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CASHFLOW STATEMENTS

A cash flow statement may easily be understood as a summary of the cashbook set out using standard
formats. The standard formats require the cash movements as per cashbook to be summarised in the cash
flow statement in 3 categories:
1) Operating activities
2) Investing activities
3) Financing activities

Suppose a cashbook was provided as follows
Cashbook (Cash and Bank
Sh Sh
Balance b/ d a
Receipts from debtors b
Receipts from cash sales c
Proceeds on disposal of fixed assets f
Loans obtained h
Payments to suppliers d
Payment for expenses e
Purchase of fixed assets g
Loans repaid I
Balance c/ d j
XX XX

The cash flow statement would be drawn up as follows:

Cash flow statement for the year ended (date)
Operating Activities Sh Sh
Receipts from debtors
Receipts from cash sales
Payments to suppliers
Payments for expenses
Net cash in flow from operating activities
b
c
(d)
(e)




XX
Investing Activities
Proceeds on disposal of fixed assets
Purchase of fixed assets
Net cash flow from investing activities
f
(g)


XX
Financing Activities
Loans obtained
Loans repaid
Net cash flow from financing activities
Net cash flow
Add cash b/ d
h
(i)





XX
XX
a _
Cash c/ f j _

It can be seen from the above illustration that the cash flow statement is just a rearrangement of cashbook
entries. However, the classifications are rigid; each item can only belong in one category. This classification
must be fully understood. The items falling into each category are governed by paragraphs 10 17 of IAS7.
These are listed below:
An enterprise presents its cash flows from operating, investing and financing activities in a manner which is
most appropriate to its business. Classification by activity provides information that allows users to assess the
impact of those activities on the financial position of the enterprise and the amount of its cash and cash
equivalents. This information may also be used to evaluate the relationships among those activities.
A single transaction may include cash flows that are classified differently. For example, when the cash
repayment of a loan includes both interest and capital, the interest element may be classified as an operating
activity and the capital element is classified as a financing activity.
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1) Operating activities
The amount of cash flows arising from operating activities is a key indicator of the extent to which the
operations of the enterprise have generated sufficient cash flows to repay loans, maintain the operating
capability of the enterprise, pay dividends and make new investments without recourse to external sources of
financing. Information about the specific components of historical operating cash flows is useful, in
conjunction with other information, in forecasting future operating cash flows.

Cash flows from operating activities are primarily derived from the principal revenue-producing activities of
the enterprise. Therefore, they generally result from the transactions and other events that enter into the
determination of net profit or loss. Examples of cash flows from operating activities are:

(a) Cash receipts from the sale of goods and the rendering of services;
(b) Cash receipts from royalties, fees, commissions and other revenue;
(c) Cash payments to suppliers for goods and services;
(d) Cash payments to and on behalf of employees;
(e) Cash receipts and cash payments of an insurance enterprise for premiums and claims, annuities and
other policy benefits;
(f) Cash payments or refunds of income taxes unless they can be specifically identified with financing
and investing activities; and
(g) Cash receipts and payments from contracts held for dealing or trading purposes.

Some transactions, such as the sale of an item of plant, may give rise to a gain or loss which is included in
the determination of net profit or loss. However, the cash flows relating to such transactions are cash
flows from investing activities.

An enterprise may hold securities and loans for dealing or trading purposes, in which case they are similar
to inventory acquired specifically for resale. Therefore, cash flows arising from the purchase and sale of
dealing or trading securities are classified as operating activities. Similarly, cash advances and loans made
by financial institutions are usually classified as operating activities since they relate to the main revenue-
producing activity of that enterprise.

2) Investing Activities

The separate disclosure of cash flows arising from investing activities is important because the cash flows
represent the extent to which expenditures have been made for resources intended to generate future income
and cash flows. Examples of cash flows arising from investing activities are:

(a) Cash payments to acquire property, plant and equipment, intangibles and other long-term assets.
These payments include those relating to capitalised development costs and self-constructed
property, plant and equipment;
(b) Cash receipts from sales of property, plant and equipment, tangibles and other long-term assets;
(c) Cash payments to acquire equity or debt instruments of other enterprises and interests in joint
ventures (other than payments for those instruments considered to be cash equivalents and those
held for dealing or trading purposes);
(d) Cash receipts from sales of equity or debt instruments of other enterprises and interests in joint
ventures (other than receipts for those instruments considered to be cash equivalents and those held
for dealing or trading purposes);
(e) Cash advances and loans made to other parties (other than advance and loans made by a financial
institution);
(f) cash receipts from the repayment of advances and loans made to other parties (other than advances
and loans of a financial institution);
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(g) Cash payments for future contracts, forward contracts, option contracts and swap contracts except
when the contracts are held for dealing or trading purposes, or the payments are classified as
financing activities; and
(h) Cash receipts from future contracts, forward contracts, option contracts and swap contracts except
when the contracts are held for dealing or trading purposes, or the receipts are classified as financing
activities.
When a contract is accounted for as a hedge of an identifiable position , the cash flows of the contracts
are classified in the same manner as the cash flows of the position being hedged.
3) Financing Activities

The separate disclosure of cash flows arising from financing activities is important because it is useful in
predicting claims on future cash flows by providers of capital to the enterprise. Examples of cash flows
arising from financing activities are;

(a) Cash proceeds from issuing shares or other equity instruments;
(b) Cash payments to owners to acquire or redeem the enterprises shares
(c) Cash proceeds from issuing debentures, loans, notes, bonds mortgages and other short or long-term
borrowings;
(d) Cash repayments of amounts borrowed; and
(e) Cash payments by a lessee for the reduction of the outstanding liability relating to a finance lease.

The first category (operating activity) cash flows may be arrived at by two methods;

(a) The direct method whereby major classes of gross cash receipts and gross cash payments are disclosed;
or
(b) The indirect method whereby the net profit or loss is adjusted for the effects of transactions of a non-
cash nature and accruals/ prepayments

[The examiner prefers the indirect method as less raw data needs to be supplied to the candidate and a
more rigorous understanding of cash flow statements is expected from the candidate]

Even though both methods lead to the same end results, the direct method is more recommended as
it provides more information to the user of the financial statements.


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Format for cash flow statement (using direct cash flow method
Operating activities Sh Sh
Cash receipts from customers X
Cash paid to suppliers and employees (X)
Cash generated from operations X
Interest paid/ received (X)
Income taxes paid (X)
Net cash flow from operating activities X
Investing activities
Purchase of property plant and equipment (X)
Proceeds on disposal of equipment X_
Net cash flow from investing activities X
Financing activities
Proceeds from issuance of share capital X
Redemption and purchase of share capital (X)
Proceeds from long- term borrowings X
Repayments on long-term borrowings (X)
Payments on finance lease obligations (X)
Dividends paid (X)
Net cash flow from financing activities X_
Net change in cash and cash equivalents X
Cash and cash equivalents b/ f X_
Cash and cash equivalents c/ f XX
Format for cash flow statements (using indirect cash flow method)
Sh Sh
Net profit before tax X
Adjustment for items not involving movement of cash
Depreciation X
Profit and losses on fixed asset disposals X_
X
Adjustment for working capital items
(Increase)/ Decrease in stocks X
(Increase)/ Decrease in debtors X
(Decrease)/ Increase in creditors X.
Cash generated from operations X
Tax paid (X)
Net cash inflow from operating activities X
Investing Activities
Purchase of property plant and equipment (X)
Proceeds on disposal of equipment X_
Net cash flow from investing activities X
Financing Activities
Proceeds from issuance of share capital X
Redemptions and purchase of share capital (X)
Proceeds from long-term borrowings X
Repayments on long-term borrowings (X)
Payments on finance lease obligations (X)
Dividends paid (X)
Net cash flow from financing activities X_
Net change in cash and cash equivalents X
Cash and cash equivalents b/ f X_
Cash and cash equivalents c/ f XX
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Practise Exercise 1
The balance sheet of Bidhaa Ltd for the years ended 31 December, 2010 and 31 December 2011 were
summarised and shown below:

2011 2010
Fixed assets (at written down values) shs shs
Premises 10,000 10,000
Fixtures 17,000 11,000
Vehicles 12,500 8,000

Current assets
Stock 17,000 14,000
Debtors 8,000 6,000
Bank and cash 23,000 29,500
87,500 78,500
Ordinary shares of shs1 per share 60,000 50,000
Reserves
Profit and Loss 5,000 4,000
Creditors due in less than one year
Trade creditors 4,000 2,500
Taxation 1,500 1,000
Proposed dividends 2,000 1,000
Creditors due in more than one year
10% debentures 15,000 20,000
87,500 78,500

