. Profit before W.C. Changes 30,100
Working capital changes
Inventory (4,000)
Receivable (4,500)
Payable 3,750 (4,750)
25,350
Taxes paid (5,200)
Cash flow generated from Operating activities 20,150
Cash flow from investing activities
Sub. Company disposal (5500 + 200) 5,700
P.P. E. Acquired (15,450) 9,750
9,750

Cash flow from financial activities


F. Cost paid (1,400)
Dividend paid (3,000)
Dividend – NCI (500)
L.T. Loans (2,500)
7,400
Increase / (Decrease) in Cash & Cash equivalents 3,000
Opening Cash & Cash equivalents (3,000)
Closing Cash & Cash equivalents -

W-1 Disposal
Rs. Rs.
Net Assets 6,000 Cash 5,500\
P&L 700 NCI 1,200
____ ____
6,700 6,700

W-2 Tax expenses


Banks 300 b/f 5,000
Cash 5,200 P&L 6,500
c/d 6,000
_____ _____
11,500 11,500

W-3 CRE
Dividend 3,000 b/f 29,500
c/d 38,300 PAT 11,800
40,300 40,300
W-4 NCI
Disposal 1,200 b/f 5,750
Dividend 500 PAT 1,000
c/d 5,050 ____
6,750 6,750

W-5 PPE
b/f 50,000 B.S. 4,000
Dep. 10,100
Cash 15,450 c/d 51,350
65,450 65,450

W-6 Inventory
b/f 23,000 B.S. 2,000
Cash dividend 4,000 c/d 25,000
27,000 27,000

W-7 Receivables
b/f 19,000 B.S. 2,500
Cash 4,500 c/d 21,000
23,500 23,500

W-8 Cash & Cash Equivalents


Closing Opening
Balance. Balances
Cash 6,000 2,000
Bank O.D. (6,000) (5,000)
-- (3,000

W-9 L.T. Loan


B.S. 500 b/f 12,500
Cash 2,500
c/d 9,500 c/d 18,500
12,500 12,500

W-10 Trade payable


B.S. 1,500 b/f/ 16,250
c/d 18,500 Cash 3,750
20,000 20,000
W-11 B. Sale
PPE 4,000 Payable 1,500
Inv. 2,000 N.OD 200
REC 2,500 Tax 300
L.T.L. 500
Disposal 6,000
____ ____
8,500 8,500
PAST PAPERS
Q-1
Following is the consolidated balance sheet of Iqbal Limited as at June 30, 2007:
2007 2006
Rupees in
million
ASSETS
Non-Current Assets
Tangible fixed assets 2,142 1,927
Goodwill 343 305
2,485 2,232
Current Assets
Cash and bank 808 700
Investments 982 560
Trade receivables 1,128 1,168
Inventory 1,850 1,715
4,768 4,143
TOTAL ASSETS 7,253 6,375

EQUITY AND LIABILITIES Equity


Ordinary shares of Rs. 10 each 505 450
8% preference shares of Rs. 10 each 600 600
Share premium 55 -
Revaluation reserves 140 -
Accumulated profits 2,670 2,480
3,970 3,530
Minority Interest 238 200
4,208 3,730

Liability against assets subject to finance lease 300 420

Deferred tax 75 55

Current Liabilities
Running finance 940 900
Trade payables 950 720
Income tax payable 600 450
Dividends payable 180 100
2,670 2,170
TOTAL EQUITY AND LIABILITIES 7,253 6,375
Following further information has been extracted from the records:
(i) Iqbal Limited has two subsidiaries i.e. Faiz Limited and Badar Limited.
(ii) The factory buildings of Faiz Limited and Badar Limited were
revalued during the year and the surplus arising on the revaluation
was credited to a revaluation reserve account.
(iii) Certain plant and machineries belonging to Faiz Limited, acquired
under finance lease arrangement, were capitalized at Rs. 50 million.
(iv) On September 30, 2006, equipment costing Rs. 55 million carried in
the books of Iqbal Limited at Rs. 35 million as at June 30, 2006 was
completely destroyed by fire. Insurance proceed of Rs. 40 million was
received on November 17, 2006. There was no other disposal of
tangible fixed assets in any of the three companies.
(v) Total depreciation in the consolidated profit and loss account
amounted to Rs. 314 million which included depreciation on leased
assets amounting to Rs. 38 million.
(vi) 80% of the paid-up capital of Faiz Limited was acquired during the
year for Rs. 110 million. The payment was made by issuing 5.5 million
ordinary shares of Rs. 10 each at 100% premium. The net assets of
Faiz Limited at the date of acquisition were as follows:

