The objective of IAS 7 is to require the presentation of information about the historical changes in cash and cash equivalents of an entity by means of a statement of cash flows. IAS 7 Statement of Cash Flows requires an entity to present a statement of cash flows as an integral part of its primary financial statements. Statement of cash flows shows inflows and outflows of cash and cash equivalents from various activities of an enterprise during a particular period. ‘Cash’ comprises of cash in hand and demand deposits with banks, and ‘Cash equivalents’ means short-term highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.
Advantages of statement of cash flows
- Assess the Liquidity Status of Company
Statement of cash flows helps in knowing the liquidity position of the company. In case of shortage required funds can be raised through external sources. If there are excesses of funds, these can be used for growth of the business.
- Assist in Planning, Budgeting and Controlling
The financial planning and analysis is done with the help of statement of cash flows. It helps the top-level management to coordinate financial operations properly. Management can prepare estimates about various inflows of cash and outflows of cash so that it becomes helpful to take future actions.
- Performance Appraisal
The management can evaluate the performances regarding cash by comparing actual cash with projected cash flow statements. Management can take appropriate actions if any variance is found.
- Movement of Cash
Statement of cash flows represents the ins and outs of cash meaning the flows of cash on the basis of which future estimate can be made. Cash flow information is useful in assessing the ability of the enterprise to generate cash and cash equivalents. It enables users to develop models to assess and compare the present value of the future cash flows of different enterprises
Limitations of statement of cash flows
- Fails to Present Net Profit
Statement of cash flows fails to present the net income of a firm as it ignores non-cash items which are considered by income Statement. It does not help to assess profitability as it neither considers cost nor revenues. However, it can be used as supplement to income statement.
- Not a substitute to Income Statement
The functions which are performed by an income statement cannot be done by cash flow statement.
- Industry Comparison not possible
Statement of cash flows does not measure the efficiency of firm. Therefore, comparisons with other companies are not possible. A firm having less capital investment shall have less cash flow than the firm which has more capital investment resulting in higher cash flows.
- Does not Properly Assess Liquidity position
Statement of cash flows does not assess liquidity or solvency position of the firm in practice as it presents cash position only on a particular date. It only helps to know what amount of obligation can be met. Therefore, it does not represent the real liquidity position.
Classification
Cash flows are classified and presented into operating activities (either using the 'direct' or 'indirect' method), investing activities or financing activities, with the latter two categories generally presented on a gross basis.
Cash from Operating Activities
These are the principal revenue generating activities of the enterprise. They generally result from the transactions and other events that are used to determine net profit or loss. The amount of cash from operations’ indicates the internal solvency level of the company, and is regarded as the key indicator of the extent to which the operations of the enterprise have generated sufficient cash flows to maintain the operating capability of the enterprise, paying dividends, making of new investments and repaying of loans without recourse to external source of financing.
The statement of cash flows direct method uses actual cash inflows and outflows from the company's operations, instead of modifying the operating section from accrual accounting to a cash basis. The direct method shows each major class of gross cash receipts and gross cash payments.
Statement of net cash flow from operating activities (Direct Method) | |
$ | |
Cash receipts from customers | *** |
Cash paid to suppliers | (***) |
Cash paid to employees | (***) |
Cash paid for other operating expenses | (***) |
Interest paid | (***) |
Income taxes paid | (***) |
Net cash from operating activities | *** |
Theindirect method adjusts accrual basis net profit or loss for the effects of non-cash transactions. The operating cash flows section of the statement of cash flows under the indirect method is prepared as follows:
Reconciliation of operating profit to net cash flow from operating activities (Indirect Method) | |
Profit from operations / Operating profit | **** |
Add depreciation for the year | **** |
Add Loss on disposal / Less profit on disposal | * / (*) |
Add Impairment assets | **** |
Less dividend received | (***) |
Less increase / Add decrease in Inventories | (*) / * |
Less increase / Add decrease in Trade receivables | (*) / * |
Less decrease / Add increase in Trade payables | (*) / * |
Less Finance cost / Interest on debentures(loan) | (*) |
Less tax | (*) |
Net cash flow from operating activities | *** |
Examples of cash flows from operating activities are:
Cash Inflows from operating activities
- Cash receipts from sale of goods and income from services.
