Definition Cash Flow Statement
It is the part of financial statement prepared by
the business to get an overall idea of the sources (cash receipts) &
application (Cash payments) of cash during a particular period of time. It is a
statement which shows where cash came from and where it went and what the
beginning and ending balances were.
A Cash flow statement can be defined as a
statement, which summarizes sources of cash inflows, and application of cash
outflows of a firm during a particular period of time, say a month or a year.
Such a statement can be prepared from the data made available from comparative
income statement, Balance Sheet & additional information.
Purpose of statement of Cash Flow:
i)
To provide information about cash receipts
and cash payments during a period.
ii)
The organization’s ability to generate
positive future net cash flow.
iii)
To provide information on the cash effects
of operating, investing, and financing activities.
iv)
To detect the
probable reasons of changes in working capital
v)
To reconcile the
opening & the closing cash balances.
vi)
To determine if the company can pay its
liabilities or dividends or if it needs more financing;
vii)
To aid in the preparation of cash budget;
viii)
The future needs of the organization for
external financing.
Classification of cash flows
Cash flows are divided into the following categories: The cash flow statement provides information about:
a. The Cash receipts (Cash inflows) and
b. Uses of Cash (Cash outflows) during the period.
Inflows
& Outflows are reported for:
i.
Operating
Activities
ii.
Financing
Activities
iii.
Investing
Activities during the period.
Operating activities – The operations of an enterprise include all
activities to the provisions of goods or services. Thus, cash receipts from the
sale of goods or services are included in the operating activities portion of
the cash flow statement. The disbursements included in this section of the
statement included all disbursements for the purpose of producing goods or
services.
Cash effects of transactions that effect net income
and current assets or liabilities (these transactions are part of the normal
operations of the business)
Investing activities – Investing activities are defined as extending or
collecting loans, acquiring or disposing of investments (Other companies bonds
& Shares) & buying or selling long lived assets.
Cash effects of changes in fixed assets
Financing activities – Financing activities are defined as transactions
involving the company’s debt or equity capital. Included in this section of the
cash flow statement are cash receipts from the issuance of debt or the sale of
the firm own shares. Cash disbursements included in this section of the statement
include repurchase of the company’s own stock , payments of dividends to
shareholders & issuance of debts.
Cash effects of changes in long term liabilities
and capital accounts.
Types of Cash Inflows & Cash Outflows:
The
following will explain as how the various activities generate cash of a
business concern.
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Operating Activities:
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Cash Inflows from:
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Return on loans (interest received) and on interest bearing securities (Dividend received)
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Cash outflows for:
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Production of goods or services: Included disbursements such as
employee compensation to suppliers of raw materials or services & payment
for utilities)
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Salaries & Wages
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Taxes, duties, fines & Penalties
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Interest
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Other expenses-not considered investing or financing activities
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INVESTING ACTIVITIES:
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Cash Inflows from:
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1.
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2. Collections or sale of loans
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3.
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Cash outflows for:
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1. Purchase of property, plant &equipment and other productive
assets
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2. Issuance of loans
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3. Purchase of other companies
interest bearing securities or stock as an investment
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FINANCING ACTIVITIES:
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Cash Inflows from:
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1. Issuing debt such as bonds, notes or mortgages
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2.
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Cash outflows for:
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1. Payments of cash dividends to stockholders
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2. Purchase of treasury stock
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3. Payment of amount borrowed
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General guidelines:
a.
Operating
Activities: Operating Activities involves income statements items
b.
Financing
Activities: Financing Activities involve cash flows resulting from changes in
investments & long-term assets items.
c.
Investing
Activities: Investing Activities involve cash flows resulting from changes in
long term liabilities and stockholders equity items.
Significant Non- cash Activities:
Not
all of a company’s significant activities involve cash. Examples of significant
non cash activities are:
a. Issuance of common stock to purchase assets;
b. Conversion of bonds into common stocks
c.
Issuance of
debts to purchase assets;
d. Exchange of plants assets
Process of preparation of Cash flow Statement
The
process of preparation of the flow
Statement of cash flow draws upon data
from the following sources:
a. Income Statement: Determination of the cash provided by operations involves many of the
accounts involved in the calculation of income.
b. Comparative Balance Sheet: This information shows the changes in the
company’s assets, liabilities & owner’s equity accounts during the year.
c.
Selected
transactions: In most cases
other transactions are needed to determine the sources & uses of cash
during the accounting period.
Preparing a Statement of Cash flow
There are two
methods of preparing a Statement of Cash flow:
a. The Direct Method: The direct methods determines
cash flows directly for each source or use of cash.
b. The Indirect Method: The indirect method derives
cash flows from accrual basis statements.
*
For the direct & indirect methods the sections reporting investing &
financing activities are the same.
*
The net inflows & outflows for each sections (under the methods) are
identical.
*
The operating activities are reported differently.
The direct Method: Format of Statement of Cash Flow:
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Particulars
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Amounts
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Amounts
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Cash flow Operating Activities:
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Cash receipts from Customers
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*****
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Cash paid to suppliers
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Cash paid to employees
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Cash paid to workers
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Cash paid to income taxes
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Cash paid to interest
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Cash receipt from sale of goods and rendering services
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Cash receipt from royalties
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Cash receipt from fees, commission and other revenues
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Cash receipts of an insurance enterprise for premiums and
claims, Annuities and other policy benefits
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Cash receipts of an insurance enterprise for premiums and
claims, Annuities and other policy benefits
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Cash payments on behalf of
employees
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Cash receipt from interest
and dividend
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Cash payment of interest and dividend
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Cash receipts from
contracts held for dealing or trading securities
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Cash payments for
contracts held for dealing or trading securities
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Cash generated from operations before unusual items
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*****
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Proceeds from recovery of loss etc.
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******
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Net Cash provided from operating activities
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*****
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Cash flow Investing Activities:
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Cash paid to Purchase of property, plant &equipment and other productive
assets
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Cash paid for Purchase of long
term securities
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Cash paid to acquire a debt instruments of other enterprises and
interest in joint ventures
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Cash advances and loans made to other parties
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Cash receipt from
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Cash receipt from disposal of long term securities
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Cash receipt from the repayments of advances and loans made to other
parties
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Cash receipts from future contracts, forward contracts and option
contracts
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*****
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Net Cash provided from investing activities
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*****
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Cash flow Financing Activities:
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Cash receipts from Issuing debt such as bonds, notes or mortgages
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*****
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Cash receipts from selling bonds
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Cash proceeds from short term and long term borrowing
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Cash proceeds from issuing debentures, loans, notes, bonds and
mortgages
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*****
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Cash paid for retirements bonds
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Payments of cash dividends to stockholders
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*****
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Cash paid for Purchase of treasury stock
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*****
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Payment of amount borrowed
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*****
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Cash payment by a lessee for the reductions of the outstanding
liabilities relating to
finance lease
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Net Cash provided from Financing activities
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*****
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Net increase in cash & Cash equivalents
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*****
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Balance of cash & Cash equivalents beginning of the year
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*****
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Balance of cash & Cash equivalents end of the year
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*****
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The
Indirect Method: The indirect method can be summarized in the following method:
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Particulars
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Amount
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Amount
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Cash flow Operating Activities:
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Net income
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Adjustment to net income to determine cash provided by operations:
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Depreciation
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Decrease in Receivable
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Decrease in Prepaid expenses
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Dividend received
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Interest Received
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Increase in Accounts Receivable
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Less:
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Increase in Receivable
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Income tax paid
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Dividend paid
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Interest paid
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Decrease in accrued liabilities
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Net Cash provided from operating activities
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*****
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Cash flow Investing Activities:
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*****
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Collections or sale of loans
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*****
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*****
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Less:
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1. Purchase of property, plant &equipment and other productive
assets
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*****
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2. Issuance of loans
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*****
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3. Purchase of investment
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*****
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Net Cash provided from investing activities
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*****
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Cash flow Financing Activities:
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Issuing debt such as bonds, notes or mortgages
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*****
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*****
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Less:
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Payments of cash dividends to stockholders
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*****
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Purchase of treasury stock
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*****
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Payment of amount borrowed
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*****
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Net Cash provided from Financing
activities
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*****
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Net increase in cash & Cash equivalents
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*****
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Balance of cash & Cash equivalents beginning of the year
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*****
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Balance of cash & Cash equivalents end of the year
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*****
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Cash
flow statement –Math
Question#1: Identifying inflows, outflows and
activities
Indicate the type of activity each of the following
transactions represents (Operating, investing and financing) whether it is an
inflow or an outflow:
a.