Rs. in
million
Tangible fixed assets 60
Inventories 20
Trade receivables 25
Cash 10
Trade payables (25)
90

vii) Provision made during the year, for current and deferred tax
amounted to Rs. 200 million and Rs. 20 million respectively.
(viii) Profit allocated to minority shareholders amounted to Rs. 35 million.
(ix) The details relating to dividend paid by Iqbal Limited for the year are
as follows:
2007 2006
Declared on June 15, 2007 June 15, 2006
Paid on August 31, 2007 August 31, 2006
Amount Rs. 180 million Rs. 100 million
Required:
Prepare the consolidated cash flow statement for the year ended June 30, 2007.
Show necessary workings.
Q-2
The following balances were extracted from the Consolidated Income
Statement and Consolidated Statement of Financial Position of Karachi Group
Limited for the year ended June 30, 2010.
2010
Rs. (m)
Operating profit 189
Share of profit from associate 5
Financial charges (14)
Profit before tax 180
Taxation (65)
Profit for the year 115
Attributable to: -
Owners of the parent 100
Non-controlling interest 15
115

Consolidated statement of financial position

2010 2009 2010 2009


Rs. (m) Rs. (m) Rs. (m) Rs. (m)
Equity and liabilities Assets
Equity Non-current assets
Share capital 200 200 Property, plant and 510 500
equipments
Retained earnings 320 250
520 450 Investment in associates 12 10
Non-controlling interest 28 10 Intangible assets 30 25
548 460 552 535
Long term loans 125 120

Current liabilities Current assets


Current portion of long 20 -- Inventories 261 200
term loans
Trade creditors and other 262 287 Trade debtors and other 180 162
payables receivables
Accrued financial 8 5 Short term deposits 10 --
charges
Taxation 60 50 Cash and bank 20 25
350 342 471 387
Total equity and liabilities 1,023 922 Total assets 1,023 922

i) One of KGL’s three subsidiaries, Auto Engineering Works Limited was


acquired on July 01, 2009 by purchase of 80% shareholding for Rs. 30
million. Fair value of the assets and liabilities were as follows: -

Rs. In Millions
Property, plant and equipments 20.50
Inventories 10.00
Trade debtors and other receivables 8.00
Cash and bank 6.00
Trade creditors and other payables (17.00)
27.50
It is KGL’s policy to value the non controlling interest at its proportionate
share of fair value of the subsidiaries net assets.
ii) Book value of intangible assets on July 01, 2009 included trademark of Rs.
6 million. There was 50% impairment in the value of trademarks during the
year ended June 30, 2010.
iii) The following information pertaining to property, plant and equipment is
available: -
 Total depreciation charge for the year was Rs. 70 million
 A machine costing Rs. 10 million and having book value of Rs. 6.5
million was traded in with another machine having fair value of Rs.
7 million with an additional cash payment of Rs. 1 million
 Fully depreciated assets costing Rs. 10 million were scrapped
during the year.
 Proceed of a long term loan amounting to Rs. 5 million were
specifically used for purchase of property, plant and equipment.
iv) On August 5, 2010 the board of directors proposed a final dividend at
20% for the year ended June 30, 2010 (2009 15% dividend declared on
August 10, 2009)
Required:
Prepare a consolidated statement of cash flows under the indirect method for
the year ended June 30, 2010 including notes thereto as required by IAs 7.
Q-3
Alpha Pakistan Limited (APL) is a listed company and has 60% holding in Bravo
Limited (BL). The company is in the process of preparation of its consolidated
financial statements for the year ended 30 September 2011. Following are the
extracts from the information that has been gathered so far:
Consolidated Statement of Comprehensive Income (Draft) 2011

Rs. in
million
Sales 65,000
Cost of products sold (59,110)
Other operating income 2,000
Operating expenses (3,000)
Financial expenses (890)
Income tax expense (1,200)
Profit for the year 2,800
Profit attributable to
Owners of the holding company 2,500
Non-controlling interest 300
2,800

Consolidated Statement of Financial Position (Draft)