- Cash receipts from royalties, fees, commissions and other revenues.
Cash Outflows from operating activities
- Cash payments to suppliers for goods and services.
- Cash payments to and on behalf of the employees.
- Cash payments to an insurance enterprise for premiums and claims, annuities, and other policy benefits.
- Cash payments of income taxes
- Payment of interest of debentures (Finance cost)
Cash from Investing Activities
Investing activities are the acquisition and disposal of non-current assets and other investments not included in cash equivalents. Transactions related to long-term investment are also investing activities. Separate disclosure of cash flows from investing activities is important because they represent the extent to which expenditures have been made for resources intended to generate future income and cash flows.
Examples of cash flows arising from investing activities are:
Cash Inflows from Investing Activities
- Cash receipt from disposal of non-current assets including intangibles.
- Interest received in cash from loans and advances.
- Dividend received from investments in other enterprises.
Cash Outflows from investing activities
- Cash payments to acquire non-current assets including intangibles and capitalised research and development.
Cash from Financing Activities
Financing activities relate to long-term funds or capital of an enterprise. Financing activities are activities that result in changes in the size and composition of the owners’ capital (including preference share capital in case of a company) and borrowings of the enterprise. Separate disclosure of cash flows arising from financing activities is important because it is useful in predicting claims on future cash flows by providers of funds (both capital and borrowings) to the enterprise.
Examples of financing activities are:
Cash Inflows from financing activities
- Cash proceeds from issuing shares (equity or/and preference) at a premium.
- Cash proceeds from issuing debentures, loans, bonds and other short/ long-term borrowings.
Cash Outflows from financing activities
- Repayment of debentures / loan
- Dividends paid on equity and preference capital.
Format of preparing Statement of cash flows
Statement of cash flows for the year ended 31st December 2019 | ||
Net cash flow from operating activities | *** | |
Investing activities | ||
Purchase / Acquisitions of Non current assets | (***) | |
Proceeds from sale / disposal of Non current assets | *** | |
Payment to acquire investment | (***) | |
Investment income received | *** | |
Dividend received | *** | |
Net cash flow from investing activities | *** | |
Financing activities | ||
Issue of ordinary shares at premium | *** | |
Issue of preference shares at premium | *** | |
Issue of debentures | *** | |
Repayment of debentures / loan | (***) | |
Preference dividend | (***) | |
Ordinary dividend | (***) | |
Net cash flow from financing activities | *** | |
Net increase / (decrease) in cash and cash equivalents | *** | |
Cash and Cash equivalents at start | *** | |
Cash and Cash equivalents at end | *** | |
Worked Example
The directors of Hank Limited provide the following statements of financial position at 31 March:
2016 | 2015 | |
$000 | $000 | |
Assets | ||
Non-current assets (net book value) | 259 | 224 |
Current assets | ||
Inventories | 128 | 102 |
Trade receivables | 132 | 118 |
Cash and cash equivalents | – | 14 |
260 | 234 | |
Total assets | 519 | 458 |
Equity and Liabilities | ||
Equity | ||
Share capital | 210 | 180 |
Share premium | 15 | – |
Retained earnings | 107 | 131 |
332 | 311 | |
Non-current liabilities | ||
Bank loan (repayable 2020) | 42 | 20 |
Current liabilities | ||
Trade payables | 102 | 109 |
Bank overdraft | 23 | – |
Other payables – taxation | 20 | 18 |
145 | 127 | |
Total equity and liabilities | 519 | 458 |
Additional information:
The following information relates to the year ended 31 March 2016:
- The profit from operations was $30 000.
- During the year non-current assets with a cost of $24 000 and accumulated depreciation of $19 000 were sold for $8000.
- The depreciation charge for the year was $12 000. All non-current assets held at the end of the financial year are depreciated over 25 years using the straight-line method.
