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*
This could be shown as an operating cash flow.
SESSION 30 IAS 7 STATEMENT OF CASH FLOWS
Accountancy Tuition Centre (International Holdings) Ltd 2008 3011
6.2 Indirect method
$ $
Cash flows from operating activities
Profit before taxation x
Adjustments for
Depreciation x
Investment income (x)
Interest expense x
____
Operating profit before working capital changes x
Increase in trade and other receivables (x)
Decrease in inventories x
Decrease in trade payables (x)
____
Cash generated from operations x
remainder as for the direct method
6.3 Notes to the statement of cash flows
(Direct and indirect methods)
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand and balances with banks, and
investments in money market instruments. Cash and cash equivalents included in the
statement of cash flows comprise the following amounts in the statement of financial
position.
2007 2006
$ $
Cash on hand and balances with banks x x
Short-term investments x x
____ ____
x x
____ ____
SESSION 30 IAS 7 STATEMENT OF CASH FLOWS
Accountancy Tuition Centre (International Holdings) Ltd 2008 3012
Worked example 3
Antipodean Entities Statement of Financial Position as at
2007 2006
$ $ $ $
Non-current assets
(at written down value)
Premises 37,000 38,000
Equipment 45,800 17,600
Motor vehicles 18,930 4,080
______
101,730
______
59,680
Investments 25,000 17,000
_______ ______
126,730 76,680
Current assets
Inventories 19,670 27,500
Trade receivables 11,960 14,410
Short-term investments 4,800 3,600
Cash and bank balances 700 1,800
______
37,130
______
47,310
_______ _______
Total assets 163,860 123,990
Capital and reserves 78,610 75,040
Non-current liabilities
Interest-bearing borrowings 25,000 28,000
Current liabilities
Trade payables 32,050 20,950
Bank overdraft 28,200
______
60,250
______
20,950
_______ _______
Total equity and liabilities 163,860 123,990
Profit for the year ended 31 December 2007 ($25,200) is after accounting for:
$
Depreciation
Premises 1,000
Equipment 3,000
Motor vehicles 3,000
Profit on disposal of equipment 430
Loss on disposal of motor vehicle 740
Interest expense 3,000
The written down value of the assets at date of disposal was $
Equipment 5,200
Motor vehicles 2,010
Interest accrued at 31 December 2007 is $400. The company has made a substantial
distribution out of capital during the year.
Required:
Prepare a statement of cash flows for the year ended 31 December 2007 in
accordance with IAS 7 Statement of Cash Flows.
SESSION 30 IAS 7 STATEMENT OF CASH FLOWS
Accountancy Tuition Centre (International Holdings) Ltd 2008 3013
Worked solution 3 Statement of cash flows
$ $
Cash flows from operating activities
Profit before taxation 25,200
Adjustments for
Depreciation 7,000
Net loss on disposals 310
Interest expense 3,000
______
Operating profit before working capital changes 35,510
Decrease in trade receivables 2,450
Decrease in inventories 7,830
Increase in trade payables $((32,050 400) 20,950) 10,700
______
Cash generated from operations 56,490
Interest paid $(3,000 400) (2,600)
______
Net cash from operating activities 53,890
Cash flows from investing activities
Purchase of long-term investments $(25,000 17,000) (8,000)
Purchase of equipment and cars
$(36,400 (W1) + 19,860 (W2)) (56,260)
Proceeds from sale of equipment and cars (W3) 6,900
______
Net cash used in investing activities (57,360)
Cash flows from financing activities
Capital repayment (21,630)
Borrowings repayment (3,000)
______
Net cash used in financing activities (24,630)
______
Net decrease in cash and cash equivalents (28,100)
Cash and cash equivalents at beginning of period $(3,600 + 1,800) 5,400
______
Cash and cash equivalents at end of period $(4,800 + 700 28,200) (22,700)
Commentary
It is been assumed that short-term investments are cash equivalents.