2011 2010 2011 2010


Rs. in million Rs. in million
Equity and liabilities Assets
Share capital (Rs. 10) each Property, plant and
550 500 1,100 900
equipment
Retained earnings 5,950 3,600 Goodwill 15 15
Non-controlling interest Long term
235 120 24 29
receivables
Long term loans 440 145 Stock in trade 6,760 4,280
Deferred tax 210 10 Trade debts 7,534 5,421
Trade and other payables 4,688 3,970 Other receivables 900 725
Accrued financial expenses Cash and bank
35 30 2,645 2,980
balances
Provision for taxation 200 25
Short term borrowings 6,670 5,950
18,978 14,350 18,978 14,350
Following additional information is available:
 During the year, BL sold goods amounting to Rs. 140 million to APL
at a margin of 25% of cost. 40% of the above amount remained
unpaid and 30% of the goods remained unsold as on 30
September 2011. No adjustments in this regard have been made in
the above statements.
 Depreciation charge for the year was Rs. 75 million and Rs. 15
million for APL and BL respectively.
 During the year APL acquired property, plant and equipment
amounting to Rs. 250 million against a long term loan.
 The amount of long term receivables represents present value of
interest free loans to employees. The gross value of the loans is Rs.
27 million (2010: Rs. 33 million).
 Operating expenses include bad debt expenses amounting to Rs.
44 million. During the year, trade debtors amounting to Rs. 30
million were written off.
 Trade and other payables include APL’s unclaimed dividend
amounting to Rs. 8 million (2010:Rs. 10 million). At APL’s Board
meeting held on 30 November 2011, final cash dividend of Rs. 3.0
per share has been proposed (2010: Final cash dividend of Rs 2.0
per share and 10% bonus shares).
Required:
Prepare a consolidated statement of cash flows including all relevant notes for
Alpha Pakistan Limited for the year ended 30 September 2011 using the direct
method in accordance with International Financial Reporting Standards. (Ignore
corresponding figures.)
Q-4
Consolidated financial statements of Malik Group of companies (MGC) for the
year ended 31 December 2014 are presented below:
Consolidated statement of financial position as on 31 December 2014

2014 2013 2014 2013


Equity Rs. in million Non-current assets Rs. in million
Ordinary shares (Rs. Good will
10 each) 15,000 15,000 19,300 18,500
Property, plant and
Retained earnings 17,550 10,850 equipment 25,450 16,250
Investment in
Other reserves * 7,500 5,250 associate 6,200 5,400
40,050 31,100 50,950 40,150
Non-controlling
interest 3,100 3,200

Non-current liabilities
Loans from banks 5,000 3,000 Current assets
Deferred tax 1,500 1,050 Inventories 4,700 4,350
Trade and other
receivables 3,900 3,300
Current liabilities Cash and bank 2,100 1,400
Trade and other
payables 8,000 7,250
Income tax 3,875 3,525
Accrued interest 125 75
61,650 49,200 61,650 49,200
* Include revaluation reserve
Consolidated statement of comprehensive income for the year ended 31
December 2014
Rs. in
million
Revenue 20,900
Operating expenses (11,550)
Profit from operations 9,350
Gain on disposal of subsidiary 1,000
Finance cost (350)
Income from associates 1,150
Profit before taxation 11,150
Income tax expense (2,250)
Profit for the year 8,900
Other comprehensive income for the year
Re-measurement of post-employment benefits 2,000
Other comprehensive income from associates 500
Total comprehensive income 11,400
Profit attributable to:
 Parent shareholders 7,950
 Non-controlling interest 950
8,900
Total comprehensive income attributable to:
 Parent shareholders 10,200
Non-controlling interest 1,200
11,400
Additional information:
i. During the year, MGC acquired 80% holding in Gomel Limited (GL)
against a cash consolidation of Rs. 15,000 million. On the date of
acquisition, the non-controlling interest’s holding was measured at its fair
value of Rs. 3,400 million. The fair value of net assets of GL at acquisition
comprised of the following:

Rs. in
million
Property, plant and equipment 12,800
Inventory 1,500
Trade and other receivables 2,400
Cash and bank 800
Loan from banks (400)
Trade and other payables (1,800)
Income tax (400)
14,900
ii. During the year, MGC also disposed of its 60% shareholdings in Stone
Limited (SL) and realized cash proceeds of Rs. 8,500 million. This subsidiary
had been acquired several years ago for Rs. 6,000 million. At acquisition,
the fair value of SL’s net assets and non-controlling interest was Rs. 7,300
million and Rs. 3,200 million respectively. On the date of disposal, the net
assets of SL had a carrying value in the consolidated statement of
financial position as follows:
Rs. in
million
Property, plant and equipment 7,250
Inventory 1,650
Trade and other receivables 1,500
Cash and bank 500
Loan from banks (300)
Trade and other payables (800)
9,800
iii. Property, plant and equipment:
 Depreciation charge for the year is Rs. 3,850 million.
 A plant having carrying value of Rs. 2,500 million was sold for Rs. 2,750
million. Gain on disposal has been credited to operating expenses.
 On the basis of a professional valuation report, increase of Rs. 2,000
million has been recognized in the value of property, plant and
equipment.
iv. During the year Rs. 1,250 million was paid as final dividend to ordinary
shareholders.

Required:
Prepare consolidated statement of cash flow of MGC for the year ended 31
December 2014, using the indirect method. (22)
Q–5
Following are the extracts from consolidated financial statements of Musa
Limited (ML) for the year ended 30 June 2016: -
Consolidated statement of financial position as on 30 June 2016
2016 2015
Rs. (m) Rs. (m)
Assets
Goodwill 1,750 1,922
Investment in associates 4,100 3,528
Inventory 5,488 5,398
Trade and other receivables 4,659 4,107
Dividend receivable from associates 590 700
Other current assets 1,500 1,300
Cash and bank 4,500 3,710

Equity and liabilities


Non-controlling interest 1,499 1,721
Trade and other payables 18,050 17,034
Dividend payable - NCI 454 252
Consolidated statement of comprehensive income for the year ended 30 June
2016
Rs. (m)
Loss on disposal of subsidiary (7)
Income from associates 1,150
Profit attributable to: -
Owners of parent 8,233
Non-controlling interest 1,018

Following information is also available: -


a) During the year, ML acquired 60% shareholding in Esquire Limited (EL), for
Rs. 200 million. As consideration, ML issued 1 million shares at a market
value of Rs. 150 each. The balance was paid in cash. The value of EL’s net
assets on the date of acquisition was Rs. 320 million as shown below: -
Rs. (m)
Property, plant and equipment 222
Inventory 100
Receivables 50
Bank overdraft (16)
Trade and other payables (36)
320

b) During the year. ML sold entire 90% shareholding in Younas Limited (YL)
and realized cash proceeds of Rs. 800 million. This subsidiary had been
acquired several years ago for Rs. 560 million. At acquisition, the fair value
of YL’s net assets was Rs. 550 million. On the date of disposal, the carrying
value of YL’s net assets was Rs. 860 million as follows: -
Rs. (m)
Property, plant and equipment 725
Inventory 165
Cash and Bank balances 50
Trade and other payables (80)
860
Up to the date of disposal, 50% of YL’s goodwill has been impaired.
c) ML measured its non-controlling interest at the proportionate share of its
subsidiaries net identifiable assets.
Required: -
Determine the amounts to be shown in each of the following heads of accounts
in the consolidated cash flow statement for the year ended 30 June 2016.
 Impairment of goodwill to be reported as non-cash item (03)
 Dividend paid to non-controlling interest (04)
 Dividend received from associates (2.5)
 Net cash flow due to acquisition to subsidiary (1.5)
 Net cash flows arising on disposal of subsidiary (1.5)
 Changes in working capital (3.5)
SOLITIONS TO PAST PAPERS
A-1
IQBAL LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 30 JUNE, 2007

Cash Flows From Operating Activities Rs.(M)


Profit before tax 625
Adjustments for:
Preference
Dividend 48
Gain on Disposal (5)
Depreciation 314
357
Profit before changes in working
capital 982
Increase / Decrease in
Assets:
Receivables (Decrease) 65
Increase in
Inventory (115)

Increase / Decrease in
Liability:
Increase in
Payable 205
155
Cash generated from operations 1,137
Tax Paid (50)
Net cash inflows from Operating
Activities 1,087
Cash Flows from Investing Activities:
Investment (422)
Insurance
Proceed 40
Subsidiary Company
Acquired 10
Property, Plant & Eqipment (314)
Net Cash Outflow from Investing Activities (686)
Cash Floe from Financing Activities:
Preference Dividend Paid (48)
Dividend Paid (100)
Dividend - NCI (15)
Financing Lease (170)
Net Cash Outflow from Financing Activities (333)

Increase / Decrease in Cash & Cash Equivalents 68


Opening Cash & Cash (200)
quivalents
Closing Cash & Cash
Equivalents (132)
Workings:

W.1:
Tangible Asset
Rs. Rs.
Bal b/f 1927 Disposal 35
Revaluation
Reserve 140 Depreciation 314
Lease 50
Business Purchase 60
Cash 314

Bal c/d 2142


2491 2491
W.2:
Goodwill
Rs. Rs.
Bal b/f 305
Cost of Control
A/c 38
Bal c/d 343
343 343
W.3:
Cash & Cash Equivalents:
Closing
Opening Bal. Bal.