- Interest paid for the year was $9000.
- Dividends paid during the year were $25 000. A dividend of $30 000 had been proposed at the end of the year.
- The taxation charge was $20 000.
Prepare a statement of cash flows for Hank Limited for the year ended 31 March 2016 in accordance with IAS 7.
Step 1 – Calculate Operating profit
Income Statement for the year ended ……….. | |
$ | |
Revenue | *** |
Less Cost of sales | (**) |
Gross Profit | *** |
Less operating expenses | (**) |
Operating profit (Profit before interest and tax) | 30 000 |
Less Interest on debentures/ loan (Finance Cost) | (9 000) |
Profit before tax | 21 000 |
Less Tax | (20 000) |
Profit for the year | 1 000 |
Less Dividend | (25 000) |
(24 000) | |
Add retained earnings at start | 131 000 |
Retained Earnings at end | 107 000 |
Step 2 – Calculate Increase / decrease in
Inventory – Increase by $26 000 (128 – 102)
Trade receivables – Increase by $14 000(132 – 118)
Trade payables – Decrease by $7 000 (102 – 109)
Step 3 – Calculate Acquisition / Depreciation of Non Current Assets
Non-current assets at Net Book Value | |||
$ | $ | ||
Balance b/f | 224 | Disposal (24 – 19) | 5 |
Acquisition | 52 | Depreciation | 12 |
(259+12+5-224) | Balance c/d | 259 | |
276 | 276 | ||
Balance b/d | 259 | ||
Step 4 – Calculate profit / loss on disposal and Proceeds from disposal
Disposal of Non current assets | |||
$ | $ | ||
NCA at NBV | 5 | Proceeds from sale | 8 |
*Profit on disposal | 3 | * Loss on disposal | *** |
8 | 8 | ||
Step 5 – In case 3 different figures are available for Interest, Tax and Dividend
Interest/ Tax / Dividend Account | |||
$ | $ | ||
Bank | *** | Balance b/f | *** |
Balance c/d | *** | Income statement | *** |
*** | *** | ||
Balance b/d | *** | ||
Step 6 – Calculate changes in Equity
Ordinary share capital | $ | |
Balance at start | 180 | |
Add issue of shares at nominal value | 30 | |
Add rights issue at nominal value | *** | |
Less bonus issue | (**) | NOT RECORDED |
Balance at end | 210 |
Step 7 – Calculate changes in Share premium
Share premium | $ | |
Balance at start | ||
Add premium on issue of shares | 15 | |
Add premium on rights issue | *** | |
Less bonus issue | (**) | NOT RECORDED |
Balance at end | 15 |
Step 8 –Calculate change in Non-current liabilities
Increase – cash inflow = $22 000 (42-20)
Decrease – Cash outflow
Statement of Cash Flows for Hank Limited for the year ended 31 March 2016 | ||
Operating Activities | $ | $ |
Profit from operations (Step 1) | 30 000 | |
Add depreciation (Step 3) | 12 000 | |
Less profit on disposal of non-current assets (Step 4) | (3 000) | |
Less increase in inventories (Step 2) | (26 000) | |
Less increase in trade receivables (Step 2) | (14 000) | |
Less decrease in trade payables (Step 2) | (7000) | |
Cash from operations | (8 000) | |
Less interest paid | (9 000) | |
Less taxation paid (Year 1) | (18 000) | |
Net cash from operating activities | (35 000) | |
Investing activities | ||
Add proceeds from sale of non-current assets (Step 4) | 8 000 | |
Less purchase of non-current assets (Step 3) | (52 000) | |
Net cash flow from investing activities | (44 000) | |
Financing activities | ||
Add receipts from share issue at premium (Step 6 / 7) | 45 000 | |
Less dividends paid | (25 000) | |
Add increase in loan (Step 8) | 22 000 | |
Net cash from financing activities | 42 000 | |
Net decrease in cash and cash equivalents | (37 000) | |
Cash and cash equivalents at the start of the year | 14 000 | |
Cash and cash equivalents at the end of the year | (23 000) | |
Q1. The summarised accounts of Sabrina plc for 2011 and 2010 are set out below.
