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In this section, the steps taken to prepare an internal statement of income from a trial balance will be revised.
These are to identify and calculate year-end adjustments; and prepare an internal statement of income taking
adjustments into account.
During the year, cash and credit transactions are posted to each individual ledger accounts as paid cash or
received and invoices received or issued. It is only when financial statements are being prepared that
adjustments are made to ensure that the income statement includes only income and expenses related to the
current financial period.
The following information relating to accruals and prepayments have not yet been taken into account in the
amounts shown in the trial balance:
• Inventory valued at cost during December 31, 20X3 was P25,875,000.
• Depreciation is to be provided as follows:
o 2% on freehold buildings using the straight-line method;
o 10% on equipment using the reducing balance method;
o 25% on motor vehicles using the reducing balance method.
• P2,300,000 was prepaid for light, power and miscellaneous expenses and P5,175,000 has accrued for
wages.
• Freehold land was revalued on December 31, 20X3 at P77,500,000, resulting in a gain of P20,000,000.
• Assume income tax at 30% of pre-tax profit
• 1,500 shares @ P1 had been issued during January 1, 20X3 at a premium of P0.50 each.
In this example, they relate to accrued and prepaid expenses and depreciation.
As shown, expenses are arranged in descending monetary value. The method for doing this is not prescribed
and companies are free to organize the expenses in other ways, for example in alphabetical order.
MAC CORPORATION
Income Statement
For the year ended December 31, 20X3
Sales 345,000,000
LESS: Cost of Sales
Operating inventory 43,125,000
Purchases 258,750,000
Closing Inventory (25,875,000) 276,000,000
Gross Profit 69,000,000
LESS: Expenses
Salaries and Wages (A) 25,530,000
Motor Expenses 9,200,000
Interest on Loan 6,325,000
Depreciation (B) 5,175,000
Insurance 5,290,000
Bank Interest 1,150,000
Light, Power, Miscellaneous (C) 1,955,000 54,625,000
Profit before tax 14,375,000
Income tax (including tax under provision) 5,062,500
Profit after tax 9,312,500
Dividends (disclosed in Statement of changes in Equity) 1,725,000
Retained Earnings 7,587,5000
Public companies are required to present their statement of income in a prescribed format to assist users making
intercompany comparisons. IAS 1 allows a company two (2) choices in the way in which it analyses the
expenses, and the formats are as follows (Elliot & Elliot, 2017):
Format 1: Vertical with costs analyzed according to function, e.g. cost of sales, distribution costs, and
administration expenses; or
Format 2: Vertical with costs analyzed according to nature, e.g. raw materials, employee benefits expenses,
operating expenses, and depreciation.
Many companies use Format 1 (unless there is an industry preference or possible national requirement to use
Format 2) with the costs analyzed according to function. If this format is used, the information regarding the
nature of expenditure (e.g. raw materials, wages, and depreciation) must be disclosed in a note to the accounts.
The analysis of expenses classified either by the nature of the expenses or by their function within the entity is
decided by whichever provides information that is reliable and more relevant (Elliot & Elliot, 2017).
In order to arrive at its operating profit (a measure of profit often recognized by many companies), a company
needs to classify all of the operating expenses of the business into one of four (4) categories:
A. Cost of Sales – It typically includes direct costs, overheads, depreciation and amortization expense, and
adjustments. The items that might appear under each heading are as follows:
• Direct Costs – direct materials purchased; direct labor; other external charges that comprise production
costs from external sources, e.g. hire charges and subcontracting costs
• Overheads – variable and fixed production overheads
• Depreciation and Amortization – depreciation of non-current assets used in production and impairment
expense
• Adjustments – capitalization of own work as a non-current asset. Any amount of the costs listed above
that have been incurred in the construction of non-current assets for retention by the company will not
appear as an expense in the statement of comprehensive income: it will be capitalized. Any amount
capitalized in this way would be treated for accounting purposes as a non-current asset and
depreciated.
