6. Statements of Cash flow

Question 1

IAS 7 Statement of Cash Flows

Answer 1

An entity shall prepare a statement of cash flows and shall present it as an integral part of its financial
statements for each period for which financial statements are presented.

Question 2

Statement of Cash Flows

Answer 2

• Links profits with changes in assets and liabilities, and the effect on the cash flow of the company.
• Uses information from the accounting records to show an overall view of the money flowing in and out of a company during an accounting period.
• Concentrates on the liquidity of the business.

Question 3

Format of the SCF
(3 sections)

Answer 3

• Operating activities: main revenue-producing activities, together with the payment of interest and tax.
• Investing activities: acquisition and disposals of non-current assets and other investments to improve profitability, together with interest and dividends received.
• Financing activities: Receipts from the issue of new shares, payments to repay shares, changes in non-current borrowings, payments of dividends.

Question 4

Format of the SCF (cont.)

Answer 4

Each section of the statement lists the relevant cash flows for the period (inflows and outflows of cash and cash equivalents).

The statement concludes by showing the total cash movement in the period, reconciling it with the opening and closing cash and cash equivalents balances for the period.

Question 5

Cash equivalents

Answer 5

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 changes in value.

Question 6

2 methods of producing SCF

Answer 6

• Direct method: simply lists cash received and paid in order to calculate cash generated by operations.
• Indirect method: starts with the profit for the period and adjusts it.

The two methods only differ in the operating activities section.

Question 7

1. Operating activities (Indirect)

Answer 7

= Profit before tax
+ Depreciation charge for the year
+ Loss on Disposal / - Profit
- Dividends received
+ Finance costs
+ Decrease Inventories / - Increase
+ Decrease Receivables / - Increase
+ Increase Payables / - Decrease

= Cash generated by operations

-Interest paid in the period *
-Tax paid on income **

= Net cash from operating activities

Question 8

• Interest paid

Answer 8

= Finance charge
- Interest accruals

Question 9

** Tax paid during the year

Answer 9

= Tax liability beginning year
+ Tax charge for the year
- Tax liability end of year

Question 10

2. Cash flows from investing activities

Answer 10

-Purchase of PPE *
+ Proceeds on disposal of PPE
+ Interest received
+ Dividends received

= Net cash used in investing act

• PPE start year - Depreciation - Carrying amount PPE sold + Revaluations - PPE end = Additions (negative fig)

Difference in carrying amount between years (purchases) + Depreciation (as it was removed from the carrying amount previously) - Revaluations.

Question 11

3. Cash flows from Financing activities

Answer 11

+ Proceeds of share issued
+ New bank loans
- Bank loans repaid
- Dividends paid (during year)

= Net cash from financing activities

Question 12

End statement

Answer 12

+ Net cash from operating activities
+ Net cash used in investing (negative figure)
+ Net cash used from financing
= Net increase/decrease in cash and cash equivalents

+ Net cash beginning year
= Net cash end year (=bank balance)

Question 13

Profit/ loss disposal

Answer 13

-Remove profit on disposal (Operating activities)
+ Add proceeds sale (Investment activities)

Profit (Operating) = Proceeds sale - Carrying amount
Vs
Proceeds sale (Investing) = Carrying amount + Profit

Question 14

Direct method (Operating activities)

Answer 14

+ Cash received from sales
- Cash paid to suppliers and employees
= Cash generated by operations
- Interest paid
- Tax paid

Question 15

Interpreting SCF

Answer 15

• Look for positive cash flows from the operating activities section
• Make a comparison between the amount of profit and the amount of cash generated by operations. Identify reasons for differences (inventories, receivables, payables).
• Look at net cash from operating activities, if positive company has been able to meet its interest and tax obligations.
• Investing activities section, normally a link between this and an increase in loan/share capital.
• In financing activities, if increase in loan/ share capital, look where the money has been used.
• Look for dividends paid, the amount of net cash from operating activities should be sufficient for these (if not, dividends too high).
• The statement of cash flows, as a whole, links profit with changes in cash.