Sold goods
-------------------------------------------------------------------------
b.
Purchased building----------------------------------------------------------------------
c.
Issued Capital
stock-------------------------------------------------------------------
d.
Received cash
dividend----------------------------------------------------------------
e.
Paid cash dividend--------------------------------------------------------------------
f.
Purchased treasury
stock------------------------------------------------------------------
g.
Sold available for sale
securities---------------------------------------------------------
h.
Made a loan------------------------------------------------------------------------------
i.
Paid interest on
loan-----------------------------------------------------------------
j.
Paid bond
principle--------------------------------------------------------------------
k.
Received proceeds of insurance
settlement---------------------------------------------
l.
Made contribution to
charity------------------------------------------------------------
Question#2: XYZ Company had
the following transactions during 2004
i.
Issued Tk.50,000
par value common shares at par value;
ii.
Issued bond for
Tk. 3,00,000 cash
iii.
Collected
Tk.25,000 of accounts receivable
iv.
Purchase
equipment for Tk.1,00,000 cash
v.
Declared &
paid a cash dividend of Tk.30,000
vi.
Sold a long term
investment with a cost of Tk.24,000 for Tk.20,000 cash;
vii.
Issued
Tk.2,00,000 par value common shares upon conversion of bond having a face value
of Tk.2,00,000
viii.
Accounts payable
paid Tk.28,000
ix.
Purchased a
machine for Tk.48,000 signing a long term notes in exchange.
Required: Analyze the above transactions & indicate whether each
transaction resulted in a cash flow from
a. Operating Activities;
b. Investing Activities;
c.
Financing
Activities;
d. Non-Cash Investing & Financing Activities
Question#3: The comparative Balance statements of Modern & Company are presented below:
Rock Corporation
Comparative Balance Sheets
December 31,2005 and 2004
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Particulars
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2005 ($)
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2004 ($)
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Assets:
|
|
|
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Cash
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22,500
|
30,000
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Accounts Receivable -net
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84,000
|
60,000
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Inventories
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1,50,000
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1,20,000
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Investments
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75,000
|
15,000
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Equipment
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4,12,500
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3,15,000
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Accumulated Depreciation
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(1,20,000)
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(25,200)
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Total Assets
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$6,24,000
|
$4,35,000
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Liabilities
& Stockholder’s Equity:
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|
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Accounts
Payable
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21,750
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18,750
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Accrued
liabilities
|
2,250
|
3,750
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Common
Stock
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5,25,000
|
3,75,000
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Retained
Earnings
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75,000
|
37,500
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Total
Liabilities & stockholder’s Equity
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$6,24,000
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$4,35,000
|
Additional
information:
a. Net income for 2005 was Tk.67,500
b. Cash dividend of Tk.30,000 were declared & paid
c.
Fully
depreciated equipment costing $15,000 was sold for $3,750 and equipment costing
$1,12,500 for cash.
d. An additional 7,500 shares of common stock were issued for cash at $20 per
share
e.
Depreciation
expenses for the year were Tk.30,000
f.
Investment were
purchased $60,000.
Required:
Prepare a statement of Cash Flow for 2005, under the indirect method.
Question#4: The
financial statements of Wal-Mart Company
are presented below:
Wal-Mart Company
Income Statements
For the year ended December 31
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Particulars
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Amount
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Sales revenue
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$5,70,000
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Less:
Cost of goods sold
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1,50,000
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Less:
Operating expenses (excluding Depreciation)
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1,11,000
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Depreciation
Expenses
|
9,000
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Interest
expenses
|
42,000
|
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Loss on sale of
equipment
|
3,000
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Income before tax
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1,92,000
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Less: Income Tax
Expenses
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47,000
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Net Income
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1,45,000
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Wal-Mart Company
Comparative Balance
Sheet
December 31
|
Particulars
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2005
|
2004
|
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Assets:
|
|
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Cash
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$55,000
|
$33,000
|
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Accounts
Receivable (Net)
|
20,000
|
30,000
|
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Merchandise
Inventories
|
15,000
|
10,000
|
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Prepaid
expenses
|
5,000
|
1,000
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Property,
Plant & Equipment
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|
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Land
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1,30,000
|
20,000
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Building
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1,60,000
|
40,000
|
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Accumulated
Depreciation –Building
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(11,000)
|
(5,000)
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Equipment
|
27,000
|
10,000
|
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Accumulated
Depreciation -Equipment
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(3,000)
|
(1,000)
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Total
Assets
|
$3,98,000
|
1,38,000
|
|
Liabilities
& Stockholder’s Equity:
|
|
|
|
Current
Liabilities
|
|
|
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Accounts
Payable
|
28,000
|
12,000
|
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Income
Taxes Payable
|
6,000
|
8,000
|
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Long
Term Liabilities
|
|
|
|
Bonds
Payable
|
1,30,000
|
20,000
|
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Stockholders
Equity
|
|
|
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Common
share
|
70,000
|
50,000
|
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Retained
Earnings
|
1,64,000
|
48,000
|
|
Total
Liabilities & stockholder’s Equity
|
$3,98,000
|
$1,38,000
|
Additional information:
a. The
company declared & paid a $29,000
cash dividend.
b. Issued
$1,10,000 of long term bonds in exchange for land.
c.
A Building costing $1,20,000 was purchased
for cash. Equipment costing $25,000 was also purchased for cash.
d. The
company sold Equipment with a book value of $7,000 (cost $8,000, less
accumulated depreciation $1,000) for $4,000 cash.
e.
Issued common stock for $20,000 cash.
f.
Depreciation expenses was compromised of
$6,000 for building & $3,000 for equipment
Required:
Prepare a statement
of Cash Flow for 2005, under the indirect method.
Question#5: The
comparative Balance statements of Reynolds Company are presented below:
Reynolds Company
Comparative Balance
Sheet
December 31
|
Particulars
|
2005
|
2004
|
|
Assets:
|
|
|
|
Cash
|
$54,000
|
$37,000
|
|
Accounts
Receivable (Net)
|
68,000
|
26,000
|
|
Merchandise
Inventories
|
54,000
|
--------
|
|
Prepaid
expenses
|
4,000
|
6,000
|
|
Land
|
45,000
|
70,000
|
|
Building
|
2,00,000
|
2,00,000
|
|
Accumulated
Depreciation –Building
|
(21,000)
|
(11,000)
|
|
Equipment
|
1,93,000
|
68,000
|
|
Accumulated
Depreciation -Equipment
|
(28,000)
|
(10,000)
|
|
Total
Assets
|
$5,69,000
|
3,86,000
|
|
Liabilities
& Stockholder’s Equity:
|
|
|
|
Accounts
Payable
|
23,000
|
40,000
|
|
Accrued
expenses Payable
|
10,000
|
-----
|
|
Bonds
Payable
|
1,10,000
|
1,50,000
|
|
Common
share
|
2,20,000
|
60,000
|
|
Retained
Earnings
|
2,06,000
|
1,36,000
|
|
Total
Liabilities & stockholder’s Equity
|
$5,69,000
|
$3,86,000
|
Reynolds Company
Income Statements
For the year ended December 31
|
Particulars
|
Amount
|
Amount
|
|
Net
Sales revenue
|
|
$8,90,000
|
|
Less:
Cost of goods sold
|
4,65,000
|
|
|
Less:
Operating expenses
|
2,21,000
|
|
|
Interest
Expenses
|
12,000
|
|
|
Loss
on sale of equipment
|
2,000
|
|
|
|
|
7,00,000
|
|
Income before Income tax
|
|
1,90,000
|
|
Less: Income Tax
Expenses
|
|
65,000
|
|
Net Income
|
|
1,25,000
|
Additional information:
a. Operating
expenses include depreciation expenses of $33,000 and charges from prepaid
expenses of $2,000
b. Land
was sold at its book value for cash.
c.