B. Distribution and Selling Costs – These are costs incurred after the production of the finished article and
up to and including the transfer of the goods to the customer. Expenditure classified under this heading will
typically include the following:
• warehousing costs associated with the operation of the premises, e.g. rent, rates, insurance, utilities,
depreciation, repairs, and maintenance; wage costs, e.g. gross wages and pension contributions of
warehouse staff
• promotion costs, e.g. advertising, trade shows
• selling costs, e.g. salaries, commissions and pension contributions of sales staff; costs associated with
the premises, e.g. rent, rates; cash discounts on sales; travelling and entertainment
• transport costs, e.g. gross wages and pension contributions of transport staff, vehicle costs, e.g. running
costs, maintenance and depreciation
C. Administrative Expenses – These are the costs of running the business that have not been classified as
either cost of sales or distribution costs. Expenditure classified under this heading will typically include the
following:
• administration, e.g. salaries, commissions, and pension contributions of administration staff
• costs associated with the premises, e.g. rent, rates
• amounts written off the receivables that appear in the statement of financial position under current
assets
• professional fees
D. Other Operating Income or Expense – Under this, a company discloses material income or expenses
derived from ordinary activities of the business that have not been included elsewhere. If the amounts are
not material, they would not be separately disclosed but included within the other captions. Items classified
under these headings may typically include the following:
• income derived from intangible assets, e.g. royalties, commissions
• income derived from third-party use of property, plant, and equipment that is surplus to the current
productive needs of the company
• income received from employees, e.g. canteen, recreation fees
• payments for rights to use intangible assets not directly related to operations, e.g. licenses
E. Finance costs – Under this, interest received or paid on loans and bank overdraft and investment income
are disclosed in order to arrive at the profit for the period.
F. An analysis of expenses by function – This is an analysis of expenses carried out in practice in order to
classify expenses under their appropriate function heading. These are allocated or apportioned as
appropriate. The assumptions for this exercise are shown:
An analysis of depreciation
Freehold Buildings 1,150,000 575,000 287,500 287,500
Equipment 1,150,000 575,000 287,500 287,500
Motor Vehicles (allocated) 2,875,000 2,875,000
SUBTOTAL 5,175,000 1,150,000 3,450,000 575,000
G. Accounting for current tax – The profit reported in the statement of income is subject to taxation at a
percentage rate set by the government. The resulting amount is treated as an expense in the statement of
income and a current liability in the statement of financial position. However, this is an estimated figure and
the amount agreed with the tax authorities in the following accounting period might be higher or lower than
the estimate.
• Underprovisions - If the agreed amount should be higher, it means the company has underprovid ed
and will be required to pay an amount higher than the liability reported in the statement of financial
position – this results in a debit balance appearing in the trial balance prepared at the end of the
following period. This underprovision will be added to the following year’s estimated tax charged in the
statement of income.
For example, if the company estimates P5,750,000 in Year 20X1 and pays P6,000,000 in 20X2 and
estimates P5,220,000 in 20X2 on its 20X2 profits, then the charge in the statement of income for 20X2
will be P5,470,000 (5,220,000 + 250,000). Overprovisions If overprovided the agreed tax payable will
be lower, say P5,150,000, then the charge in 20X2 will be reduced by P600,000 (5,750,000-5,150,000 ).
• Overprovisions – if overprovided the agreed tax payable will be lower, say P5,150,000, then the charge
in 20X2 will be reduced by P600,000 (5,750,000-5,150,000).
Format 1 is favored by capital markets and provides a multi-stage presentation reporting four (4) profit measures
for gross, operating, pre-tax, and post-tax profit.
