Chapter 13 IAS 7 Statement of Cash flows
Transcript of Chapter 13 IAS 7 Statement of Cash flows
F1 – Financial reporting CH13 – IAS 7 Statement of Cash
flows
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Chapter 13
IAS 7 Statement of Cash flows
Chapter learning objectives:
Lead Component Indicative syllabus content
B3. Apply financial
reporting standards
when preparing basic
financial statements
Apply financial reporting standards when
preparing a:
a. Statement of financial position
b. Statement of comprehensive income
c. Statement of changes in equity
d. Statement of cash flows
• IAS 1 — Presentation of
Financial Statements
• IAS 7 — Statement of
Cash Flows
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1. The importance of statements of cash flow
The statement of cash flow shows the inflows and outflows of cash for an entity during the
period.
The statement of cash flow adds another layer of information to support the statement of
profit or loss and the statement of financial position.
Profits are not equal to cash flows. As a result, it is essential to present a statement of cash
flow for users in order to base their decisions upon.
It enables an assessment of the liquidity of a business, its financial adaptability and the
utilisation of its cash resources.
Definitions
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Pro-forma
Pro-forma statement of cash flow the year end 31 December 20X9
Cash flow from operating activities
Profit before taxation
Adjustments for:
Depreciation
(Profit)/loss on disposal
Interest receivable/investment income
Finance costs
$
X
X
(X)/X
(X)
X
$
Operating profit before working capital changes
(Increase)/decrease in inventories
(Increase)/decrease in trade and other receivables
Increase/(decrease) in trade and other payables
X
(X)/X
(X)/X
(X)/X
Cash generated from operations
Interest paid
Tax paid
X
(X)
(X)
Net cash from operating activities X
Cash flow from investing activities
Purchase of property, plant and equipment
Purchase of investments
Proceeds from sale of property, plant and equipment
Proceeds from sale of investments
Interest received
Dividends received
(X)
(X)
X
X
X
X
Net cash from investing activities (X)
Cash flow from financing activities
Proceeds from issue of ordinary shares
Proceeds from issue of preference shares
Proceeds from long-term borrowings
Redemption of long-term borrowings
Dividends paid
X
X
X
(X)
(X)
Net cash from financing activities (X)
Cash flow from financing activities
Proceeds from issue of ordinary shares
Proceeds from issue of preference shares
Proceeds from long-term borrowings
Redemption of long-term borrowings
Dividends paid
X
X
X
(X)
(X)
Net cash from financing activities (X)
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Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
X/(X)
X/(X)
Cash and cash equivalents at end of period X/(X)
2. Cash flows from operating activities
Cash flow from operating activities include:
• cash generated from operations
• interest paid
• tax paid (excluded from your F1 knowledge requirements)
Cash generated from operations
• Cash generated from operations includes all day-to-day operating cash flow.
• Numerous cash flows contribute to this figure, for e.g. cash from sales, purchases,
wage payments, receipts from receivables.
The indirect method
(1) Start with profit before tax (PBT) X
(2) Strip out non-cash items from PBT
Depreciation/amortisation/impairments
(Profit)/Loss on disposal
X
(X)/X
(3) Strip out non-operating items from PBT
Interest receivable/investment income
Finance costs
(X)
X
Operating profit before working capital charges X
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(4) Deal with working capital movements
(Increase)/decrease in inventory
(Increase)/decrease in trade receivables
Increase/(decrease) in trade payables
(X)/X
(X)/X
(X)/X
Cash generated from operations X
The direct method
$
Cash receipts from customers
Cash payments to suppliers
Cash payments to employees
Cash payments to expenses
X
(X)
(X)
(X)
Cash generated from operations X/(X)
Comparison of the methods
Test Your Understanding 1: Indirect method
The following information is available for an entity Splatter for the year ended 30 September 20X1:
Statement of Profit or Loss
$000
Revenue 450
Cost of sales (270)
Gross profit 180
Distribution costs (30)
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Administrative expenses (8)
Profit from operations 142
Finance costs (20)
Profit before tax 122
Income tax expense (30)
Profit after tax 92
The total expenses of i.e. cost of sales $270 + distribution costs $30 + administrative expenses $8 can be
analysed as follows:
$000
Wages 75
Auditors remuneration 15
Depreciation 80
Cost of materials used 200
Profit on disposal of non-current assets (50)
Rental income (12)
308
30/09/X1
$000
30/09/X0
$000
Inventories 50 25
Receivables 45 40
Payables (30) (18)
Required:
Produce the section of the statement of cash flows for cash generated from operations using the indirect
method for the year ended 30 September 20X1 in compliance with IAS 7 Statement of Cash Flows.
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Test Your Understanding 2: Direct method
The following information is available for an entity Splatter for the year ended 30 September 20X1:
Statement of Profit or Loss
$000
Revenue 450
Cost of sales (270)
Gross profit 180
Distribution costs (30)
Administrative expenses (8)
Profit from operations 142
Finance costs (20)
Profit before tax 122
Income tax expense (30)
Profit after tax 92
The total expenses of i.e. cost of sales $270 + distribution costs $30 + administrative expenses $8 can be
analysed as follows:
$000
Wages 75
Auditors remuneration 15
Depreciation 80
Cost of materials used 200
Profit on disposal of non-current assets (50)
Rental income (12)
308
30/09/X1 30/09/X0
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$000 $000
Inventories 50 25
Receivables 45 40
Payables (30) (18)
Required:
Using the information for Splatter in the previous illustration, produce the section of the statement of
cash flows for cash generated from operations using the direct method for the year ended 30 September
20X1 in compliance with IAS 7 Statement of Cash Flows.
