1. F7

2. 2

3. 3 Designed to give you the knowledge and application of: Section C: Financial Statements C1. Statements of cash flows C2. Tangible non-current assets C3. Intangible assets C4. Inventory C5. Financial assets and financial liabilities C6. Leases C9. Taxation

4. 4 Learning Outcomes  Preparation of a statement of cash flows for a single entity  Interpretation of a statement of cash flows for a single entity C1: Statements of cash flows

5. 5 Preparing cash flow statement Principal revenue- producing activities of the entity & other activities that are not investing or financing activities Cash flows from operating activity Direct methodIndirect method Major classes of gross cash receipt & gross cash payments are disclosed Profit or loss is adjusted for the effects of transactions of a non- cash nature Direct method- gross receipts & payments a) directly from the accounting records b) taking the income statement as the basis & adjusting the figures for sales, cost of sales & other items for  changes during the period in inventories and operating receivables and payables;  other non-cash items; and  other items for which the cash effects are investing or financing cash.

6. 6 Outflow Inflow  Increase in trade receivables or inventory  Decrease in trade payables  Increase in trade payables  Decrease in trade receivables or inventory Refer to Test Yourself 1 on page 144 Indirect method  Net profit: the figures of net-profit or loss is taken from the income statement and adjustments are made for the effects  Non-cash items: items like depreciation, provisions & deferred taxes need to be eliminated as the net profit / loss as the starting figure include the effect of all of these  Separate the investing & financing components:  Changes in inventory, receivables & payables: Indirect Method

7. 7 Cash flows from investing activity Acquisition & disposal of long-term assets & other investments not included in cash equivalents  Property, plant & equipment, intangibles & other long-term assets  Equity or debt instruments of other entities & interests in joint ventures  Cash advances and loans made to other parties Cash payments & receipts include Refer to Test Yourself 4 on page 147 Investing activity

8. 8 Cash flows from financing activity Activities that result in changes in size & composition of the contributed equity & borrowings of entity  Issue or redemption of shares  Borrowing & repayment of debentures, loans, notes, bonds, mortgages and other short or long-term borrowings  Cash payments towards the principal portion by the lessee of a financial lease Cash payments & receipts include Refer to Test Yourself 5 on page 148 Financing activity

9. 9 Receipts & payments are to be disclosed separately Whether interest amount is capitalised or shown as an expense, it should be disclosed separately Classification of interest paid & interest & dividends received Classification of dividends paid In classifying & disclosing interest & dividends under operating, investing or financing activities Interest & dividends Disclosure Classification under operating, investing or financing activities Consistency Example A receipt of $50,000 of interest on loans given and payment of $75,000 of interest on borrowings received should be disclosed separately. Example A company incurs an interest cost of $0.5m and (as permitted by IAS 23) capitalises it, i.e. adds it to the cost of machinery. The SOCI (income statement) will not show the interest cost separately. However, the company will have to show the interest cost separately in the statement of cash flows. Interest & dividends

10. 10 From the following details, prepare a statement of cash flows for the year ended 31 March 20X6: How to start: a) The information available is suitable for the direct method. b) Prepare a proforma for the direct method. c) Classify the activities under operating, financing and investing activities. d) Enter the figures into the format $ Total sales for the year were $949,000, which included cash sales worth586,000 Cash collections from credit customers during the year623,400 Cash paid to suppliers and employees796,810 Income tax paid187,500 Fully paid debentures redeemed at a premium of 2%, with a face value of100,000 Interest on debentures8,400 Furniture with book value of $10,500 was disposed of for $6,100 and new furniture costing $8,160 was purchased Dividends for the year ended 31 March 20X5 distributed during 20X5-20X645,000 On 31 March 20X6 cash in hand and at bank totalled81,000 Example page 152 Continued…

11. 11 Direct method statement of cash flows Cash flows from operating activities$$ Cash receipts from customers (586,000 + 623,400)1,209,400 Cash paid to suppliers and employees (796,810) Cash generated from operations 412,590 Interest paid (8,400) Income taxes paid(187,500) Net cash from operating activities 216,690 Cash flows from investing activities: Purchase of property, plant and equipment (8,160) Proceeds from sale of equipment 6,100 Net cash used in investing activities (2,060) Continued…

12. 12 Cash flows from financing activities Proceeds from long-term borrowings – redemption of debentures (102,000) Dividends paid (45,000) Net cash used in financing activities (147,000) Net increase in cash and cash equivalents 67,630 Cash and cash equivalents at beginning of period * 13,370 Cash and cash equivalents at end of period 81,000 Continued… *Not given; therefore calculated as a balancing figure