Cash & Bank 700 808


Running Finance (900) (940)

(200) (132)
W.4:
Finance Lease
Rs. Rs.
Cash 170 Bal b/d 420
Tangible Asset 50
Bal c/d 300
470 470
W.5:
Trade Receivables
Rs. Rs.
Bal b/f 1168 Decrease in Asset 65
Business Purchase 25
Bal c/d 1128
1193 1193
W.6:
Inventory A/c
Rs. Rs.
Bal b/f 1715
Increase in Asset 115
Business Purchase 20
Bal c/d 1850
1850 1850
W.7:
Profit before Tax:
PBT 625
Tax (220)
Profit After Tax 405
NCI (35)
Parent Co 370
Dividend (180)
Retained- Group 190
Bal b /f 2480
2,670
W.8:
NCI
Rs. Rs.

Cash 15 Bal b/f 200


Business Purchase 18
P&L 35
Bal c/d 238
253 253
W.9:
Tax Payable
Rs. Rs.

Cash 50 Bal b/f 450


P&L 220
Bal c/d 620
670 670
W.10:
Trade Payable
Rs. Rs.
Bal b/f 720
Increase in Liability 205
Business Purchase 25
Bal c/d 950
950 950
W.11:
Dividend
Rs. Rs.

Cash 100 Bal b/f 100


Retained Earning 180

Bal c/d 180


280 280
W.12:
Disposal A/c
Rs. Rs.

Tangible Asset 35 Cash 40


P&L 5

40 40
W.13:
Cost of Control A/c
Rs. Rs.

Share Premium 55 Business Purchase 72


Share Capital 55 Goodwill 38

110 110
W.14:
Business Purchase A/c
Rs. Rs.
Payable 85 Tangible Asset 60
Cost of Control
A/c 72 Inventories 20
NCI 18 Receivables 25
Cash 10

175 115
A-2
Karachi Group Limited
Consolidated Statement of
Cash Flows For the year ended June 30, 2010

Rs. in
million
Cash flows from operating activities
Profit before tax 180.00
Adjustments for :
Share of profit in associates (5.00)
Depreciation 70.00
Trade mark impairment (6*50%) Loss on 3.00
exchange of machine (6.5+1)-7 0.50
Financial expenses 14.00
262.50
Increase in inventories (261-10-200) (51.00)
Increase in trade debtors and other receivables (180-8-162) (10.00)
Decrease in trade creditors and other payables (262-17-287) (42.00)
Cash generated from operating activities 159.50
Financial expenses paid* (5+14-8) (11.00)
Income taxes paid (50+65-60) (55.00)
Net cash from operating activities 93.50
*This may also be shown under financing activities

Cash flows from investing activities


Acquisition of subsidiary-Auto Engineering Works Ltd.(30-6) (24.00)
Note 1
Purchase of property, plant and equipment (55.00)
W1
Dividend received from associates (10+5-12) 3.00
(76.00)
Cash flows from financing activities
Proceeds from long term borrowings (125+20-120-5) (20.00)
Dividend paid to controlling interest* (200*15%) (30.00)
Dividend paid to non-controlling interest* 28-(10+15+5.5) (2.50)
*these may also be shown under operating cash flow
(12.50)
Net increase in cash and cash equivalents 5.00
Cash and cash equivalents at beginning of the period 25.00
Note 3
Cash and cash equivalents at end of the period 30.00
Note 3

W-1 Purchase of property, plant and equipment


Balance - June 30, 2009 500.00
Depreciation for the year (70.00)
WDV of asset given up in trade-in (6.50)
423.50
Balance - June 30, 2010 (510.00)
Total additions for the year (86.50)
Less : Additions against loan 5.00
Fair value of subsidiary's assets acquired 20.50
New machine price adjusted against old machine (7-1) 6.00
Additions against cash payment (55.00)