Income Statement for the year ended 30 June | 2011 | 2010 |
$000 | $000 | |
Revenue | 2 546 | 1 458 |
Cost of sales | 981 | 512 |
Gross profit | 1 565 | 946 |
Depreciation | 786 | 384 |
Other expenses | 108 | 84 |
Profit on disposal of non-current assets | 15 | 8 |
Operating profit | 686 | 486 |
Interest (Finance cost) | 225 | 80 |
461 | 406 | |
Taxation | 103 | 94 |
Profit after taxation | 358 | 312 |
Dividends | 160 | 80 |
Retained profit for year | 198 | 232 |
Retained profit b/f | 821 | 589 |
Retained profit c/f | 1 019 | 821 |
Statement of Financial Position as at 30 June | ||
2011 | 2010 | |
$000 | $000 | |
Non-current assets | 5 214 | 2 576 |
Current assets | ||
Inventories | 441 | 227 |
Trade receivables | 639 | 361 |
Bank | – | 78 |
6 294 | 3 242 | |
Capital and reserves | ||
Ordinary share capital | 2 000 | 1 000 |
Share premium | 50 | – |
Retained earnings | 1 019 | 821 |
3 069 | 1 821 | |
Non current liabilities | ||
8% Debentures (2020) | 2 500 | 1 000 |
5 569 | 2 821 | |
Current liabilities | ||
Trade payables | 347 | 287 |
Dividends | 80 | 40 |
Taxation | 103 | 94 |
Bank | 195 | – |
6 294 | 3 242 | |
Note:
All sales and purchases are made on credit.
Non-current assets costing $40 000, with accumulated depreciation of $25 000, were sold during the year.
REQUIRED
- Prepare reconciliation between cash flows from operating activities and operating profit for the year ended 30 June 2011.
- Prepare a cash flow statement for the year ended 30 June 2011 in accordance with IAS 7.
Q2. The statement of financial position at 31 March 2010 and 2009 for Costello plc are shown below:
2010 | 2009 | |||
$000 | $000 | $000 | $000 | |
Non-current (fixed) assets (Note 1) | 8 080 | 5 330 | ||
Current assets | ||||
Inventories | 948 | 920 | ||
Trade and other receivables | 542 | 522 | ||
Cash and cash equivalents (bank) | – | 1 490 | 580 | 2 022 |
Total Assets | 9 570 | 7 352 | ||
Equity | ||||
Ordinary shares of $1 each fully paid (Note 3) | 3 000 | 2 000 | ||
Share premium account | 1 000 | – | ||
Retained earnings | 4 502 | 4 312 | ||
8 502 | 6 312 | |||
Non-current liabilities | ||||
7% debentures (Note 2) | 360 | 500 | ||
Net assets | 8 862 | 6 812 | ||
Current liabilities | ||||
Trade and other payables | (453) | (234) | ||
Tax | (168) | (306) | ||
Cash and cash equivalents (bank) | (87) | 708 | – | 540 |
Equity and Liabilities | 9 570 | 7 352 | ||
The following information is available for the year ended 31 March 2010: | |||||
$000 | |||||
Profit from operations (operating profit) | 393 | ||||
Finance costs (interest paid) | (30) | ||||
Tax | (168) | ||||
Dividends paid | (5) | ||||
Retained profit for the year | 190 | ||||
Note 1 | |||||
Non-current (fixed) assets | 2010 | 2009 | |||
Land | $000 | $000 | |||
Cost | 2 550 | 2 550 | |||
Additions | 450 | – | |||
Revaluation | 500 | – | |||
Book value | 3 500 | 2 550 | |||
There were no disposals of land during the year. | |||||
Buildings | $000 | $000 | |||
Cost | 1 530 | 1 530 | |||
Additions | 1 350 | – | |||
Accumulated depreciation | (900) | (430) | |||
Net book value | 1 980 | 1 100 | |||
There were no disposals of buildings during the year. | |||||
Plant and machinery | $000 | $000 | |||
Cost | 1 600 | 1 600 | |||
Additions | 620 | – | |||
Disposals | (130) | – | |||
Accumulated depreciation | (810) | (400) | |||
Net book value | 1 280 | 1 200 | |||
During the year plant and machinery which had originally cost $130 000 was sold for $6000. The depreciation charged on this plant and machinery was $98 000. | |||||
Vehicles | $000 | $000 | |||
Cost | 900 | 900 | |||
Additions | 1 270 | – | |||
Disposals | (200) | – | |||
Accumulated depreciation | (650) | (420) | |||
Net book value | 1 320 | 480 | |||
During the year vehicles which had originally cost $200 000 were sold at a profit of $7000. The sales proceeds were $37 000.