Cash dividend of $.55,000 were declared
& paid in 2005
d. Interest
expenses of $1,20,000 was paid in cash.
e.
Equipment with a cost of $1,66,000 was purchased for cash. Equipment with a cost of $41,000 and a book value of $36,000 was sold for $34,000 cash.
f.
Bonds of $10,000 were redeemed at their
book value for cash. Bonds of $30,000 were converted into common stock.
g. Common
stock ($1 par) of $1,30,000 was issued for cash.
h. Accounts
payable pertain to merchandise suppliers.
Required: Prepare a
statement of Cash Flow for 2005, under the indirect method.
Question#6: The comparative Balance statements of Mona
& Company are presented below:
Mona &
Company
Comparative Balance Sheet
December 31
|
Particulars
|
2005 (Tk.)
|
2004 (Tk.)
|
|
Assets:
|
|
|
|
Cash
|
37,800
|
13,200
|
|
Accounts Receivable
|
51,000
|
45,600
|
|
Inventory
|
1,08,000
|
1,13,400
|
|
Land & Building
|
45,000
|
60,000
|
|
Equipment
|
1,56,000
|
1,20,000
|
|
Accumulated Depreciation
|
(39,600)
|
(25,200)
|
|
Total Assets
|
3,58,200
|
3,27,000
|
|
Liabilities
& Stockholder’s Equity:
|
|
|
|
Accounts
Payable
|
20,400
|
28,200
|
|
Bond
Payable
|
90,000
|
1,20,000
|
|
Common
Stock ($5 per share)
|
1,28,400
|
98,400
|
|
Retained
Earnings
|
1,19,400
|
80,400
|
|
Total
Liabilities & stockholder’s Equity
|
3,58,200
|
3,27,000
|
Additional
information:
a. Net income for 2005 was Tk.63,000
b. Cash dividend of Tk.24,000 were declared & paid
c.
Bond payable
amounting to Tk.30,000 was redeemed for cash.
d. Common Shares were issued for Tk.30,000 cash.
e.
Depreciation
expenses were Tk.14,400
f.
Sales for the
year were Tk.5,86,800
Required: Prepare a statement of Cash Flow for 2005, under the indirect
method.
Question#7: The financial statements of XYZ Company are presented below:
XYZ Company
Income Statements
For the year ended December 31
|
Particulars
|
Amount
|
Amount
|
|
Net
Sales (All on account)
|
|
Tk6,00,000
|
|
Less:
Cost of goods sold
|
|
4,50,000
|
|
Contribution
Margin
|
|
1,50,000
|
|
Less:
Operating expenses:
|
|
|
|
Selling
Expenses
|
60,000
|
|
|
Administrative
expenses
|
25,000
|
|
|
Total
Operating expenses
|
|
85,000
|
|
Net Operating Income
|
|
65,000
|
|
Less: Interest Expenses
|
|
5,000
|
|
Income before tax
|
|
60,000
|
|
Less: Income Tax
Expenses
|
|
17,500
|
|
Net Income
|
|
42,500
|
XYZ Company
Comparative Balance Sheet
December 31
|
Particulars
|
2005
|
2004
|
|
Assets:
|
|
|
|
Cash
|
Tk.60,000
|
Tk.32,500
|
|
Accounts
Receivable (Net)
|
50,000
|
35,000
|
|
Merchandise
Inventories
|
95,000
|
87,500
|
|
Property,
Plant & Equipment (Net)
|
1,75,000
|
1,95,,000
|
|
Accumulated Depreciation
|
(75,000)
|
(60,000)
|
|
Total
|
3,05,000
|
2,90,000
|
|
Liabilities
& Stockholder’s Equity:
|
|
|
|
Accounts
Payable
|
65,000
|
82,500
|
|
Income
Taxes Payable
|
37,500
|
50,000
|
|
Notes
Payable
|
50,000
|
25,000
|
|
Common
share
|
62,500
|
62,500
|
|
Retained
Earnings
|
90,000
|
70,000
|
|
Total
Liabilities & stockholder’s Equity
|
3,05,000
|
2,90,000
|
Additional
information:
a. During the year plant & Equipment was sold for
Tk.25,000 cash. The original costs of the assets was Tk.37,500 & had a book
value Tk.25,000 at time of sale.
b. Dividend of Tk.25,000 were declared & paid
c.
Depreciation
expenses altogether Tk.27,500
d. Additional equipment was purchased for Tk.17,500
Required: Prepare a statement of Cash Flow for 2005, under the Direct
Method & indirect method.
Question#8: The comparative Balance statements of Modern & Company are presented below:
Mona &
Company
Comparative Balance Sheet
December 31
|
Particulars
|
2005 (Tk.)
|
2004 (Tk.)
|
|
Assets:
|
|
|
|
Cash
|
37,800
|
13,200
|
|
Accounts Receivable
|
51,000
|
45,600
|
|
Inventory
|
1,08,000
|
1,13,400
|
|
Land & Building
|
45,000
|
60,000
|
|
Equipment
|
1,56,000
|
1,20,000
|
|
Accumulated Depreciation
|
(39,600)
|
(25,200)
|
|
Total Assets
|
3,58,200
|
3,27,000
|
|
Liabilities
& Stockholder’s Equity:
|
|
|
|
Accounts
Payable
|
20,400
|
28,200
|
|
Bond
Payable
|
90,000
|
1,20,000
|
|
Common
Stock ($5 per share)
|
1,28,400
|
98,400
|
|
Retained
Earnings
|
1,19,400
|
80,400
|
|
Total
Liabilities & stockholder’s Equity
|
3,58,200
|
3,27,000
|
Additional
information:
a. Net income for 2005 was Tk.63,000
b. Cash dividend of Tk.24,000 were declared & paid
c.
Bond payable
amounting to Tk.30,000 was redeemed for cash.
d. Common Shares were issued for Tk.30,000 cash.
e.
Depreciation
expenses were Tk.14,400
f.
Sales for the
year were Tk.5,86,800
Required: Prepare a statement of Cash Flow for 2005, under the indirect
method.