SESSION 30 IAS 7 STATEMENT OF CASH FLOWS
Accountancy Tuition Centre (International Holdings) Ltd 2008 3014
WORKINGS
(1) Equipment (WDV)
$ $
Bal b/d 17,600 Disposal 5,200
Depreciation 3,000
Additions () 36,400 Bal c/d 45,800
54,000 54,000
(2) Motor vehicles (WDV)
$ $
Bal b/d 4,080 Disposal 2,010
Depreciation 3,000
Additions () 19,860 Bal c/d 18,930
23,940 23,940
(3) Disposals
$ $
Equipment 5,200
Motor vehicle 2,010 Loss on disposal (vehicles) 740
Profit on disposal (equipment) 430 Proceeds () 6,900
7,640 7,640
SESSION 30 IAS 7 STATEMENT OF CASH FLOWS
Accountancy Tuition Centre (International Holdings) Ltd 2008 3015
Worked example 4
Alma has the following income statement for the year ended 31 December 2007 and
statement of financial position extracts at that date.
Income statement
$000
Revenue 2,880
Cost of sales (2,016)
_____
Gross profit 864
Expenses (288)
_____
Profit 576
Statement of financial position (extracts)
2007 2006
$000 $000
Current assets
Inventory 384 336
Trade receivables 622 564
Current liabilities
Trade payables 403 331
You are given the following information:
(1) Expenses include depreciation of $86,000, bad debts written off of $34,000
and employment costs of $101,000.
(2) During the year Alma disposed of some plant for $58,000 which had a net
book value of $43,000, the profit being netted off against expenses.
Required:
(a) Show how the net cash flows from operating activities would be
presented in the statement of cash flows using the direct method. (Ignore
taxation.)
(b) Prepare the note reconciling the operating profit to net cash flows from
operating activities.
Worked solution 4
(a) Cash-flows from operating activities
$000
Cash received from customers (W1) 2,788
Cash paid to suppliers and employees (1,992 (W2) + 183 (W4)) (2,175)
_____
Cash from operating activities 613
SESSION 30 IAS 7 STATEMENT OF CASH FLOWS
Accountancy Tuition Centre (International Holdings) Ltd 2008 3016
WORKINGS
(1) Trade receivables
$000
Bal b/d 564
Revenue 2,880
_____
3,444
$000
Bad debt 34
Cash (Balancing figure) 2,788
Bal c/d 622
_____
3,444
(2) Trade payables
$000
Cash (Balancing figure) 1,992
Bal c/d 403
_____
2,395
$000
Bal b/d 331
Purchases (W3) 2,064
_____
2,395
(3) $000
Opening inventory 336
Purchases (Balancing figure) 2,064
Closing inventory (384)
_____
Cost of sales 2,016
_____
(4) Other cash expenses:
$000
From income statement 288
Adjustments for non-cash items
Depreciation (86)
Bad debts (34)
Profit on disposal 15
___
183
(b) Reconciliation of operating profit to net cash flows from operating activities
$000
Profit 576
Depreciation 86
Profit on disposal (15)
Increase in inventory (384 336) (48)
Increase in receivables (622 564) (58)
Increase in payables (403 331) 72
___
613
SESSION 30 IAS 7 STATEMENT OF CASH FLOWS
Accountancy Tuition Centre (International Holdings) Ltd 2008 3017
Activity 1
Casino is a publicly listed company. Details of its statements of financial position as at
31 March 2008 and 2007 are shown below together with other relevant information:
Statements of financial position
31 March 2008 31 March 2007
$m $m $m $m
Non-current assets (note (i))
Property, plant and equipment 880 760
Intangible assets 400 510
1,280 1,270
Current assets
Inventory 350 420
Trade receivables 808 372
Interest receivable 5 3
Short term deposits 32 120
Bank 15 1,210 75 990
Total assets 2,490 2,260
Equity and liabilities
Ordinary shares of $1 each 300 200
Share premium 60
Revaluation surplus 112 45
Retained earnings 1,098 1,270 1,165 1,210
1,570 1,410
Non-current liabilities
12% Loan note 150
8% Convertible bond 160
Deferred tax 90 250 75 225
Current liabilities
Trade payables 530 515
Bank overdraft 125
Taxation 15 110
670 625
Total equity and liabilities 2,490 2,260
SESSION 30 IAS 7 STATEMENT OF CASH FLOWS
Accountancy Tuition Centre (International Holdings) Ltd 2008 3018
The following supporting information is available:
(i) Details relating to the non-current assets are:
Property, plant and equipment at:
31 March 2008 31 March 2007
Cost/ Carrying Cost/ Carrying
Valuation Depreciation value Valuation Depreciation value
$m $m $m $m $m $m
Land and buildings 600 12 588 500 80 420
Plant 440 148 292 445 105 340
880 760
Casino revalued the carrying value of its land and buildings by an increase of $70
million on 1 April 2007. On 31 March 2008 Casino transferred $3 million from the
revaluation surplus to retained earnings representing the realisation of the revaluation
surplus due to the depreciation of buildings.