Sales 345,000,000
Cost of Sales 293,422,500
Gross Profit 51,577,500
Distribution Costs 25,041,250
Administrative Expenses 4,686,250
Operating Profit 21,850,000
Finance Costs 7,475,000
Profit from ordinary activities before tax 14,375,000
Income Tax (4,312,500 + 750,000) 5,062,500
Profit for the year 9,312,500
If Format 2 will be used, the expenses are classified as a change in inventory, raw materials, employee benefits
expense, other expenses and depreciation as shown below:
Sales 345,000,000
Decrease in inventory (17,250,000)
Raw Materials (258,750,000) (276,000,000)
Employee benefit expense
Salaries (25,530,000)
Depreciation (5,175,000)
Other operating expenses
Motor Expenses (9,200,000)
Insurance (5,290,000)
Light, power, and miscellaneous (1,955,000) (16,445,000)
Operating Profit 21,850,000
The operating profit is unchanged from what appears using Format 1. This method differs in that classification
by nature does not require the allocation of expenses to functions. It is a format that is seen to be appropriat e
to particular industries such as the airline industry where it is adopted by Air China and EasyJet.
When IAS 1 was revised in 2008 the profit and loss account or ‘income statement’ was replaced by the statement
of comprehensive income, and a new section of ‘Other comprehensive income’ (OCI) was added to the previous
statement of income (Elliot & Elliot, 2017).
Other comprehensive income includes unrealized gains and losses resulting from changes in fair values of
assets/liabilities such as changes in the fair value of intangible assets and property, plant and equipment ;
changes on the revaluation of equity investments; actuarial gains and losses on defined benefit plans and gains
and losses from translating the financial statements of a foreign operation. The statement was then retitled as
‘Statement of Comprehensive Income’.
Comprehensive Income – It recognizes the gains and losses, both realized and unrealized, that have
increased or decreased the owners’ equity in the business. Such gains and losses arise, for example, from the
revaluation of non-current assets and from other items e.g. financial instruments and employee benefits, which
referred to as ‘other comprehensive income’.
IAS 1 gives options on how to report other comprehensive income. It can be a separate statement or as an
extension of the statement of income.
Sales 345,000,000
Cost of Sales 293,422,500
Gross Profit 51,577,500
In the given example above, there is a revaluation gain on the freehold land which needs to be added to the
profit on ordinary activities for the year in order to arrive at the comprehensive income.
The statement of changes in equity is a primary statement and is required to be presented with the same
importance as the other primary statements. This statement is designed to illustrate the following:
• Prior period adjustments. The effect of any prior period adjustments is shown by adjusting the retained
earnings figure brought forward.
• Capital transactions with the owners. This includes dividends and a reconciliation between the opening
and closing equity capital, reporting any change such as increases from bonus, rights or new cash issues
and decreases from any buyback of shares.
• Transfers from revaluation reserves. When a revalued asset is disposed of, any revaluation surplus may
be transferred directly to retained earnings, or it may be left in equity under the heading ‘revaluation surplus’.
• Comprehensive income. The comprehensive income for the period is disclosed.
MAC CORPORATION
Statement of Owner’s Equity
IAS 1 specifies which items are to be included on the face of the statement of financial position. These are
referred to as alpha headings (a) to (r) – for example (a) Property, plant, and equipment, (b) Investment property,
. . . , (g) Inventories, . . . , (k) Trade and other payables. It does not prescribe the order and presentation that
are to be followed. It would be acceptable to present the statement as assets fewer liabilities equaling equity,
or total assets equaling total equity and liabilities (Elliot & Elliot, 2017).
Current/Non-Current Classification
• The standard does not absolutely prescribe that enterprises need to split assets and liabilities into current
and non-current. However, it does state that this split would need to be done if the nature of the business
indicates that it is appropriate.
• If it is more relevant, a presentation could be based on liquidity and, if so, all assets and liabilities would be
presented broadly in order of liquidity. However, in almost all cases it would be appropriate to split items
into current and non-current and properly indicate the headings.