Question#9 The financial statements of Wal-Mart Company are presented below:
Wal-Mart Company
Income Statements
For the year ended December 31
|
Particulars
|
Amount
|
Amount
|
|
Net
Sales (All on account)
|
|
Tk6,00,000
|
|
Less:
Cost of goods sold
|
|
4,50,000
|
|
Contribution
Margin
|
|
1,50,000
|
|
Less:
Operating expenses:
|
|
|
|
Selling
Expenses
|
60,000
|
|
|
Administrative
expenses
|
25,000
|
|
|
Total
Operating expenses
|
|
85,000
|
|
Net Operating Income
|
|
65,000
|
|
Less: Interest Expenses
|
|
5,000
|
|
Income before tax
|
|
60,000
|
|
Less: Income Tax
Expenses
|
|
17,500
|
|
Net Income
|
|
42,500
|
Wal-Mart Company
Comparative Balance Sheet
December 31
|
Particulars
|
2005
|
2004
|
|
Assets:
|
|
|
|
Cash
|
Tk.60,000
|
Tk.32,500
|
|
Accounts
Receivable (Net)
|
50,000
|
35,000
|
|
Merchandise
Inventories
|
95,000
|
87,500
|
|
Property,
Plant & Equipment (Net)
|
1,75,000
|
1,95,,000
|
|
Accumulated Depreciation
|
(75,000)
|
(60,000)
|
|
Total
|
3,05,000
|
2,90,000
|
|
Liabilities
& Stockholder’s Equity:
|
|
|
|
Accounts
Payable
|
65,000
|
82,500
|
|
Income
Taxes Payable
|
37,500
|
50,000
|
|
Notes
Payable
|
50,000
|
25,000
|
|
Common
share
|
62,500
|
62,500
|
|
Retained
Earnings
|
90,000
|
70,000
|
|
Total
Liabilities & stockholder’s Equity
|
3,05,000
|
2,90,000
|
Additional
information:
a. During the year plant & Equipment was sold for
Tk.25,000 cash. The original costs of the assets was Tk.37,500 & had a book
value Tk.25,000 at time of sale.
b. Dividend of Tk.25,000 were declared & paid
c.
Depreciation
expenses altogether Tk.27,500
d. Additional equipment was purchased for Tk.17,500
Required:
Prepare a statement of Cash Flow for 2005, under the Direct Method &
indirect method.
Question#10: The comparative Balance statements of Modern & Company are presented below:
Mona &
Company
Comparative Balance Sheet
December 31
|
Particulars
|
2005 (Tk.)
|
2004 (Tk.)
|
|
Assets:
|
|
|
|
Cash
|
37,800
|
13,200
|
|
Accounts Receivable
|
51,000
|
45,600
|
|
Inventory
|
1,08,000
|
1,13,400
|
|
Land & Building
|
45,000
|
60,000
|
|
Equipment
|
1,56,000
|
1,20,000
|
|
Accumulated Depreciation
|
(39,600)
|
(25,200)
|
|
Total Assets
|
3,58,200
|
3,27,000
|
|
Liabilities
& Stockholder’s Equity:
|
|
|
|
Accounts
Payable
|
20,400
|
28,200
|
|
Bond
Payable
|
90,000
|
1,20,000
|
|
Common
Stock ($5 per share)
|
1,28,400
|
98,400
|
|
Retained
Earnings
|
1,19,400
|
80,400
|
|
Total
Liabilities & stockholder’s Equity
|
3,58,200
|
3,27,000
|
Additional
information:
a. Net income for 2005 was Tk.63,000
b. Cash dividend of Tk.24,000 were declared & paid
c.
Bond payable
amounting to Tk.30,000 was redeemed for cash.
d. Common Shares were issued for Tk.30,000 cash.
e.
Depreciation
expenses were Tk.14,400
f.
Sales for the
year were Tk.5,86,800
Required:
Prepare a statement of Cash Flow for 2005, under the indirect method.
Question#11: The comparative Balance statements of
Jhon & Company are presented below:
Jhon & Company
Comparative Balance Sheet
December 31 2005 &2004
|
Particulars
|
2005
|
2004
|
|
Debit
Accounts Balance
|
|
|
|
Cash
|
Tk.40000
|
Tk.21,000
|
|
Accounts
Receivable (Net)
|
2,50,000
|
1,70000
|
|
Merchandise
Inventories
|
3,10,000
|
2,6000
|
|
Property,
Plant & Equipment (Net)
|
5,10,000
|
4,00,
000
|
|
Prepaid Expenses
|
7,000
|
14,000
|
|
Loan to Simon Company
|
40,000
|
-------
|
|
Total
|
11,21,000
|
8,65,000
|
|
Credit
Accounts Balance
|
|
|
|
Accumulated
Depreciation
|
1,32,000
|
1,20,000
|
|
Accounts
Payable
|
3,10,000
|
2,50,000
|
|
Accrued
Liabilities
|
20,000
|
30,000
|
|
Deferred
income tax
|
1,90,000
|
70,000
|
|
Bond
Payable
|
45,000
|
42,000
|
|
Common per share
|
3,00,000
|
2,70,000
|
|
Retained
Earnings
|
1,24,000
|
83,000
|
|
Total
|
11,21,000
|
8,65,000
|
Rony &
Company
Income Statements
For the year ended December 31
|
Particulars
|
Amount
|
Amount
|
|
Net
Sales (All on account)
|
|
Tk9,00,000
|
|
Less:
Cost of goods sold
|
|
5,00,000
|
|
Contribution
Margin
|
|
4,00,000
|
|
Less:
Operating expenses:
|
|
3,.28,000
|
|
Net Operating Income
|
|
72,000
|
|
Gain on sale of
Equipment
|
|
8,000
|
|
Income before taxes
|
|
80,000
|
|
Less: Income Tax
Expenses
|
|
24,000
|
|
Net Income
|
|
56,000
|
Equipment that had cost Tk.40,000
and on which there was accumulated depreciation of Tk.30,000 was sold
during the year 2005 for Tk.18,000. Cash Dividend totaling Tk.15,000 were declared & paid
during the year 2005.
Required:
Prepare a statement of Cash Flow for 2005, under
1. Direct Method &
2. Indirect method.
Question#12: The comparative Balance statements of
Jhon & Company are presented below:
Jhon & Company
Comparative Balance Sheet
December 31 2005 &2004
|
Particulars
|
2005
|
2004
|
|
Debit
Accounts Balance
|
|
|
|
Cash
|
Tk.40000
|
Tk.21,000
|
|
Accounts
Receivable (Net)
|
2,50,000
|
1,70000
|
|
Merchandise
Inventories
|
3,10,000
|
2,6000
|
|
Property,
Plant & Equipment (Net)
|
5,10,000
|
4,00,
000
|
|
Prepaid Expenses
|
7,000
|
14,000
|
|
Loan to Simon Company
|
40,000
|
-------
|
|
Total
|
11,21,000
|
8,65,000
|
|
Credit
Accounts Balance
|
|
|
|
Accumulated
Depreciation
|
1,32,000
|
1,20,000
|
|
Accounts
Payable
|
3,10,000
|
2,50,000
|
|
Accrued
Liabilities
|
20,000
|
30,000
|
|
Deferred
income tax
|
1,90,000
|
70,000
|
|
Bond
Payable
|
45,000
|
42,000
|
|
Common per share
|
3,00,000
|
2,70,000
|
|
Retained
Earnings
|
1,24,000
|
83,000
|
|
Total
|
11,21,000
|
8,65,000
|
Rony &
Company
Income Statements
For the year ended December 31
|
Particulars
|
Amount
|
Amount
|
|
Net
Sales (All on account)
|
|
Tk9,00,000
|
|
Less:
Cost of goods sold
|
|
5,00,000
|
|
Contribution
Margin
|
|
4,00,000
|
|
Less:
Operating expenses:
|
|
3,.28,000
|
|
Net Operating Income
|
|
72,000
|
|
Gain on sale of
Equipment
|
|
8,000
|
|
Income before taxes
|
|
80,000
|
|
Less: Income Tax
Expenses
|
|
24,000
|
|
Net Income
|
|
56,000
|
Equipment that had cost Tk.40,000
and on which there was accumulated depreciation of Tk.30,000 was sold
during the year 2005 for Tk.18,000. Cash Dividend totaling Tk.15,000 were declared & paid
during the year 2005.