Notes to the statement of cash flows


Note 1: Acquisition of subsidiary - Auto Engineering Works Limited
The control of a subsidiary, Auto Engineering Works Limited was acquired during
the year. The details of consideration paid, value of assets acquired and
liabilities assumed are as follows:

Rs. in million
Consideration paid in cash net of cash acquired (30-6) 24.00

Fair value of assets and liabilities:


Property, plant and equipments 20.50
Inventories 10.00
Trade debtors and other receivables 8.00
Cash and bank balances 6.00
Trade creditors and other payables (17.00)
27.50

Note 2: Property, plant and equipment

During the year, the group acquired property, plant and equipment with an
aggregate cost of Rs. 86.5 million as detailed below:

By acquisition of the subsidiary 20.50


Purchase against specific loan 5.00
Purchase against trade-in 6.00
Cash purchases (W- 55.00
1)
86.50

Note 3: Cash and cash equivalents


2010 2009
Short term deposits 10.00 -
Cash and bank balances 20.00 25.00
30.00 25.00

A-3
Alpha Pakistan Limited
Consolidated statement of cash flows
For the year ended 30 September 2011

2001
Rs. in
million
Cash flows from operating activities
Cash receipts from customers W1 62,759
Cash paid to suppliers and for operating expenses W2 (61,827)
Cash generated from operations 932
Financial charges paid {(30+890-35)+(33-29)-(27-24) (886)
Income tax paid (10+25+1,200-210-200) (825)
Recoveries from employees against long term receivables (33-27) 6
Net cash from operating activities (773)

Cash flows from investing activities


Purchase of property, plant and equipment(1,100+90-900-250) Note 1 (40)
Cash flows from financing activities
Dividend paid to controlling interest (10+100-8) (102)
Dividend paid to non-controlling interest {120+300-235} (185)
Proceeds from long term loans (440 – 145 – 250) 45
(242)
Net decrease in cash and cash equivalents (1,055)
Cash and cash equivalents at beginning of the year (5,950-2,980) (2,970)
Cash and cash equivalents at end of the year Note 2 (4,025)

Note 1: Property, plant and equipment


During the year the group acquired property, plant and equipment with an
aggregate cost of Rs 290 million as detailed below:
Cash purchases 40
Purchase against loan 250
290
Note 2: Cash and cash equivalents
Cash and bank balances 2,645
Short term borrowings (6,670)
4,025

WORKINGS
W1: Cash receipts from customers
Sales for the year after elimination of inter-company sales (65,000-140) 64,860
Increase in trade debts (7,534-5,421)-(140x40%)+44 (2,101)
62,759

W2: Cash paid to suppliers and for operating expenses


Cost of products sold (59,110-140) +(140x30%x25/125) 58,978
Increase in closing stock in trade (6,760-4,280)-(140x30%x25/125) 2,472
Increase in trade and other payables excluding dividend
(4,688-3,970)-(140x40%)+(10-8) (664)
Operating expenses 3,000
Depreciation (75+15) (90)
Bad debts expense (44)
Other operating income 2,000
Increase in other receivables (900-725) 175
Net decrease in cash and cash equivalents 6,1827
A-4
MALIK GROUP OF COMPANIES
CONSOLIDATED STATEMETN OF CASHFLOWS
FOR THE YEAR ENDED DECEMBER 31, 2014

Workings Rs. (m)


Cash flow from operating activities
Profit before tax 11,150
Adjustments for: -
Finance cost 350
Gain on sale of subsidiary (1,000)
Income from associate (1,150)
Depreciation 3,850
Goodwill impairment 1 800
Gain on disposal of PPE Rs. (2,750-2,500) (250)
2,600
Operating profit before working capital changes 13,750
Working capital changes
Increase in inventory 2 (500)
Decrease in receivables 2 300
Decrease in payables 2 (250)
(450)
Cash generated from operations 13,300
Finance cost paid Rs. (75+35-125) (300)
Income tax paid 3 (1,850)
Net cash generated from operations 11,150

Cash flows from investing activities


Acquisition of property, plant and equipment 4 (8,000)
Acquisition of subsidiary (1,500-80) (14,200)
Proceeds from disposal of PPE 2,750
Proceeds from disposal of subsidiary (8,500-500) 8,000
Dividend received from associate 5 850
Net cash out flow from investing activities (10,600)