NON-CURRENT ASSETS
Property, Plant, and Equipment 150,525,000
CURRENT ASSETS
Inventory 25,875,000
Receivables 28,750,000
Cash on hand and in bank 4,600,000
Prepayments 2,300,000 61,525,000
TOTAL ASSETS 212,050,000
NON-CURRENT LIABILITIES
10% Loan (20X9) 63,250,000
CURRENT LIABILITIES
Payables 30,650,000
Provisions for Income Tax 2,875,000
Accruals 5,175,000
Bank Overdraft 6,325,000 45,025,000
EQUITY
Share Capital 16,500,000
Share Premium 750,000
Revaluation Reserve 20,000,000
Retained Earnings 66,525,000 103,775,000
TOTAL LIABILITIES AND EQUITY 212,050,000
Published accounts are supported by a number of explanatory notes. These have been expanded over time to
satisfy various user needs.
Accounting policies are chosen by a company as being the most appropriate to the company’s
circumstances and best able to produce a fair view. They typically disclose the accounting policies followed
for the basis of accounting, for example, that the accounts have been prepared on a historical cost basis
and how revenue, assets, and liabilities have been reported. The policies relating to assets and liabilities
will cover non-current and current items, for example, the depreciation method used for non-current assets
and the valuation method used for inventory such as FIFO or weighted average (Elliot & Elliot, 2017).
Useful lives, components, and residual amounts are reviewed annually. Such a review takes into
consideration the nature of the assets, their intended use and the evolution of technology. Depreciation
of property, plant, and equipment is allocated to the appropriate headings of expenses by function in the
statement of comprehensive income.
Property, Plant, and Equipment are shown on the balance sheet at their historical cost. Depreciation is
provided on components that have homogenous useful lives by using the straight-line method so as to
depreciate the initial cost down to the residual value over the estimated useful lives. The residual values
are 30% on head office, 20% of distribution centers for products stored at ambient temperature and nil
for all other asset types.
b. Notes giving greater detail of the make-up of items that appear in the statement of financial position
Each of the alpha headings may have additional detail disclosed by way of a note to the accounts. For
example, inventory of P25,875,000 in the statement of financial position may have a note of its detailed
make-up as follows:
Raw Materials 11,225,000
Work in Process 1,500,000
Finished Goods 13,150,000
25,875,000
Accumulated Depreciation
As at 01/01/20X3 2,300,000 3,450,000 9,200,000 14,950,000
Charge for the year 1,150,000 1,150,000 2,875,000 5,175,000
As at 12/31/20X3 3,450,000 4,600,000 12,075,000 20,125,000
Net book value
As at 12/31/20X3 77,500,000 54,050,000 10,350,000 8,625,000 150,525,000
As at 12/31/20X2 57,500 55,200,000 11,500,000 11,500,000 135,700,000
These notes are intended to assist in predicting future cash flows. They give information on matters such
as:
• capital commitments that have been contracted for but not provided in the accounts;
• capital commitments that have been authorized but not contracted for;
• future commitments, e.g. share options that have been granted; and
• contingent liabilities e.g. guarantees given by the company in respect of overdraft facilities arranged by
subsidiary companies or customers.
In deciding upon disclosures, management has an obligation to consider whether the omission of the
information is material and could influence users who base their decisions on the financial statements. The
management decision would be influenced by the size or nature of the item and the characteristics of the
users. They are entitled to assume that the users have a reasonable knowledge of business and accounting
and a willingness to study the information with reasonable diligence (Elliot & Elliot, 2017).
An example is an information relating to staff. It is common for enterprises to provide a disclosure of the
average number of employees in the period or the number of employees at the end of the period. IAS 1
does not require this information but it is likely that many businesses would provide and categorize the
information, possibly following functions such as production, sales, and administration.
