IAS 7 - Statement of cash flows


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

***


The indirect 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

0


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 

  1. Prepare reconciliation between cash flows from operating activities and operating profit for the year ended 30 June 2011.
  2. 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.