13. 13 Interpretation of cash flow statement Effects of different accounting treatments for the same transactions & events are eliminated Financing inflows & outflows are shown separately Better to look at cash flows for several periods Check how far & how fast profits are converted into cash flows Comparison of operating with borrowing – help to judge dependence on borrowings Other ratios can also be calculated Liquidity: helps in assessing solvency position Financial position: helps to understand changes Performance of an entity Use of cash flow in assessing Financial position of an entity

14. 14 $ i.Net profit before income tax, after considering the following items: 3,066,980 a)Depreciation on property, plant & equipment 806,400 b)Discount on issue of debentures written off 56,000 c)Interest on debentures paid 504,000 d)Profit on sale of investments 15,400 e)Interest received on investments 70,000 f)Compensation received in a lawsuit 112,000 ii.Income tax paid during the year 1,540,000 iii.Book value of investments sold 343,000 iv.Nominal value of preference shares redeemed at a premium of 5% 2,100,000 v.Nominal value of equity shares issued for cash at a premium of 20% 700,000 vi.Dividends paid for the year 20X4-05 840,000 vii.Interim dividends paid for 20X5-06 280,000 viii.Land purchased (payment made by way of 560,000 equity shares of $1 each issued at a premium of 20%) 672,000 ix.Current assets and current liabilities in the beginning and end of year The following figures have been extracted from Souffle Ltd's books for the year ended 31st March 20X6: Example(page 153) Continued…

15. 15 Prepare statement of cash flows for the year ended 31 March 20X6. Answer Hints: a)The details given are suitable for the indirect format. Therefore, prepare such a format. b)Decide on the classification of each item. c)Adjust the items included in the net profit but not forming part of operating activities. d)Find out the differences between opening and closing balances of the assets given and enter them in the cash flow (see workings 1 and 2). e)Write the items at the correct places in the cash flow. f)Find out the total balance of cash equivalents at the end. Out of this total, the cash balance is known. The balancing figure will be the bank balance. As at 31 March 20X5 $ As at 31 March 20X6 $ Stock 1,740,200 1,905,400 Trade receivables 291,900 300,440 Cash in hand 26,600 35,420 Cash at bank 261,800 ? Bills receivable 98,000 84,000 Bills payable 77,00070,000 Trade payables 233,940241,360 Outstanding expenses 106,960116,480 Continued…

16. 16 $$ Cash flows from operating activities Profit before taxation 3,066,980 Adjustments for: Depreciation 806,400 Investment income (70,000) Profit on sale of investments (15,400) Interest expense 504,000 Discount on issue of debentures written off 56,000 Decrease / (Increase) in trade and other receivables (W1) 5,460 Decrease / (Increase) in inventories (165,200) Increase / (Decrease) in trade and other payables (W2) 9,940 Cash generated from operations 4,198,180 Interest paid (504,000) Income taxes paid(1,540,000) Net cash from operating activities 2,154,180 Indirect method statement of cash flows Continued…

17. 17 Cash flows from investing activities Proceeds from sale of investments (343,000 + 15,400) 358,400 Interest received on investments70,000 Net cash received from/ (used in) investing activities 428,400 Cash flows from financing activities Proceeds from issue of share capital (700,000 + 20%) 840,000 Redemption of preference shares (2,100,000 + 5%)(2,205,000) Proceeds from long-term borrowings Payment of finance lease liabilities Dividends paid (840,000 + 280,000)(1,120,000) Net cash received from / (used in) financing activities(2,485,000) Net increase / (decrease) in cash and cash equivalents 97,580 Cash and cash equivalents at beginning of period (26,600 + 261,800) 288,400 Cash and cash equivalents at end of period 385,980 Continued…

18. 18 Out of this, cash balance is $35,420. Therefore, bank balance = $280,560 Workings W1 W2 Notes: 1.It is assumed that the lawsuit relates to operating activities and hence no adjustment is made to remove its effect from operating activities. 2.The above cash flow does not include purchase of land worth $672,000 by issue of 560,000 share shares of $1 each at a premium of 20%, since it is a non-cash transaction. $ Decrease in trade and other receivables: Decrease in bills receivable (98,000 – 84,000)14,000 Increase in trade receivables (300,440 – 291,900)(8,540) 5,460 $ Increase in trade and other payables: Decrease in bills payable (77,000 – 70,000)(7,000) Increase in trade payables (241,360 – 233,940)7,420 Increase in outstanding expenses (116,480 – 106,960)9,520 9,940 Continued…

19. 19 RECAP  Preparation of a statement of cash flows for a single entity  Interpretation of a statement of cash flows for a single entity

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