This shows a significant increase in staff numbers with reasons given within the report. However, the
annual report is not the only source of information – there might be separate employee reports and
information obtained during labor negotiations such as the ratio of short-term and long-term assets to
employee numbers, the capital–labor ratios and the average revenue and net profits per employee in
the company with inter-period and inter-firm comparisons. For example, in 2015 the reported profit after
tax of Company A is P143,500,000 with a staff of 93,800 compared to Company B which reported a
profit after tax of P3,819,000 with a staff of 200,966. Company B also reports revenue per employee
but there is no requirement to produce this figure and analysts would themselves need to calculate
these – and questions should then perhaps be raised as to whether differing rates might mean that
there are less customer satisfaction and the possibility of a fall with lower revenue or more employees.
The intention of prescribing formats is to report transactions identically but there are various reasons why some
differ. For example, in computing the cost of sales: (a) how inventory is valued, (b) the choice of depreciation
policy, (c) management attitudes, and (d) the capability of the accounting system.
Different companies may assume different physical flows when calculating the cost of direct materials used
in production. This will affect the inventory valuation. One (1) company may assume a first-in-first-out (FIFO)
flow, where the cost of sales is charged for raw materials used in production as if the first items purchased
were the first items used in production. Another company may use an average basis. Illustrated below is
the effect on sales of using FIFO and weighted average assuming that the company has started trading on
January 1, 20X1 without any opening inventory and sold 40,000 items on March 31, 20X1 for P4 per item.
Inventory valued on a FIFO basis is P60,000 with the 20,000 items in inventory valued at P3 per item, on
the assumption that the purchases made on January 1, 20Xl and February 1, 20X1 were sold first. Invent ory
valued on an average basis is P40,000 with the 20,000 items in inventory valued at P2 per item on the
assumption that sales made in March cannot be matched with a specific item.
The effect on the gross profit percentage is shown above. This demonstrates that, even from a single
difference in accounting treatment, the gross profit for the same transaction could be materially different in
both absolute and percentage terms.
Losses might be predicted and measured at a diverse rate. For example, when measuring the probabilit y
of the net realizable value of inventory falling below the cost figure, the management decision will be
influenced by the optimism with which it views the future of the economy, the industry and the company.
There could also be other influences. For example, if bonuses are based on net income, there is an incentive
to overestimate the net realizable value; whereas, if management is preparing a company for a management
buy-out, there is an incentive to underestimate the net realizable value in order to minimize the net profit for
the period (Elliot & Elliot, 2017).
d. Differences arising from the capability of the accounting system to provide data
Accounting systems within companies differ and costs that are collected by one (1) company may well not
be collected by another company. For example, the apportionment of costs might be more detailed with
different proportions being allocated or apportioned (Elliot & Elliot, 2017).
Fair Presentation
IAS 1 “Presentation of Financial Statements” requires financial statements to give a fair presentation of the
financial position, financial performance and cash flows of an enterprise. In paragraph 17 it states that:
In virtually all circumstances, a fair presentation is achieved by compliance with applicable IFRSs. A fair
presentation also requires an entity to:
a) select and apply accounting policies in accordance with IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors;
b) present information, including accounting policies, in a manner that provides relevant, reliable, comparable
and understandable information; and
c) provide additional disclosures when compliance with the specific requirements in IFRSs is insufficient to
enable users to understand the impact of particular transactions, other events and conditions on the entity’s
financial position and financial performance.
IAS 7 ‘Statement of Cash Flows’ explains the changes that have occurred in a number of liquid assets easily
accessible – these are defined as cash + cash equivalents.
During 1991, Professor John Arnold wrote in a report by the ICAEW Research Board and ICAS Researc h
Advisory Committee - The Future Shape of Financial Reports: “little attention is paid to the reporting entity’s
cash or liquidity position. Cash is the lifeblood of every business entity. The report . . . advocates that companies
should provide a cash flow statement . . . preferably using the direct method.”
Statement of cash flows is now one of the primary financial statements and as important as statements of
comprehensive income: The emphasis on cash flows, and the emergence of the statement of cash flows as an
important financial report, does not mean that operating cash flows are a substitute for, or are more important
than, net income. In order to analyze financial statements correctly, we need to consider both operating cash
flows and net income.