Required:
Prepare a statement of Cash Flow for 2005, under
3. Direct Method &
4. Indirect method.
Question#13: The
comparative Balance statements of Juarez Company are presented below:
Juarez Company
Comparative Balance
Sheet
December 31
|
Particulars
|
2005
|
2004
|
|
Assets:
|
|
|
|
Cash
|
$1,91,000
|
$1,59,000
|
|
Accounts
Receivable (Net)
|
12,000
|
15,000
|
|
Merchandise
Inventories
|
1,70,000
|
1,60,000
|
|
Prepaid
expenses
|
6,000
|
8,000
|
|
Land
|
1,40,000
|
80,000
|
|
Equipment
|
1,60,000
|
|
|
Accumulated
Depreciation -Equipment
|
(16,000)
|
|
|
Total
Assets
|
$6,63,000
|
4,22,000
|
|
Liabilities
& Stockholder’s Equity:
|
|
|
|
Accounts
Payable
|
52,000
|
60,000
|
|
Income
tax payable
|
12,000
|
--------
|
|
Accrued
expenses Payable
|
15,000
|
20,000
|
|
Bonds
Payable
|
1,30,000
|
----------
|
|
Common
share
|
3,60,000
|
3,00,000
|
|
Retained
Earnings
|
94,000
|
42,000
|
|
Total
Liabilities & stockholder’s Equity
|
$6,63,000
|
$4,22,000
|
Juarez Company
Income Statements
For the year ended December 31,2005
|
Particulars
|
Amount
|
Amount
|
|
Net
Sales revenue
|
|
$9,75,000
|
|
Less:
Cost of goods sold
|
6,60,000
|
|
|
Less:
Operating expenses (excluding depreciation)
|
1,76,000
|
|
|
Depreciation Expenses
|
18,000
|
|
|
Loss
on sale of equipment
|
1,000
------------
|
8,55,000
|
|
Income before Income tax
|
|
1,20,000
|
|
Less: Income Tax
Expenses
|
|
36,000
|
|
Net Income
|
|
84,000
|
Additional information:
a. In
2005 , the company declared & paid a $32,000 cash dividend.
b. Bonds
were issued at the face value for $1,30,000 in cash.
c.
Equipment with a cost of $1,80,000 was
purchased for cash.
d. Equipment
costing of $20,000 was sold for $17,000
cash when the book value of the equipment was $18,000.
e.
Common stock of $60,000 was issued to
acquire land.
Required: Prepare a
statement of Cash Flow for 2005, under the Indirect method & direct method.
Solution:
Juarez Company
Statement of Cash Flow –Under direct Method
For the year ended December 31,2005
|
Cash
flows from operating activities
|
Amount
|
Amount
|
|
Cash
receipts from customers= Revenues-Decrease in accounts receivable
=($9,75,000+3,000)
|
|
$9,78,000
|
|
Cash
payments:
|
|
|
|
To
suppliers: (COGS+ increase in inventories+ decrease in accounts payable) = (6,60,000+10,000+8,000)
|
6,78,000
|
|
|
From
operating expenses: Operating expenses – decrease in prepaid expenses +
decrease in accrued accounts payable
(1,76,000--2,000+5,000)
|
1,79,000
|
|
|
For
Income taxes: Income tax expenses- increase in income tax payable=
(36,000-12,000)
|
24,000
|
8,81,000
|
|
Net
Cash provided by operating activities
|
|
97,000
|
|
Cash
flows from Investing activities:
|
|
|
|
|
17,000
|
|
|
Purchase
of Equipment
|
(1,80,000)
|
|
|
Net
Cash provided by Investing activities
|
|
(1,63,000)
|
|
Cash
flows from Financing activities:
|
|
|
|
Issue of bonds payable
|
1,30,000
|
|
|
Payments
to cash dividends
|
(32,000)
|
|
|
Net
Cash provided by financing activities
|
|
98,000
|
|
Net
increase in Cash
|
|
32,000
|
|
Cash
at the beginning of the period
|
|
1,59,000
|
|
Cash
at the end of the period
|
|
$1,91,000
|
|
Non
Cash investing & Financing activities:
|
|
|
|
Conversion
of common stock to purchase land
|
|
$60,000
|
Question#14: The income
statement for the year ended December 31,2005 for Jhon Kosinski Manufacturing
company contained the following condensed information.
Jhon Kosinski
Manufacturing company
Income Statements
For the year ended December 31
|
Particulars
|
Amount
|
Amount
|
|
Revenue
|
|
$65,83,000
|
|
Less:
Operating expenses (excluding depreciation)
|
49,20,000
|
|
|
Depreciation expenses
|
8,80,000
|
58,00,000
|
|
Income before Income tax
|
|
7,83,000
|
|
Less: Income Tax
Expenses
|
|
3,53,000
|
|
Net Income
|
|
4,30,000
|
Included
in operating expenses is a $24,000 loss resulting from the sale of machinery
for $2,70,000 cash. Machinery was purchased at a cost of $7,50,000.
The following balances are reported on Jhon Kosinski Manufacturing company
comparative balance sheets at December 31
Jhon Kosinski
Manufacturing company
Comparative Balance Sheets (partial)
|
Particulars
|
2005
|
2004
|
|
Cash
|
6,72,000
|
$1,30,000
|
|
Accounts
receivable
|
7,75,000
|
6,10,000
|
|
Inventories
|
8,34,000
|
8,67,000
|
|
Accounts Payable
|
5,21,000
|
5,01,000
|
Income tax expenses of
$3,53,000 represents the amount paid in 2005. Cash dividend of $2,00,000 were
declared & paid in 2005
Required: Prepare a
statement of Cash Flow for 2005, under the indirect method.
Solution:
a. Jhon Kosinski
Manufacturing company
Statement of Cash Flow –Under Indirect Method
For the year ended December 31,2005
|
Cash
flows from operating activities
|
|
|
|
Net
income
|
|
$4,30,000
|
|
Adjustments
to reconcile net income to net cash provided by operating activities
|
|
|
|
Depreciation
Expenses
|
$8,80,000
|
|
|
Loss
on sale of equipment
|
24,000
|
|
|
Increase
in accounts receivable
|
(1,65,000)
|
|
|
Decrease
in inventories
|
33,000
|
|
|
Increase
in Accounts Payable
|
20,000
|
|
|
|
|
7,92,000
|
|
Net
Cash provided by operating activities
|
|
12,22,000
|
|
Cash
flows from Investing activities:
|
|
|
|
|
2,70,000
|
|
|
Purchase
of Machinery
|
(7,50,000)
|
|
|
Net
Cash provided by Investing activities
|
|
(4,80,000)
|
|
Cash
flows from Financing activities:
|
|
|
|
Payments
of dividends
|
|
(2,00,000)
|
|
Net
increase in Cash
|
|
5,42,000
|
|
Cash
at the beginning of the period
|
|
1,30,000
|
|
Cash
at the end of the period
|
|
$6,72,000
|
Jhon Kosinski Manufacturing company
Statement of Cash Flow –Under direct Method
For the year ended December 31,2005
|
Cash
flows from operating activities
|
|
|
|
Cash
receipts from customers= Revenues-increase in accounts receivable
=($65,38,000-1,65,000)
|
|
$64,18,000
|
|
Cash
payments:
|
|
|
|
From
operating expenses: (49,20,000-24,000-33,000-20,000)
|
48,43,000
|
|
|
For
Income taxes
|
3,53,000
|
51,96,000
|
|
Net
Cash provided by operating activities
|
|
12,22,000
|
|
Cash
flows from Investing activities:
|
|
|
|
|
2,70,000
|
|
|
Purchase
of Machinery
|
(7,50,000)
|
|
|
Net
Cash provided by Investing activities
|
|
(4,80,000)
|
|
Cash
flows from Financing activities:
|
|
|
|
Payments
of dividends
|
|
(2,00,000)
|
|
Net
increase in Cash
|
|
5,42,000
|
|
Cash
at the beginning of the period
|
|
1,30,000
|
|
Cash
at the end of the period
|
|
$6,72,000
|
Chapter 23
STATEMENT OF CASH FLOWS
1 Business
Context
Cash is
essential if a business is to continue its operations. Cash, or access to cash,
is
needed to pay
for an entity’s outlays on a continuing basis and is a fundamental part of its
operating cycle.
