11 Chapter 17 statements Of Cash flow

CopyRight 2011 By 周冬华 博士 CPA 2 structure

CopyRight 2011 By 周冬华 博士 CPA 3 Exam guide a group statement of cash flows could well appear in the case study question in compulsory Section A of the paper as it did in the pilot paper.

CopyRight 2011 By 周冬华 博士 CPA 4 IAS 7 Statement of cash flows Fast forward Statements of cash flows are a useful addition to the financial statements of companies because it is recognized that accounting profit is not the only indicator of a company’s performance. Statements of cash flows concentrate on the sources and uses of cash and are a useful indicator of a company’s liquidity and solvency.

CopyRight 2011 By 周冬华 博士 CPA 5 Objective of the statement of cash flows  The objective of IAS 7 Statement of cash flows is:  to ensure that all entities provide information about the historical changes in cash and cash equivalents by means of a statement of cash flows  to classify cash flows (i.e. inflows and outflows of cash and cash equivalents) during the period between those arising from operating, investing and financing activities.

CopyRight 2011 By 周冬华 博士 CPA 6 Definitions Key terms  Cash comprises cash on hand and demand deposits.  Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.  Cash flows are inflows and outflows of cash and cash equivalents.  Operating activities are the principal revenue-producing activities of the entity and other activities that are not investing or financing activities.  Investing activities are the acquisition and disposal of non- current assets and other investments not included in cash equivalents.  Financing activities are activities that result in changes in the size and composition of the equity capital and borrowings of the entity.

CopyRight 2011 By 周冬华 博士 CPA 7 cash and cash equivalents  Loans and other borrowings are classified as financing activities  Bank overdrafts are repayable on demand and are treated as part of an entity’s total cash management system. If these circumstances an overdrawn balance will be included in cash and cash equivalents.  Movements between different types of cash and cash equivalent are not included in cash flows.

CopyRight 2011 By 周冬华 博士 CPA 8 Presentation of a statement of cash flows  Operating  Investing  Financing  Depends on the nature of the entity

CopyRight 2011 By 周冬华 博士 CPA 9 Operating activities  (a) Cash receipts from the sale of goods and the rendering of services  (b) Cash receipts from royalties, fees, commissions and other revenue  (c) Cash payments to suppliers for goods and services  (d) Cash payments to and on behalf of employees

CopyRight 2011 By 周冬华 博士 CPA 10 Investing activities  (a) Cash payments to acquire property, plant and equipment, intangibles and other non-current assets, including those relating to capitalized development costs and self-constructed property, plant and equipment  (b) Cash receipts from sales of property, plant and equipment, intangibles and other non-current assets  (c) Cash payments to acquire shares or debentures of other entities  (d) Cash receipts from sales of shares or debentures of other entities  (e) Cash advances and loans made to other parties  (f) Cash receipts from the repayment of advances and loans made to other parties

CopyRight 2011 By 周冬华 博士 CPA 11 Financing activities  (a) Cash proceeds from issuing shares  (b) Cash payments to owners to acquire or redeem the entity's shares  (c) Cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short or long-term borrowings  (d) Principal repayments of amounts borrowed under finance leases

CopyRight 2011 By 周冬华 博士 CPA 12 Reporting cash flows from operating activities  Direct method  Indirect method

CopyRight 2011 By 周冬华 博士 CPA 13 Direct method  The direct method of arriving at cash flow from operating activities uses the actual trading cash flows to arrive at operating profit. These cash flows are:  cash received from customers  cash paid to suppliers  cash paid for expenses  cash paid for wages and salaries.

CopyRight 2011 By 周冬华 博士 CPA 14 Indirect method  This method is undoubtedly easier from the point of view of the preparer of the statement of cash flows. The net profit or loss for the period is adjusted for the following.  Changes during the period in inventories, operating rececvables and payables.  Non cash items, eg depreciation, provisions, profits/losses on the sales of assets  Other items, the cash flows from which should be classified under investing or financing activities.

CopyRight 2011 By 周冬华 博士 CPA Interest and dividends  Each should be classified in a consistent manner from period to period as either operating investing or financing activities.  Page

CopyRight 2011 By 周冬华 博士 CPA 16 Preparing a cash flow statement-Single company Fast forward You need to be aware of the format of the statement as laid out in IAS 7; setting out the format is an essential first stage in preparing the statement, so this format must be learnt.

CopyRight 2011 By 周冬华 博士 CPA 17 Preparing a cash flow statement  (a) Increase in inventory is treated as negative (in brackets). This is because it represents a cash outflow; cash is being spent on inventory.  (b) An increase in receivables would be treated as negative for the same reasons; more receivables means less cash.  (c) By contrast an increase in payables is positive because cash is being retained and not used to settle accounts payable. There is therefore more of it.

CopyRight 2011 By 周冬华 博士 CPA Proforma for indirect method  Profit before tax x Add depreciation x Loss （ profit ） on sale of non-current assets x （ Increase ） /decrease in inventories （ x ） /x （ Increase ） /decrease in receivables （ x ） /x Increase/ （ decrease ） in payables x/ （ x ） Cash generated from operations x Interest （ paid ） /received （ x ） Income taxes paid （ x ） Net cash flows from operating activities x 18

CopyRight 2011 By 周冬华 博士 CPA Step-by-step preparation procedure:  1. Set out the proforma leaving plenty of space  2. Complete the reconciliation of operating profit to net cash from operating activities, as far as possible  3. Calculate the following where appropriate. tax paid. Dividends paid. purchase and sale of non-current assets. issues of shares. repayment of loans 19

CopyRight 2011 By 周冬华 博士 CPA  4. Work out the profit if not already given using: opening and closing balances, tax charge and dividends  5. Complete the note of gross cash flows. Alternatively the information may go straight into the statement  6. Slot the figures into the statement and any notes required  Question on page

CopyRight 2011 By 周冬华 博士 CPA Consolidated statements of cash flows  Consolidated cash flows should not present a great problem if you understand how to deal with acquisitions and disposals of subsidiaries, NCI and dividends.  Consolidated statements of cash flows follow the same principles as for single company statements, with some additional complications  Cash flows that are internal to the group should be eliminated in the preparation of a consolidated statement of cash flows. 21

CopyRight 2011 By 周冬华 博士 CPA Acquisition of subsidiaries(p423)  the net cash paid (not shares, not loan notes) in the acquisition of a subsidiary should be shown, within Investing Activities  a disclosure note is required showing the detail of the total purchase consideration, and how much was actually paid, in cash  disclosure is also needed to show the detail of assets and liabilities acquired as well as the cash and cash equivalents paid or received 22

CopyRight 2011 By 周冬华 博士 CPA Associates and joint ventures  dividends received from associates will be shown within “Investing Activities” 23

CopyRight 2011 By 周冬华 博士 CPA Example 1 24

CopyRight 2011 By 周冬华 博士 CPA solution  Answer to Example 1  Investment brought forward 180,000  Share of profit 13,000  193,000  Investment carried forward (190,000)  ∴ Dividend received 3,000 25

CopyRight 2011 By 周冬华 博士 CPA Non-controlling interest  only the money actually paid to the non-controlling interest will be shown, within “Financing Activities”  Example on page 424.  Finance lease transactions on page

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