They are now primary financial statements because the financial viability and survival prospects of any
organization rest on the ability to generate positive operating cash flows. These are necessary in order to be
able to pay the interest on loans and repay the loans, finance capital expenditure to maintain or expand
operating capacity, and reward the investors with an acceptable dividend policy. If there is still a positive cash
flow after this, it will help to reduce the need for additional external loans or equity funding (Elliot & Elliot, 2017).
The following extract from Heath and Rosenfield’s article on solvency is a useful conclusion to our analysis of
the benefits of cash flow statements, emphasizing that they also provide a basis for predicting future
performance: Solvency is a money or cash phenomenon. A solvent company is one with adequate cash to pay
its debts; an insolvent company is one with inadequate cash . . . Any information that provides insight into the
amounts, timings, and certainty of a company’s future cash receipts and payments is useful in evaluating
solvency. Statements of past cash receipts and payments are useful for the same basic reason that statements
of comprehensive income are useful in evaluating profitability: both provide a basis for predicting future
performance (Elliot & Elliot, 2017).
IAS 7 Format
The cash flows are analyzed under three (3) standard headings to explain the net increase/decrease in cash
and cash equivalents and the effect on the opening amount of cash and cash equivalents. The headings are:
Net cash generated by operating activities; Cash flows from investing activities; and Cash flows from financing
activities.
• Cash flows generated from operations – The first section of the cash flow statement illustrates the cash
received and used during normal operating activities. This section details the changes in the ledger account
balances for your current assets and current liabilities. These accounts are your accounts payable, accounts
receivable, prepaid insurance and unearned revenues. When you sell products or services, that activity is
reported here.
• Cash flows from investing activities – The second section is dedicated to investment activity. All of a
company's investments are listed under this category. Any purchase or sale of property, equipment, and
plants also qualify under the investment section. The ledger accounts to review for this section include the
long-term investments account, vehicles, capital equipment accounts, land, and buildings. If you run a cafe
or restaurant, buying a new grill or oven would qualify under this section. Report any equipment you buy for
your regular business operations here.
• Cash flows from financing activities – The third section of the cash flow statement lists the information
on the company's financing activities. Financing activities include purchases of bonds and stock as well as
dividend payments. Some of the applicable ledger accounts include your capital equipment and paid-in
capital accounts, notes and bonds payable, stock and retained earnings.
In the quote from The Future Shape of Financial Reports above, reference was made to the direct method.
This preference was expressed because there are two methods, both of which are permitted by IAS 7.
• Direct Method – reports cash inflows and outflows directly, starting with the major categories of gross cash
receipts and payments. This means that cash flows such as receipts from customers and payments to
suppliers are stated separately within the operating activities.
The following shows the statement of cash flows for Mac Ramos for the period ended March 31, 20X4.
NOTES:
(1) Cash received from customers (2) Cash paid to suppliers and employees
• Indirect Method – starts with the profit before tax and then adjusts this figure for noncash items such as
depreciation and changes in working capital.
Depreciation 102,000
Profit on sale of plant (13,000)
Adjustments for changes in working capital:
Increase in trade receivables (260,000)
Increase in inventories (900,000)
Decrease in trade payables (140,000)
Interest expense (added back) 20,000
Cash generated from operations 309,000
The direct method demonstrates more of the qualities of a true cash flow statement because it provides more
information about the sources and uses of cash. This information is not available elsewhere and helps in the
estimation of future cash flows.
The principal advantage of the direct method is that it shows operating cash receipts and payments. Knowledge
of the specific sources of cash receipts and the purposes for which cash payments were made in past periods
may be useful in assessing future cash flows. Disclosure of cash from customers could provide additional
information about an entity’s ability to convert revenues to cash.