During the year Casino acquired new plant at a cost of $60 million and sold some old
plant for $15 million at a loss of $12 million.
There were no acquisitions or disposals of intangible assets.
(ii) Statement of comprehensive income for the year to 31 March 2008 (extract):
$m $m
Operating loss (32)
Interest receivable 12
Finance costs (24)
Loss before tax (44)
Income tax repayment claim 14
Deferred tax charge (15) (1)
Loss for the period (45)
The finance costs are made up of:
Interest expenses (16)
Penalty cost for early redemption of 12% loan note (6)
Issue costs of 8% convertible bond (2)
(24)
(iii) The short term deposits meet the definition of cash equivalents.
(iv) Dividends of $25 million were paid during the year.
Required:
As far as the information permits, prepare a statement of cash flows for Casino
for the year to 31 March 2008 in accordance with IAS 7 Statement of Cash
Flows.
SESSION 30 IAS 7 STATEMENT OF CASH FLOWS
Accountancy Tuition Centre (International Holdings) Ltd 2008 3019
7 Additional disclosures
There are a number of extra disclosures which should be made in most cases
to support the statement of cash flow:
Analysis of cash and cash equivalents;
Major non cash transactions;
Cash and cash equivalents held by the group;
Reporting futures, options and swaps;
Voluntary disclosures.
7.1 Analysis of cash and cash equivalents
A note should be presented that reconciles amounts held as cash and cash
equivalents at the start and end of the period.
Illustration 3 Cash and cash equivalents
2007 2006 Change
$ $ $
Cash on hand 1,300 (1,300)
Bank overdraft (11,000) (11,000)
(11,000) (1,300) (12,300)
7.2 Major non cash transactions
Non cash transactions should be excluded from the statement of cash flows.
However some of these do have a major impact on investing and financing
activities and should be disclosed in a note.
Examples of such transactions could include:
the issue of shares in order to acquire assets;
the conversion of debt to equity;
the inception of significant lease arrangements.
In each case a brief description of the nature and purpose of the transaction
should be given.
7.3 Voluntary disclosures
The standard encourages the disclosure of other information which may be relevant
to users seeking to assess the financial health of a business. These are:
the amount of undrawn borrowings that are available and any
restrictions on their future use.
the amount of cash flows that represent increases in capacity rather
than maintenance of existing capacity.
SESSION 30 IAS 7 STATEMENT OF CASH FLOWS
Accountancy Tuition Centre (International Holdings) Ltd 2008 3020
the amount of cash flows from each major activity related to
interests in joint ventures which have been accounted for using
proportional consolidation.
a segment analysis of cash flows arising from each major activity.