Note: The 10% debentures were redeemed and cancelled on 31 December 2011

The profit and Loss account for the year ended 31 December 2011 was summarised thus:

shs shs
Turnover 36,250
Cost of sales (21,750)
Gross profit 14,500
Profit on disposal of vehicles 700
15,200
Less:
Wages and salaries 1,600
Other (cash) expenses 3,600
Depreciation 3,500
Debenture interest 2,000
10,700
Profit before tax 4,500
Less: Tax 1,500
Profit after tax 3,000
Less: Proposed dividends (2,000)
Retained profit: for year 1,000
: Brought forward 4,000
: Carried forward 5,000


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Separate bank and cash accounts for the year ended 31 December 2011 were summarised as shown below:

Bank
shs

Cash

shs

Bank
shs

Cash

shs
Opening balance b/ d
Receipts from debtors
Receipts from fixed asset
disposals vehicles
Ordinary share issue
Transfer from cash
25,300
30,500

1,200
10,000
4,650





_
4,200
3,750

500
-
-





_
Payment to trade creditors
Wages, salaries
Other expenses
Debenture interest
Fixed assets
fixtures
vehicles
Tax paid
Dividends paid
10% debentures:
redeemed
Transfer to bank
Closing balances c/ d
23,250
700
2,400
2,000

7,000
8,000
1,000
1,000
5,000

21,300
-
900
1,200


-
-



4,650
1,700
71,650 8,450 71,650 8,450
Opening balances b/ d 21,300 1700

Suggested Solution (refer only to cash book for 1
st
solution)

Bidhaa Ltd
Cash flow statement for the eyar ended 31 December 2011 (Direct Method)
Operating activities shs shs
Cash receipts from customers (30500 + 3750) 34,250
Cash paid to suppliers and employees (23250 + 700 + 900) (24,850)
Other cash payments (2400 + 1200) (3,600)
Cash generated from operations 5,800
Tax paid (1,000)
Debenture interest paid (2,000)
Net cash inflow from operating activities 2,800
Investing activities
Payments to acquire fixtures (7,000)
Payments to acquire vehicles (8,000)
Proceeds on disposal of vehicles 1,700
Net cash outflow from investing activities (13,300)
Financing Activities
Ordinary share issue 10,000
Redemption of debentures (5,000)
Dividends paid (1,000)
4,000
Net change in cash and cash equivalents (6,500)
Cash and cash equivalents b/ f (25,300 + 4,200) 29,500_
Cash and cash equivalents c/ f (21,300 + 1,700) 23,000

Note:
1) When all cash movements have been brought in, the opening cash is added thereon to generate the
closing cash
2) Under the direct method, the cash flow statement has been drawn up from the cash book only.
3) The term cash and cash equivalents refers to:
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Cash in hand
Cash at bank
Short-term investments
For the solution using the indirect method, no reference to the cash book is made. Information provided to
enable preparation of the cash flow statement under this method consists:
1) Beginning of the year balance sheet
2) End of year balance sheet
3) A profit and loss account for the year
4) Additional information
Thus accounts need reconstruction to obtain required values for the cash flow statement to be drawn up.

Bidhaa Ltd
Cash flow statement for the year ended 31 December 2011 (Indirect method)
Operating activities shs shs
Net profit before tax 4,500
Adjustment for items not involving movement of funds
Depreciation 3,500
Profit on disposal of vehicles (700)
7,300
Adjustment for working capital items
Increase in stock (3,000)
Increase in debtors (2,000)
Increase in creditors (trade) 1,500
Cash generated from operations 3,800
Taxation paid (1,000)
Net cash inflow from operating activities 2,800
Investing activities
Payments to acquire fixtures (7,000)
Payments to acquire vehicles (8,000)
Proceeds on disposal of vehicles 1,700
Net cash outflow frominvesting activities (13,300)
Financing activities
Ordinary share issue 10,000
Redemption of debentures (5,000)
Dividends paid (1,000)
4,000
Net change in cash and cash equivalents (6,500)
Cash and cash equivalents b/ f (25,300 + 4,200) 29,500 _
Cash and cash equivalents c/ f (21,300 + 1,700) 23,000 _