The principal advantage of the indirect method is that it highlights the differences between operating profit and
net cash flow from operating activities to provide a measure of the quality of income. Many users of financial
statements believe that such reconciliation is essential to give an indication of the quality of the reporting entity’s
earnings. Some investors and creditors assess future cash flows by estimating future income and then allowing
for accruals adjustments, thus information about past accruals adjustments may be useful to help estimate
future adjustments.
Cash Equivalents
Cash equivalents are short-term, highly liquid investments which are readily convertible into known amounts of
cash and which are subject to an insignificant risk of changes in value (Elliot & Elliot, 2017).
Near-cash items are normally those that are within three (3) months of maturity at the date of acquisition.
Investments falling outside this definition are reported under the heading of ‘investing activities’. In view of the
variety of cash management practices and banking arrangements around the world and in order to comply with
IAS 1 Presentation of Financial Statements, an entity discloses the policy which it adopts in determining the
composition of cash and cash equivalents.
The following are the steps explaining how to prepare a statement of cash flows.
STEP 1. Calculate the differences in the statements of financial position and decide whether to report under
operating, investing or financing activities or as a cash equivalent.
Statements of Financial Position of Mac Ramos as at March 31, 20X3 and March 31, 20X4
Current Assets
Inventory 800,000 1,700,000 900,000 Operating
Trade Receivables 640,000 900,000 260,000 Operating
Securities maturing less - 20,000 20,000 Cash Equivalent
than 3 months at
acquisition
Cash 80,000 10,000 70,000 Cash Equivalent
1,520,000 2,630,000
Current Liabilities
Trade Payables 540,000 400,000 140,000 Operating
Taxation 190,000 170,000 20,000 Operating
Overdraft 8,000 78,000 70,000 Cash Equivalent
738,000 648,000
Net Current Assets 782,000 1,982,000
2,850,000 4,280,000
Share Capital 1,300,000 1,400,000 100,000 Financing
Share Premium A/C 200,000 400,000 200,000 Financing
Retained Earnings 1,150,000 2,650,000 1,150,000 2,950,000
Profit for year - 1,180,000
10% Loan 20X7 200,000 150,000 50,000 Financing
2,850,000 4,280,000
STEP 2. Identify any item in the statement of income for the year ended March 31, 20X4 after profit before
interest and tax (PBIT) to be entered under operating, investing or financing activities.
Sales 12,000,000
Cost of Sales 10,000,000
Gross Profit 2,000,000
Distribution Costs 300,000
Administrative Expenses 180,000 480,000
PBIT 1,520,000
Interest Expense (20,000) Operating
Profit before Tax 1,500,000 Operating
Income Tax Expense (200,000) Operating
Profit after Tax 1,300,000
Dividend Paid (120,000) Financing
Retained earnings for the year 1,180,000
STEP 3. Refer to the PPE schedule to identify any acquisitions, disposals, and depreciation charges that affect
the cash flows. The schedule showed:
Cost
As at March 31, 20X3 2,520,000
Additions (a) 560,000
Disposal (c) (320,000)
As at March 31, 20X4 2,760,000
Accumulated Depreciation
As at March 31, 20X3 452,000
Charge for year (b) 102,000
Disposal (c) (92,000)
As at March 31, 20X4 462,000
NBV as at March 31, 20X4 2,298,000
NBV as at March 31, 20X3 2,068,000
The cash flow items entered into the statement of cash flows in accordance with IAS 7
Interest paid, interest and dividends received could be classified either as operating cash flows or as financing
(for interest paid) and investing cash flows (for receipts). Dividends paid could be presented either as financing
cash flows or as operating cash flows. However, it is a requirement that whichever presentation is adopted by
an enterprise should be consistently applied from year to year (Elliot & Elliot, 2017).
References
Elliot, B., & Elliot, J. (2017). Financial accounting and reporting: Eigteenth edition. United Kingdom, Harlow,
United Kingdom: Pearson Education Limited.
Weygandt, J. J., Keiso, D. D., & Kimmel, P. D. (2012). Financial accounting. United States of America: John
Wiley & Sons, Inc.