Other cash flows from operating activities
Other cash flow that is considered as cash flow from operating activities may include:
• Interest paid.
• Income tax paid (accounting for this is not examinable).
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Test Your Understanding 3: Interest paid
Below are extracts from the financial statements of an entity Pincer:
Statement of profit or loss and other comprehensive income for the year ended 31 March 20X1
$m
Profit from operations 140
Interest receivable 80
Finance cost (55)
Profit before tax 165
Statement of financial position 31 March 20X1 31 March 20X0
$m $m
Current liabilities
Interest payable 244 311
Required:
What is the interest paid shown under cash flows from operating activities for Pincer during the year
ended 31 March 20X1?
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3. Cash flows from investing activities
Cash inflows from investing activities may include:
• interest received
• dividends received
• proceeds from the sale of non-current assets
Cash outflows from investing activities may include:
• purchases of non-current assets
Interest/Dividends received
Cash paid to acquire non-current assets
The cash flow for non-current assets should be calculated using the following proforma:
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Cash received on disposal of non-current assets
You may have to calculate the proceeds by working backwards from the profit or loss on
disposal as follows:
Test Your Understanding 4: Cash from investing activities
Below are extracts from the financial statements of an entity Pincer:
Statement of profit or loss and other comprehensive income for the year ended 31 March 20X1:
$m
Profit from operations 140
Statements of financial position 31 March 20X1 31 March 20X0
$m $m
Assets
Non-current assets
Property, plant and equipment 1,050 650
Equity
Capital and reserves
Share capital 30 25
Share premium 450 380
Revaluation reserve 260 0
Retained profit 115 30
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Additional information:
Profit from operations is after charging depreciation on the property, plant and equipment of $22 million.
The revaluation reserve relates wholly to property, plant and equipment.
During the year ended 31 March 20X1, plant and machinery costing $1,464 million, which had a carrying amount
of $424 million, was sold for $250 million.
Required:
What is the amount paid for purchases of property, plant and equipment shown under cash flows from
investing activities for Pincer during the year ended 31 March 20X1?
4. Cash flows from financing activities
Proceeds from new share issues
The proceeds from share issues will be calculated by looking at the movement on the
share capital and share premium accounts in the SOFP.
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Proceeds/repayments from loans and debentures
The proceeds/repayment of loans/debentures will be calculated by looking at the
movements on the loan/debenture accounts in the SOFP.
The dividend payment can either be found in the SOCIE or by looking at the movement on
the retained earnings account as follows:
Test Your Understanding 5: Cash flow from financing activities
Below are extracts from the financial statements of an entity Pincer:
Statement of profit or loss and other comprehensive income for the year ended 31 March 20X1
$m
Profit for the year 140
Statements of financial position 31 March 20X1 31 March 20X0
$m $m
Equity
Capital and reserves
Share capital 30 25
Share premium 450 380
Revaluation reserve 260 0
Retained profit 115 30
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Required:
What are the amounts for:
• Cash received from issues of shares, and
• Dividends paid
shown under cash flows from financing activities for Pincer during the year ended 31 March 20X1?
5. Solutions to Test Your Understanding
Test Your Understanding 1: Indirect method
$000
Cash flows from operating activities
Profit before tax 122
Depreciation 80
Profit on disposal of non-current assets (50)
Finance costs 20
Operating profit before working capital changes 172
Increase in inventories (50 – 25) (25)
Increase in trade receivables (45 – 40) (5)
Increase in trade payables (30 – 18) 12
Cash generated from operations 154
Explanation:
Both inventory and receivable balances are increasing, hence a reduction in cash, i.e. the more money tied up
in inventory or the more money owed by receivables the less cash we have available in the bank. Therefore,
this is shown as a decrease in the statement.
Payables also increase but this means we have an increase in cash, i.e. the more money we owe suppliers, the
longer we are keeping the cash in the bank.
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Test Your Understanding 2: Direct method
Splatter Statement of cash flows for the year ended 30 September 20X1
$000
Cash flows from operating activities
Cash receipts from customers (W1) 445
Rental income 12
Cash payments to suppliers (W2) (213)
Cash payments to employees (75)
Cash payments for expenses (15)
Cash generated from operations 161
Working 1:
Cash receipts from customers
$000
Opening receivables 40
Sales revenue 450
Closing receivables (45)
Cash received from customers 445
Working 2:
Cash payment to suppliers
$000
Opening inventory 25
Purchases (bal. fig.) 225
Closing inventory (50)
Cost of materials used 200
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$000
Opening payables 18
Purchases (above) 225
Closing payables (30)
Payments to suppliers 213
Test Your Understanding 3: Interest paid
Interest paid is $122m.
Interest paid ($m)
Bank (bal. fig.) 122 Bal. b/d 311
Bal. c/d (SOFP) 244 Profit or loss (finance costs) 55
366 366
Test Your Understanding 4: Cash from investing activities
Purchases of property, plant and equipment = $586m.
Property, Plant and Equipment ($m)
Bal. b/d 650 Depreciation 22
Bank (bal. fig.) 586 Disposal 424
Revaluation 260 Bal. c/d 1,050
1,496 1,496
Test Your Understanding 5: Cash flow from financing activities
Issue of shares = $75m
Dividend paid = ($55m)
Share capital and share premium ($m)
SC balance b/d 30 SC balance b/d 25
SP balance c/d 450 SP balance b/d 380
Cash from share issue (β) 75
480 480