An entity’s operating cycle is the period of time that a normal operating
transaction
takes to complete within a business, for example the time between the receipt
of
the order to
final payment being made by the customer. If an entity is unable to pay its
debts
as they fall
due, then it risks insolvency.
Cash and
liquidity are different concepts to profit. It is possible for a highly
profitable entity to
have liquidity
problems if it does not manage the flow of cash within its business
effectively.
Cash is about
the liquidity of a business, and hence cash flows concern the change in that
liquidity. Cash
management is not just about surviving; it is about the process of utilising
cash
resources to
their optimal effect.
For an investor
to be able to assess the effectiveness of a business, it is important that
information is
included in the financial statements not only on the entity’s performance and
financial
position but also on its cash flows. When used alongside a statement of
financial
position, for
example, a statement of cash flows provides users with information on the
changes in net
assets of the entity. An entity may have a strong financial position and good
performance
during the period, but may also have suffered significant cash outflows. The
financial
information is therefore not complete without the cash flow information, which
may
tell a different
story to the original assessment of an entity’s performance.
2 Chapter
Objectives
This chapter
covers the preparation and presentation of a statement of cash flows as part of
an entity’s
financial statements.
IAS 1 Presentation of financial
statements sets
out the content of an entity’s financial
statements. It
includes the requirement for a statement of cash flows to be presented.
On completion of
this chapter you should be able to:
understand the objectives and scope of
IAS 7 Statement
of cash flows;
identify the important terminology and
definitions which relate to the presentation of
the statement of
cash flows in the financial statements;
distinguish between cash and cash
equivalents, and other assets and liabilities;
identify the main sections of a
statement of cash flows and the cash flows relating to
each of them;
and
apply knowledge and understanding of
IAS 7 through basic calculations.
Chapter 21 -
Statement of Cash Flows
Page 304
3 Objectives,
Scope and Definitions of IAS 7
3.1 Objective and scope
The objective of
IAS 7 is to provide information about the historical changes in cash, and cash
equivalents, of
an entity. This information is presented via a statement of cash flows that
classifies cash
flows under the headings of: [IAS 7.10]
operating activities;
investing activities; and
financing activities.
The preparation
of a statement of cash flows as part of an entity’s financial statements is
required of all
entities, with no exceptions. [IAS 7.1]
3.2 What is cash?
The nature of cash
may, at first, seem obvious, but cash may be held in many forms. Some
forms of cash
can be accessed immediately while there is a delay in accessing others.
As defined by
IAS 7, cash includes not only cash itself but also any instrument that can be
converted into
cash so quickly that it is in effect equivalent to cash.
In IAS 7, the
statement of cash flows seeks to identify changes in:
Classification Amounts included
Cash “Cash in hand and demand deposits”. [IAS 7.6]
Cash equivalents “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”. [IAS 7.6]
An essential
element of a cash equivalent is that it is held for the purpose of meeting
shortterm
cash commitments
as they fall due and not for long-term investment purposes. To meet
the definition
of a cash equivalent, the item should be “readily convertible” which suggests
that it has a
short maturity of, say, three months or less from the date of acquisition. Cash
equivalents may
therefore include:
short term deposits;
loan notes;
bank deposit accounts; and
government securities.
Equity
investments should normally be excluded, because, unlike government securities,
they
are subject to a
significant risk of changes in value.
Bank borrowings
normally form part of an entity’s financing activities, which are discussed
below. A bank
overdraft, however, is often used as a key element of an entity’s daily cash
management; for
example a positive cash balance may be held at the end of one day with an
overdraft the
next. In such circumstances the overdraft should be included as a component of
cash and cash
equivalents.
Chapter 21 –
Statement of Cash Flows
Page 305
3.3 Sources and uses of cash
Cash flows are inflows
and outflows of cash and cash equivalents (hereafter referred to as
‘cash’). [IAS
7.6]
IAS 7 requires
sources and uses of cash to be analysed under the following headings:
[IAS 7.10]
Headings Description
Operating activities “The principal revenue-producing activities
of the entity and other
activities that are not investing or financing activities”. [IAS 7.6]
Investing activities “The acquisition and disposal of long-term
assets and other
investments not included in cash equivalents”. [IAS 7.6]
Financing activities “Activities that result in changes to the
size and composition of
the contributed equity and borrowings of an entity”. [IAS 7.6]
Illustration 1
The list of
transactions and balances set out below should be included in the cash flow
headings as
shown in the table.
– cash payments to purchase a non-current
asset;
– the issue of shares for cash;
– cash received from customers;
– a short-term cash deposit requiring 20
days’ notice for its withdrawal;
– a cash repayment of a bank overdraft
(assuming the overdraft is used as an integral part
of the entity’s
cash management);
– revaluation of land;
– cash repayment of a loan;
– cash received as commission;
– a bonus issue of shares; and
– cash payment to purchase listed
government securities (with a maturity date in one
month’s time).
Chapter 21 -
Statement of Cash Flows
Page 306
Operating cash
flow
Investing cash
flow
Financing cash
flow
Cash and cash
equivalents
Cash received
from
customers
Cash payments to
purchase a
noncurrent
asset
Issue of shares
for
cash
Short-term cash
deposit
Cash received as
commission
Cash repayment
of
a loan
Cash repayment
of
an overdraft
Cash payment to
purchase listed
government
securities
Note: the
following items are non-cash transactions and would not appear in the statement
of cash flows:
– revaluation of land; and
– a bonus issue of shares.
Chapter 21 –
Statement of Cash Flows
Page 307
4 Overview of
IAS 7 – A Statement of Cash Flows
An illustrative
pro forma statement of cash flows is set out below:
Statement of cash flows for the year ended 30 June 2008
CU000 CU000
Cash flows from operating activities
Cash generated
from operations 10,000
Interest paid
(3,000)
Tax paid (5,000)
Net cash from operating activities 2,000
Cash flows from investing activities
Purchase of property,
plant and equipment (1,200)
Proceeds from
sales of property, plant and equipment 100
Interest
received 200
Dividends
received 300
Net cash used in investing activities (600)
Cash flows from financing activities
Issue of
ordinary shares 2,000
Issue of
preference shares 1,100
Issue of
non-current interest-bearing borrowings 2,500
Redemption of
non-current interest-bearing borrowings (1,000)
Dividends paid
(500)
Net cash used in financing activities 4,100
Net change in
cash and cash equivalents 5,500
Cash and cash
equivalents brought forward 3,200
Cash and cash equivalents carried forward 8,700
This
illustrative example of a statement of cash flows shows interest paid as part
of operating
activities
because it is part of the profit or loss reported by the entity in the period.
However,
IAS 7 also
permits interest paid to be reported as part of the entity’s financing or
investing
activities. [IAS
7.31]
Interest
received and dividends received are shown as part of the investing activities
in the
illustration set
out above; however, they may be reported as part of the operating or financing
activities as
described above for interest paid. [IAS 7.31]
Dividends paid
are shown as part of the financing operations of the entity in the illustration
because they relate
to the cost of obtaining equity finance. An alternative treatment permitted
under IAS 7 is
to include them as part of the operating activities of the entity. Although
dividends paid
are not deducted in arriving at the profit or loss for the period in the
statement
of comprehensive
income, this presentation allows a user to assess the entity’s future ability
to pay dividends
out of its operating activities.
The separate
line items set out under the required cash flow headings should represent the
major classes of
gross cash receipts and payments arising for each of the activities.
[IAS 7.21]
Certain cash
flows may be reported on a net basis under the relevant cash flow heading.