Cash flows from financing activities


Increase in long term loan (3,000+400-300-5,000) 1,900
Dividend paid to parent share holders (1,250)
Dividend paid to NCI 6 (500)
Net cash inflow from financing activities 150

Increase in cash and cash equivalents 700


Opening cash and cash equivalents 1,400
Closing cash and cash equivalents 2,100

WORKINGS
W-1 Goodwill Impairment
Goodwill as on January 01, 2014 18,500
Add: goodwill of subsidiary acquired during the year 1.1 3,500
Less: goodwill of subsidiary disposed off during the year 1.1 (1,900)
Less: goodwill as on December 31, 2014 (19,300)
Impairment (balancing figure) 800
W1.1 Goodwill of acquired/disposed off subsidiaries
Gomel Stone
Cost of investment 15,000 6,000
NCI at fair value 3,400 3,200
FV of net assets (14,900) (7,300)
Goodwill at acquisition 3,500 1,900
W-2 Working capital changes Inventory Receivables Payables
Openings balance as on January 01, 2014 4,350 3,300 7,250
Add: transferred in on acquisition of subsidiary 1,500 2,400 1,800
Less: transferred out on disposal of subsidiary (1,650) (1,500) (800)
4,200 4,200 8,250
Less: closing balance as on December 31, 2014 (4,700) (3,900) (8,000)
Working capital changes (500) 300 250
W-3 Income taxes paid
Current and deferred on January 01, 2014 (3,525+1,050) 4,575
Add: transferred on acquisition of subsidiary 400
Add: tax for the year 2,250
Less: current and deferred tax as on Dec 31, 2014 (5,375)
Income taxes paid during the year 1,850
W-4 acquisition of PPE
Opening balance on Jan 01, 2014 16,250
Add: transferred in on acquisition of subsidiary 12,800
Less: transferred out on disposal of subsidiary (7,250)
Less: depreciation (3,850)
Add: revaluation surplus 2,000
Less: disposal of plant (2,500)
Less: closing balance (25,450)
Acquisition during the year (8,000)
W-5 dividend from associate
Opening balance 5,400
Add: income from associate 1,650
Less: closing balance (6,200)
Dividend received 850
W-6 dividend to NCI
Opening balance 3,200
Add: total comprehensive income 1,200
Add: acquisition of Gomel 3,400
Less: disposal of Stone (4,200)
Less: closing balance (3,100)
Dividend paid 500
A-5
a) Impairment of goodwill
Rs. (m) Rs. (m)
Goodwill at the beginning of the year 1,922.00
Add: goodwill on acquisition of EL (200-(320x60%)) 8.00
Less: goodwill on disposal of YL ((560-(550x90%))x50% (32.50)
Less: goodwill at the end of the year (1,750.00)
Impairment loss on goodwill 147.50

b) Dividend paid to NCI


Rs. (m) Rs. (m)
NCI balance –opening 1,721
Add: dividend payable 252
Add: profit attributable to NCI for the year 1,018
Add: acquisition of EL (320x40%) 128
Less: disposal of YL (860x10%) (86)
Less: NCI balance –closing (1,499)
Less: dividend payable (454)
1,080

c) Dividend received from associates


Rs. (m) Rs. (m)
Investment in associate –opening balance 3,528
Add: dividend receivable from associate –opening balance 700
Add: income from associates 1,150
Less: investment in associate – closing balance (4,100)
Less: dividend receivable from associates (590)
688

d) Net cash flow due to acquisition of subsidiary


Rs. (m) Rs. (m)
Cash paid to acquire subsidiary (200-150) (50)
Bank overdraft on acquisition (16)
Cash outflow from acquisition of subsidiary (66)

e) Net cash inflows from disposal of subsidiary


Rs. (m) Rs. (m)
Sale proceeds from disposal of subsidiary 800
Cash and bank of disposed subsidiary (50)
Cash inflow from disposal of subsidiary 750

f) Changes in working capital


Description Inventory Trade and Other Trade and
other current other
receivables assets payables
Rs. (m Rs. (m) Rs. (m) Rs. (m
Opening balance 5,398 4,107 1,300 17,034
Add: transfer in on 100 50 -- 36
acquisition of subsidiary
Less: transfer out on (165) -- -- (80)
acquisition of subsidiary
5,333 (4,157) 1,300 16,990)
Less: closing balance (5,488) (4,659) (1,500) (18,050)
on 30 June 2016
Working capital 155 (502) (200) 1,060
changes