Note 2
$140 000 debentures were paid on 30 September 2009.
Note 3
In May 2009 a bonus issue of 1 new ordinary share for every 4 held was made. It is company policy to maintain reserves in their most flexible form. A rights issue of 1 ordinary share for every 5 held at a premium of $2 each was made in February 2010.
REQUIRED
- Prepare a statement to show the reconciliation of profit from operations (operating profit) to net cash flow from operating activities for the year ended 31 March 2010.
- Prepare a statement of cash flows for the year ended 31 March 2010
Q3. The directors of Plantin plc have produced the following.
Statement of Financial Position at 1 April 2014
Non-current assets Tangible Property, plant and equipment | Cost | Depreciation | Net book value |
Land and buildings | 260 000 | 90 000 | 170 000 |
Plant and equipment | 152 000 | 87 000 | 65 000 |
412 000 | 177 000 | 235 000 | |
Investments | 55 000 | ||
290 000 | |||
Intangible | |||
Goodwill | 80 000 | ||
370 000 | |||
Current assets | |||
Inventories | 45 000 | ||
Trade and other receivables | 56 000 | ||
101 000 | |||
Total assets | 471 000 | ||
Equity | |||
Ordinary share capital ($1 shares) | 100 000 | ||
5% Non-redeemable $1 preference shares | 80 000 | ||
Retained earnings | 110 000 | ||
290 000 | |||
Non-current liabilities | |||
5% debentures | 100 000 | ||
Current liabilities | |||
Trade and other payables | 24 000 | ||
Taxation | 40 000 | ||
Cash and cash equivalents | 17 000 | ||
81 000 | |||
Total equity and liabilities | 471 000 |
The following information is also available for the following year.
Extract from Income Statement for the year ended 31 March 2015 | $ |
Profit from operations | 74 000 |
Income from investments | 5 000 |
Finance costs | (12 000) |
Profit before taxation | 67 000 |
Taxation | (15 000) |
Profit for the year | 52 000 |
Statement of cash flows for the year ended 31 March 2015 | ||
$ $ | ||
Operating activities | ||
Profit from operations | 74 000 | |
Depreciation - buildings | 28 000 | |
Depreciation- plant and equipment | 33 000 | |
Impairment of goodwill | 20 000 | |
Increase in inventories | (30 000) | |
Increase in trade receivables | (40 000) | |
Increase in trade payables | 30 000 | |
Cash from operations | 115 000 | |
Interest paid | (12 000) | |
Tax paid | (40 000) | |
Net cash flow from operations | 63 000 | |
Investing activities | ||
Purchase of non-current assets | ||
- buildings | (80 000) | |
- plant and equipment | (80 000) | |
Income from investments | 5 000 | (155 000) |
Financing activities | ||
Re-payment of debentures | (50 000) | |
Proceeds of issue of non-redeemable preference shares | 20 000 | |
Proceeds of issue of 50 000 ordinary shares | 80 000 | |
Dividends paid (preference) | (4 000) | 46 000 |
Net decrease in cash and cash equivalents | (46 000) | |
Cash and cash equivalents at 1 April 2014 | (17 000) | |
Cash and cash equivalents at 31 March 2015 | (63 000) | |
REQUIRED
Prepare Plantin plc’s statement of financial position as at 31 March 2015.