Items shown net
may include, for example, cash that is received by the entity on behalf of a
third party and
is subsequently paid on to that third party. Cash flows should also be
Chapter 21 -
Statement of Cash Flows
Page 308
presented on a
net basis where the related inflow and outflow occur within a short space of
time, the cash
flows are large and the maturity dates are short (within three months). An
example is the
purchase and sale of the same investment. [IAS 7.22]
5 Cash Flows
from Operating Activities
The cash flows
from an entity’s operating activities can be presented using two methods:
[IAS 7.18]
the direct method, which discloses the
major classes of gross cash receipts and
gross cash
payments; or
the indirect method, where the entity
starts with the profit or loss for the period and
adjusts it for
non-cash transactions, deferrals or accruals of income and expenditure
and items that
form part of the entity’s investing and financing activities.
5.1 The direct method
The direct
method details the actual cash flows that are part of the operating activities
of the
entity. Such
cash flows should therefore include, for example, payments to suppliers,
receipts
from customers,
payments to employees and other payments and receipts made or received
as part of the
entity’s operating activities.
Where this
approach is adopted, the information will generally be obtained from the
entity’s
accounting
records directly.
An alternative
approach under the direct method can be to adjust each line item in the
statement of
comprehensive income for non-cash transactions that have occurred during the
period and for
items that fall under the headings of investing and financing activities.
The nature of
the adjustments using this approach is illustrated in the following table:
Statement of comprehensive
income item Examples of adjustments
Revenue Change in trade receivables
Cost of sales Relevant part of depreciation charge
Change in inventories
Change in trade payables on purchases
Operating
expenses Relevant part of depreciation charge
Changes in accruals/prepayments
Change in trade payables on operating
expenses
Chapter 21 –
Statement of Cash Flows
Page 309
Illustration 2
Extracts from
the draft financial statements of Delta for the year ended 31 December 2007,
are set out
below:
Statement of comprehensive income
CU CU
Revenue 250,000
Cost of sales
Opening inventories 30,000
Purchases
218,000
Closing
inventories (52,000)
(196,000)
Gross profit
54,000
Other operating
expenses (all cash costs except
for depreciation
of CU11,000) (21,600)
Profit from
operations 32,400
Statement of financial position extracts 31 Dec 2007 31 Dec 2006
CU CU
Trade
receivables 68,000 23,000
Trade payables
21,600 42,800
The cash from
operations for Delta for the year ended 31 December 2007 using the direct
method is:
CU
Cash from
customers (250,000 + (23,000 – 68,000)) 205,000
(Revenue plus
the movement in trade receivables)
Cash to
suppliers (218,000 + (42,800 – 21,600)) (239,200)
(Purchases plus
the movement in trade payables)
Other cash
operating expenses (21,600-11,000) (10,600)
(Other cash
operating activity expenses adjusted
for non-cash
items, i.e. depreciation)
Cash outflow
from operating activities (44,800)
Notes: This
illustration highlights how an entity can have profits from operating
activities but
an outflow of
cash from those activities.
5.2 Indirect method
The indirect
method of calculating the cash flows from an entity’s operating activities
makes
adjustments to
the profit or loss for the period. The adjustments are for non-cash
transactions,
deferrals or
accruals of income and expenditure and for items that will form part of the
investing and
financing activities of the entity. [IAS 7.18]
Chapter 21 -
Statement of Cash Flows
Page 310
Illustration 3
Using the
information from Illustration 2 above, the cash generated from operations for
Delta
for the year
ended 31 December 2007 using the indirect method is:
CU
Profit from
operating activities 32,400
Depreciation
charge (adjust for non-cash expenses) 11,000
Increase in
inventories (52,000-30,000) (22,000)
(adjust for the
movement in inventories)
Increase in
trade receivables (68,000-23,000) (45,000)
(adjust for the
movement in inventories)
Decrease in
trade payables (21,600-42,800) (21,200)
(adjust for the
movement in inventories) _______
Cash outflow
from operating activities (44,800)
_______
This gives the
same solution as the direct method.
The adjustments
for movements in inventories, trade receivables and payables are to
reverse out the
effect of accruals accounting (recording income when it becomes receivable
rather than when
the cash is received).
The presentation
of the net cash flows of the entity for its operating activities may be
presented by
showing movements during the period in inventories and operating receivables
and payables.
5.3 Taxation
Although
profit-based taxes may relate to items throughout the cash flow statement, it
may
not be
practicable to identify separately the elements of tax which relate to each of
the three
components of
the cash flow statement. As a result, tax will normally be reported as part of
an
entity’s
operating activities, although it may be split between the relevant headings
where it is
practicable to
do so. [IAS 7.35]
The cash flow in
relation to tax should be separately identified in the cash flow statement and,
where it has
been allocated between the different headings, a total should be disclosed.
[IAS 7.35]
Chapter 21 –
Statement of Cash Flows
Page 311
6 Cash Flows
from Investing Activities
Cash flows
arising from investing activities are important, as they provide information on
the
level of
investment that an entity has made in assets that it will hold and use in its
business on
an ongoing
basis.
Examples of cash
flows arising from investing activities include:
cash paid to acquire, or a receipt from
the sale of, an item of property, plant or
equipment;
cash paid to acquire, or a receipt from
the sale of, an intangible asset, such as a
brand or
trademark;
cash paid to acquire, or a receipt from
the sale of, a separate business;
cash paid to acquire, or a receipt from
the sale of, an equity or debt instrument in
another entity,
such as a joint venture; and
cash given as an advance or loan to
another entity, or the repayment of such items.
Cash inflows or
outflows arising from the sale or acquisition of a business should be shown as
a net figure and
identified separately in the statement of cash flows. As listed above, such
cash flows form
part of an entity’s investing activities. [IAS 7.39]
It is important
to remember that when an asset is sold, not only will there be a cash inflow
from the
proceeds of the sale, but the entity will also make a profit or loss on the
transaction.
The profit or
loss itself is not a cash flow and therefore is not reported in the statement
of cash
flows. It is the
cash proceeds received on the sale that are reported in the statement of cash
flows.
Illustration 4
An item of plant
was disposed of for cash proceeds of CU1,000. The carrying amount of the
item of plant at
the date of the sale was:
CU
Cost 3,000
Less:
Accumulated depreciation 1,300
_____
Carrying amount
1,700
A loss of CU700
(the difference between the proceeds of CU1,000 and the carrying amount
of CU1,700)
should be recognised in profit or loss and the non-current asset should be
removed from the
statement of financial position. This loss should be excluded when
calculating cash
flows from operating activities for the statement of cash flows.
The CU1,000 cash
proceeds received should be recognised in the statement of cash flows
as an investing
activity – “proceeds from sale of property, plant and equipment”.
The cash flows
that occur as a result of making an acquisition of a business, or from disposal
of a business,
have a direct impact on the entity’s cash flows reported in the period and its
likely future
cash flows. Such information should therefore be separated out, so that a user
of
the financial
statements is able to make a better assessment about cash flows that are likely
to be ongoing
and those that are not. IAS 7 specifically requires the following information
to
be disclosed in
aggregate for acquisitions and sales of businesses, including subsidiaries,
made during the
period: [IAS 7.40]
Chapter 21 -
Statement of Cash Flows
Page 312
the total proceeds from a sale of
businesses or the consideration paid to acquire
businesses,
separately identifying the proportion that is cash;
the amount of cash in the businesses
being purchased or sold; and
a summary of the assets and liabilities,
other than cash, of the businesses acquired
or disposed of.
Chapter 21 –
Statement of Cash Flows
Page 313
7 Cash Flows
from Financing Activities
Financing
activities change the amount and composition of an entity’s equity capital and
borrowings. Such
activities are included under a separate heading in the statement of cash
flows because
this analysis provides useful information on the amount of cash generated by
the entity that
will be needed to service its financing activities. Examples of financing activities
are:
cash proceeds received from issuing
shares in the entity;
cash paid to redeem shares in the
entity;
cash proceeds received from issuing
debt instruments, such as debentures, bonds or
long-term
borrowings;
cash paid to repay debt instruments;
and
the capital element in finance lease
payments made during the period.
