CH 17. Group statements of cash flows

Question 1

What are the objectives of a cash flow statement?

Answer 1

IAS 7 Statement of Cash Flows

• The objective of a statement of cash flows is to provide information on an entity’s changes in cash and cash equivalents during the period.
• The statement of financial position and statement of profit or loss are prepared on an accruals basis and do not show how the business has generated and used cash in the reporting period.
• The statement of profit or loss may show profits even though the company is suffering severe cash flow problems.
• A statement of cash flows is therefore important because it enables users of the financial statements to assess the liquidity, solvency and financial adaptability of the business.

Question 2

What is the proforma for the Indirect Method of cash flow statement?

Answer 2

Question 3

What is the proforma for the Direct method of cash flow?

Answer 3

Question 4

What are the 3 main headings of a cash flow statement?

Answer 4

• IAS 7 does not prescribe a specific format for the statement of cash flows, although it requires that cash flows are classified under one of three headings:
• Cash flows from operating activities, defined as the entity’s principal revenue-earning activities and other activities that do not fall under the next two headings
• Cash flows from investing activities, defined as the acquisition and disposal of long-term assets and other investments (excluding cash equivalents)
• Cash flows from financing activities, defined as activities that change the size and composition of the entity’s equity and borrowings.

Question 5

Define Cash and Cash Equivalents?

Answer 5

The statement of cash flows reconciles cash and cash equivalents from the start of the reporting period to the end of the reporting period.

• Cash equivalents are

‘short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value’

IAS 7 does not define ‘readily convertible’ but notes that investment would qualify as a cash equivalent if it had a short maturity of ‘three months or less from the date of acquisition’

• Equity investments are generally excluded from being included in cash equivalents because there is a significant risk of a change in value.
• IAS 7 makes an exception for preference shares with a short period to maturity and specified redemption date.

Question 6

What are three extra elements to consider when producing a cash flow statement?

Answer 6

When producing a consolidated statement of cash flows, there are three extra
elements that need to be considered:

• • Acquisitions and disposals of subsidiaries
• • Cash paid to non-controlling interests
• • Associates and Joint Ventures

Question 7

What are the cash flow effect if any Acquisitions and disposals of subsidiaries?

Answer 7

Acquisitions

• we must record the actual cash flow for the purchase of the subsidiary
  + Plus any cash held by the subsidiary that is now controlled by the group.
• The assets and liabilities of the acquired subsidiary must be included in any workings to calculate the cash movement for an item during the year.

Disposals

• **Show the cash received from the sale of the subsidiary,
• Less any cash held by the subsidiary that the group has lost control over.**
• The assets and liabilities of the disposed subsidiary must be included in any workings to calculate the cash movement for an item during the year.

Question 8

How is the Cash paid to non-controlling interests treated in the cashflow statement?

Answer 8

• When a subsidiary that is not wholly-owned pays a dividend, some of that dividend is paid outside of the group to the non-controlling interest.
• Dividends paid to non-controlling interests should be disclosed separately in the statement of cash flows.
• To calculate the dividend paid, reconcile the non-controlling interest in the statement of financial position from the opening to the closing balance. You can use a T-account or a schedule to do this.

Question 9

What are the cash flow effects of an associate?

Answer 9

Associates are not part of the group and therefore cash flows between the group and the associate must be reported in the statement of cash flows.

Cash flows relating to associates as follows:

• dividends received from an associate
• loans made to associates
• cash payments to acquire associates
• cash receipts from the sale of associates.

These cash flows should be presented as cash flows from investing activities.

The associate share of profits in the P/L

• Remember, associates are accounted for using the equity method. This means that, in the consolidated statement of profit or loss, the group records its share of the associate’s profit for the year.
• This is a non-cash income and so must be deducted in the reconciliation between profit before tax and cash generated from operations.