This information should be presented by way of a note and could
appear as follows:
Cash flows Segment 1 Segment 2 Total
Operating activities x x X
Investing activities x x X
Financing activities x x X
___ ___ ___
x x X
___ ___ ___
Focus
You should now be able to:
explain the need for a statement of cash flows and assess the usefulness of
information given by the statement of cash flows;
prepare the statement of cash flows, including relevant notes, for an
individual company in accordance with IAS 7.
Commentary
Questions may specify the use of the direct or the indirect method.
SESSION 30 IAS 7 STATEMENT OF CASH FLOWS
Accountancy Tuition Centre (International Holdings) Ltd 2008 3021
Activity solution
Solution 1
Statement of Cash Flows Casino for the Year to 31 March 2008
$m $m
Cash inflows from operating activities
Operating loss (32)
Adjustments for:
Depreciation buildings (W1) 2
plant (W2) 81
intangibles (510 400) 110
Loss on disposal of plant (from question) 12
205
Operating profit before working capital changes 173
Decrease in inventory (420 350) 70
Increase in trade receivables (808 372) (436)
Increase in trade payables (530 515) 15
Cash generated from operations (178)
Interest paid (16)
Income tax paid (W3) (81)
Net cash outflow from operating activities (275)
Cash flows from investing activities
Purchase of land and buildings (W1) (100)
plant (W2) (60)
Sale of plant (W2) 15
Interest received (12 5 + 3) 10 (135)
Cash flows from financing activities
Issue of ordinary shares (100 + 60) 160
Issue of 8% convertible debt (160 2 issue costs) 158
Repayments of 12% loan (150 + 6 penalty) (156)
Dividends paid (25) 137
Net decrease in cash and cash equivalents (273)
Cash and cash equivalents at beginning of period (120 + 75) 195
Cash and cash equivalents at end of period (125 (32 +15)) (78)
Commentary
Interest and dividends received and paid may be shown as operating cash
flows or as investing or financing activities as appropriate.
SESSION 30 IAS 7 STATEMENT OF CASH FLOWS
Accountancy Tuition Centre (International Holdings) Ltd 2008 3022
WORKINGS (in $ million)
(1) Land and buildings (net book value)
$m $m
Bal b/d 420
Revaluation gain (see below) 70 Depreciation (12 (80 70)) 2
Additions () 100 Bal c/d 588
590 590
Commentary
Since there have been no disposals but accumulated depreciation is less than
in the previous year, it has been assumed that the revaluation has been
reflected through a write-back of $70m accumulated depreciation, leaving a
charge for the year of $2m.
Revaluation surplus
$m $m
Transfer to retained earnings 3 Bal b/d 45
Balance c/d 112 Revaluation gain () 70
115 115
(2) Plant (cost)
$m $m
Bal b/d 445 Disposal () 65
Additions (given) 60 Bal c/d 440
505 505
Plant disposals
$m $m
Cost (as above) 65 Proceeds 15
Depreciation () 38
Loss on disposal 12
65 65
SESSION 30 IAS 7 STATEMENT OF CASH FLOWS
Accountancy Tuition Centre (International Holdings) Ltd 2008 3023
Plant depreciation
$m $m
Disposal (as above) 38 Bal b/d 105
Bal c/d 148 Charge for the year () 81
186 65
(3) Taxation
$m $m
Tax paid 81 Bal b/d (110 + 75) 185
Bal c/d (15 + 90) 105 Net charge for the year 1
186 186
(4) Retained earnings
$m $m
Loss for period 45 Bal b/d 1,165
Dividends paid 25 Transfer from revaluation surplus 3
Bal c/d 1,098
1,168 1,168
Commentary
This retained earnings working is not required as part of the solution in this
case. However, some questions may require such a reconciliation of the
movement in retained earnings to find a missing figure, such as a transfer to
share capital in respect of a bonus issue of shares. It is therefore included as
a proof that all the movements in retained earnings balances have been
identified and dealt with.
SESSION 30 IAS 7 STATEMENT OF CASH FLOWS
Accountancy Tuition Centre (International Holdings) Ltd 2008 3024