As discussed
above, dividends paid by an entity may also form part of an entity’s financing
activities,
depending on the analysis chosen.
It is important
to remember that it is cash movements that are reflected in the statement of
cash flows, so,
for example, where shares are issued above their par value, the amount
recorded in the
statement of cash flows is a single figure for the total cash received (being
the
par value and
any share premium recognised). The same principle applies to dividends paid
by an entity,
since dividends recognised elsewhere in the financial statements may include
amounts that
have been declared at the end of the reporting period, although not yet paid.
The statement of
cash flows only recognises the actual outflow of cash to investors.
Illustration 5
An entity has
declared preference dividends for the year of CU7,000 (based on its 7%
CU100,000
irredeemable preference shares in issue).
At the start of the
year, there was a balance of CU3,500 for preference dividends payable.
At the end of
the year no amount was owing to preference shareholders in respect of
dividends.
The preference
dividend paid for the year is not simply the CU7,000 declared, as this
amount needs to
be adjusted for any opening and closing balances.
CU
Opening balance
3,500
Declared in the
year 7,000
Less: Closing
balance -
_____
Dividend paid
10,500
Chapter 21 -
Statement of Cash Flows
Page 314
8 Sundry Items
8.1 Foreign currency cash flows
Where a cash
flow arises from a transaction in a foreign currency, it should be translated
into
the entity’s
functional currency at the exchange rate on the date that the cash flow
occurred.
[IAS 7.25]
Accounting for
foreign currency transactions is dealt with in IAS 21 Accounting for the effects
of changes in foreign exchange rates. The translation of foreign currency
cash flows should
be consistent
with the application of IAS 21. The average exchange rate for the period may
be used as an
approximation to the actual exchange rate, although an entity is not permitted
to use the rate
at the end of the reporting period to translate foreign currency cash flows.
Where an entity
has a foreign subsidiary, its cash flows should be translated to the functional
currency at the
exchange rates on the dates that the cash flows occurred. [IAS 7.26]
8.2 Non-cash transactions
Investing and
financing transactions that do not impact on cash, for example the conversion
of debt to
equity, should not be included in the statement of cash flows. The effect of
such
transactions
should be disclosed elsewhere in the financial statements as appropriate.
[IAS 7.43]
8.3 Additional disclosures
An entity should
disclose the components of cash and provide a reconciliation between this
and the
corresponding items in the statement of financial position. [IAS 7.45]
If an entity has
any significant cash balances that are restricted in some way and therefore
are not
available for use by the entity, this should be explained. [IAS 7.48]
Other
disclosures are required where such additional information is relevant to users
in their
understanding of
an entity’s financial statements. Additional useful disclosures may include,
for example, the
amount of an entity’s undrawn borrowings and a split of cash flow
information to
identify the flows that are needed to maintain an entity’s current operating
capacity and
those which increase its capacity.
9 Chapter Review
This chapter has
been concerned with the statement of cash flows. In particular it has focused
on identifying
and disclosing the key elements of a statement of cash flows.
This chapter has
covered:
the objectives, scope, definitions and
disclosure requirements of IAS 7;
cash flows arising from operating
activities;
cash flows arising from investing
activities; and
cash flows arising from financing
activities.
Chapter 21 –
Statement of Cash Flows
Page 315
10 Self Test
Questions
Chapter 21
1. Which TWO of
the following transactions would be presented in a statement
of cash flows,
according to IAS7 Statement of cash flows?
A Conversion
of loans into shares
B Loan
interest received
C Loan
interest owed
D Proceeds
of loan issue
2. Which ONE of
the following items should be presented under Cash flows from
investing activities, according to IAS7 Statement of cash flows?
A Employee
costs
B Property
revaluation
C Redemption
of debentures
D Development
costs capitalised in the period
3. Which ONE of
the following items should be presented under Cash flows from
financing activities, according to IAS7 Statement of cash flows?
A Employee
costs
B Property
revaluation
C Redemption
of debentures
D Development
costs capitalised in the period
4. Which ONE of
the following items should be presented under Cash flows from
operating activities, according to IAS7 Statement of cash flows?
A Employee
costs
B Property
revaluation
C Redemption
of debentures
D Development
costs capitalised in the period
5. Which TWO of
the following can be classified as Cash and cash equivalents
under IAS7 Statement of cash flows?
A Redeemable
preference shares due in 180 days
B Loan
notes held due for repayment in 90 days
C Equity
investments
D A
bank overdraft
Chapter 21 -
Statement of Cash Flows
Page 316
6. In accordance
with IAS7 Statement
of cash flows,
and treating it as a nonrecurring
event, which
classification of the cash flow arising from the
proceeds from an
earthquake disaster settlement would be most appropriate?
(select one answer)
A Cash
flows from operating activities
B Cash
flows from investing activities
C Cash
flows from financing activities
D Does
not appear in the cash flow statement
7. In accordance
with IAS7 Statement
of cash flows,
and treating it as a nonrecurring
event, which
classification of the cash flow arising from the
proceeds of sale
of a subsidiary would be most appropriate?
(select one answer)
A Cash
flows from operating activities
B Cash
flows from investing activities
C Cash
flows from financing activities
D Does
not appear in the cash flow statement
8. In accordance
with IAS7 Statement
of cash flows,
and treating it as a nonrecurring
event, which
classification of the cash flow arising from the disposal
proceeds of a
major item of plant would be most appropriate?
(select one answer)
A Cash
flows from operating activities
B Cash
flows from investing activities
C Cash
flows from financing activities
D Does
not appear in the cash flow statement
Chapter 22 –
Operating Segments
Page 317
Chapter 22
OPERATING
SEGMENTS
1 Business
Context
Most
multinational entities sell a number of products and services in different
markets or
geographical
locations which may be regarded as different operating segments. The total
profitability of
an entity will depend on the performance of each of these segments. For some
entities the key
segments will be based on products and services, for others it may be by
geographical
area. In each case, the separate management and performance measurement
of individual
segments is essential, as while one product or geographical area may be
performing well,
another may be failing.
While management
will have access to performance data on each separate part of the
business, the
published statement of comprehensive income only reports the aggregate
performance of
the entity. Overall profitability is important, but additional information is
needed by
external users to understand fully the businesses hidden below this top level
reporting.
IFRS 8 Operating segments provides the link between the business
operations and the main
components of
the financial statements by requiring information to be disaggregated.
Investors can
therefore make better assessments of the performance of each part of the
business,
leading to a better understanding of the business as a whole.
A related
business issue occurs when an entity closes or discontinues a part of its
overall
business
activity. Management will have assessed the impact of the closure on its future
profitability,
but users of the financial statements, be they investors or other stakeholders,
will
want to make
their own assessment. IFRS 5 Non-current assets held for sale and
discontinued operations provides an analysis not of future profit but of the contribution
of the
discontinued
element to the current year’s profit (or loss), i.e. the part that will not be
included
in future years’
profits.
Showing
information about segments and discontinued operations separately allows users
of
financial
statements to make relevant future projections of cash flows, financial
position and
earnings-generating
capacity.
2 Chapter
Objectives
This chapter
deals with the requirement to produce information on the entity’s different
operating
segments in accordance with IFRS 8. It also deals with the part of IFRS 5 about
the
reporting
requirements where the entity has discontinued operations during the period.
On completion of
this chapter you should be able to:
demonstrate a knowledge of the
objectives and scope of IFRS 8;
demonstrate a knowledge of the
important terminology used when identifying and
disclosing
segmental information;
understand how to identify reportable
segments;
demonstrate a knowledge of the key
disclosures required for reportable segments;
understand the definition of
discontinued operations according to IFRS 5; and
demonstrate knowledge of the key
disclosures required for discontinued operations.
