21 July, 2012

Statement of Cash Flows




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.
Operating Activities:
Cash Inflows from:
Sale of goods or services
Return on loans (interest received) and on interest  bearing securities (Dividend received)
Cash outflows for:
Production of goods or services: Included disbursements such as employee compensation to suppliers of raw materials or services & payment for utilities)
Salaries & Wages
Taxes, duties, fines & Penalties
Interest
Other expenses-not considered investing or financing activities
INVESTING ACTIVITIES:
Cash Inflows from:
1. Sale of property, plant &equipment and other productive assets
2. Collections or sale of loans
3.Sale of other companies interest bearing securities or stock owned as an investment
Cash outflows for:
1. Purchase of property, plant &equipment and other productive assets
2. Issuance of loans
3. Purchase  of other companies interest bearing securities or stock as an investment
FINANCING ACTIVITIES:
Cash Inflows from:
1. Issuing debt such as bonds, notes or mortgages
2. Sale of bonds, mortgages, notes & other borrowings
Cash outflows for:
1. Payments of cash dividends to stockholders
2. Purchase of treasury stock
3. Payment of amount borrowed
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:
Particulars
Amounts
Amounts
Cash flow Operating Activities:


Cash receipts from Customers
*****

Cash paid to suppliers


Cash paid to  employees


Cash paid to  workers


Cash paid to income taxes


Cash paid to  interest


Cash receipt from sale of goods and rendering services


Cash receipt from royalties


Cash receipt from fees, commission and other revenues


Cash receipts of   an insurance enterprise for premiums and claims, Annuities and other policy benefits


Cash receipts of   an insurance enterprise for premiums and claims, Annuities and other policy benefits


Cash payments on behalf of employees


Cash receipt from interest and dividend


Cash  payment of interest and dividend


Cash receipts from contracts held for dealing or trading securities


Cash payments for contracts held for dealing or trading securities


Cash generated from operations before unusual items

*****
Proceeds from recovery of loss etc.

******
Net Cash provided from operating activities

*****
Cash flow Investing Activities:


Cash paid to Purchase of property, plant &equipment and other productive assets


Cash paid for  Purchase of long term securities


Cash paid to acquire a debt instruments of other enterprises and interest in joint ventures


Cash advances and loans made to other parties


Cash receipt from Sale of property, plant &equipment and other productive assets


Cash receipt from disposal of long term securities


Cash receipt from the repayments of advances and loans made to other parties


Cash receipts from future contracts, forward contracts and option contracts
*****

Net Cash provided from investing activities

*****
Cash flow Financing Activities:


Cash receipts from Issuing debt such as bonds, notes or mortgages
*****

Cash receipts from selling bonds


Cash proceeds from short term and long term borrowing


Cash proceeds from issuing debentures, loans, notes, bonds and mortgages


Sale of company’s own capital stock (bonds, mortgages, notes & other borrowings)
*****

Cash paid for retirements bonds


Payments of cash dividends to stockholders
*****

Cash paid for Purchase of treasury stock
*****

Payment of amount borrowed
*****

Cash payment by a lessee for the reductions of the outstanding liabilities relating to
finance lease


Net Cash provided from Financing activities

*****
Net increase in cash & Cash equivalents

*****
Balance of cash & Cash equivalents beginning of the year

*****
Balance of cash & Cash equivalents end  of the year

*****
The Indirect Method: The indirect method can be summarized in the following method:
Particulars
Amount
Amount
Cash flow Operating Activities:


Net income


Adjustment to net income to determine cash provided by operations:


Depreciation


Decrease in Receivable


Decrease in Prepaid expenses


Dividend received


Interest Received


Increase in Accounts Receivable


Less:


Increase in Receivable


Income tax paid


Dividend paid


Interest paid


Decrease in accrued liabilities


Net Cash provided from operating activities

*****
Cash flow Investing Activities:


Sale of property, plant &equipment and other productive assets
*****

Collections or sale of loans
*****

Sale of other companies interest bearing securities or stock owned as an investment
*****

Less:


1. Purchase of property, plant &equipment and other productive assets
*****

2. Issuance of loans
*****

3. Purchase of  investment
*****

Net Cash provided from investing activities

*****
Cash flow Financing Activities:


Issuing debt such as bonds, notes or mortgages
*****

Sale of company’s own capital stock (bonds, mortgages, notes & other borrowings)
*****

Less:


Payments of cash dividends to stockholders
*****

Purchase of treasury stock
*****

Payment of amount borrowed
*****

Net Cash provided from Financing  activities

*****
Net increase in cash & Cash equivalents

*****
Balance of cash & Cash equivalents beginning of the year

*****
Balance of cash & Cash equivalents end of the year

*****
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

Particulars
2005 ($)
2004 ($)
Assets:


Cash
22,500
30,000
Accounts Receivable -net
84,000
60,000
Inventories
1,50,000
1,20,000
Investments
75,000
15,000
Equipment
4,12,500
3,15,000
Accumulated Depreciation
(1,20,000)
(25,200)
Total Assets
$6,24,000
$4,35,000
Liabilities & Stockholder’s Equity:


Accounts Payable
21,750
18,750
Accrued liabilities
2,250
3,750
Common Stock
5,25,000
3,75,000
Retained Earnings
75,000
37,500
Total Liabilities & stockholder’s Equity
$6,24,000
$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
Particulars
Amount
 Sales revenue
$5,70,000
Less: Cost of goods sold
1,50,000
Less: Operating expenses (excluding Depreciation)
1,11,000
Depreciation Expenses
 9,000
Interest expenses
 42,000
Loss on sale of equipment
3,000
Income before tax
1,92,000
Less: Income Tax Expenses
47,000
Net Income
1,45,000

Wal-Mart  Company

Comparative Balance Sheet

December 31


Particulars
2005
2004
Assets:


Cash
$55,000
$33,000
Accounts Receivable (Net)
20,000
30,000
Merchandise Inventories
15,000
10,000
Prepaid expenses
        5,000
1,000
Property, Plant & Equipment


Land
     1,30,000
20,000
Building
     1,60,000
40,000
Accumulated Depreciation –Building
    (11,000)
(5,000)
Equipment
    27,000
10,000
Accumulated Depreciation -Equipment
     (3,000)
(1,000)
Total Assets
   $3,98,000

1,38,000

Liabilities & Stockholder’s Equity:


Current Liabilities


Accounts Payable
  28,000
12,000
Income Taxes Payable
  6,000
8,000
Long Term Liabilities


Bonds Payable
1,30,000
20,000
Stockholders Equity


Common share
  70,000
50,000
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:


Sale of Equipment
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:


Sale of Machinery
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:


Sale of Machinery
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.

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