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IAS-7 STATEMENT OF CASH FLOWS

Purposes of Statement of Cash Flows (a) To provide information about the cash receipts and cash payments of an entity during a period. Important information for financial statement users because many feel that accrual accounting does not present true picture. (b) To summarize the operating, investing, and financing activities of the business. It is an integral part of Financial Statements. USES OF STATEMENT OF CASH FLOWS Statement of Cash Flows helps users of financial statements in the following: Assessing the entitys ability to generate positive future cash flows and cash equivalents. Assessing the entitys ability to pay dividends and meet obligations. Assessing the entitys ability to finance further investments. Assessing the cash and non-cash investing and financing transactions during the period Reconciling the difference between net income and net cash flow from operating activities. Evaluating changes in: Net assets Financial structure Ability to affect amounts and timings of cash flows (to adapt to changing circumstances and opportunities. Developing models to assess and compare the present value of future cash flows of different enterprises. Comparing the operating performance of different enterprises (by eliminating effects of alternative accounting treatments). Historical cash flow information may provide an indicator of the amount, timing and certainty of future cash flows. DEFINITIONS Cash comprises cash on hand and demand deposits. Bank overdraft is treated as negative cash. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash subject to an insignificant risk of changes in value. Examples include: Short term investments, treasury bills and government stocks with maturity of less than three months Loan-note (asset) repayable on demand Cash flows are inflows and outflows of cash and cash equivalents. Operating activities are the principal revenue-producing activities of the enterprises and other activities that are not investing or financing activities. Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Financing activities are activities that result in changes in the size and composition of equity capital and borrowing. CLASSIFICATION OF CASH FLOWS INTO OPERATING, INVESTING AND FINANCING ACTIVITIES Operating Cash flows from operating activities are primarily derived from the principal revenue-producing activities of the enterprise. Therefore, they generally result from the transactions and other events that enter into the determination of net profit or loss. Examples of cash flows from operating activities are: (a) (b) (c) (d) (e) Cash receipts from the sale of goods and the rendering of services; Cash receipts from royalties, fees, commissions and other revenue; Cash payments to suppliers for goods and services; Cash payments to and on behalf of employees; Cash receipts and cash payments of an insurance enterprise for premiums and claims, annuities and other policy benefits;

(f) Cash payments or refunds of income taxes unless they can be specifically identified with financing and investing activities; and (g) Cash receipts and payments from contracts held for dealing or trading purposes. Some transactions, such as the sale of an item of plant, may give rise to a gain or loss, which is included in the determination of net profit or loss. However, the cash flows relating to such transactions are cash flows from investing activities. Investing The separate disclosure of cash flows arising from investing activities is important because the cash flows 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: (a) Cash payments to acquire property, plant and equipment, intangibles and other long-term assets. These payments include those relating to capitalised development costs and self-constructed property, plant and equipment; (b) Cash receipts from sales of property, plant and equipment, intangibles and other long-term assets; (c) Cash payments to acquire equity or debt instruments of other enterprises and interests in joint ventures (other than payments for those instruments considered to be cash equivalents or those held for dealing or trading purposes); (d) Cash receipts from sales of equity or debt instruments of other enterprises and interests in joint ventures (other than receipts for those instruments considered to be cash equivalents and those held for dealing or trading purposes); (e) Cash advances and loans made to other parties (other than advances and loans made by a financial institution); (f) Cash receipts from the repayment of advances and loans made to other parties (other than advances and loans of a financial institution); Financing The 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 capital to the enterprise. Examples of cash flows arising from financing activities are: (a) Cash proceeds from issuing shares or other equity instruments; (b) Cash payments to owners to acquire or redeem the enterprise's shares; (c) Cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short or long-term borrowings; (d) Cash repayments of amounts borrowed; and (e) Cash payments by a lessee for the reduction of the outstanding liability relating to a finance lease.

FORMAT OF STATEMENT OF CASH FLOWS CFE Limited Statement of Cash Flows For the year ended June 30, 2012 CASHFLOWS FROM OPERATING ACTIVITIES Profit Before Tax Add/ Less: Adjustments for (items appearing in P&L) Depreciation/ Amortisation Interest Expense/ (Income) (Gain)/ Loss on Sale of Fixed Assets/ Investments Amount provided in P&L for Repairs, Maintenance etc. * Government Grants taken to Income Dividend Income Operating Profit before Working Capital Changes Add/ Less: Working Capital Changes (Increase)/ Decrease in Debtors and Other Receivables (Increase)/ Decrease in Stocks Increase/ (Decrease) in Creditors Cash Generated from Operations Add/ Less: Interest (Paid)/ Received Dividend (Paid)/ Received Taxes (Paid) Payment made on account of Repairs, Maintenance etc. * Net Cash from/ (used in) Operating Activities CASHFLOWS FROM INVESTING ACTIVITIES Purchase of Property, Plant and Equipment (Fixed Assets) Proceeds from Sale of Property, Plant and Equipment (Fixed Assets) Purchase of Intangible Assets and Capitalization of Development Expenditure Proceeds from Intangible Assets Purchase of Investments Proceeds from Sale of Investments Proceeds from Government Grants Net Cash from/ (used in) Investing Activities CASHFLOWS FROM FINANCING ACTIVITIES Repayment of Long-term Loans/ Borrowings/ Debentures Proceeds from Long-term Loans/ Borrowing/ Debentures Capital Repayment of Lease Liabilities Proceeds from Issue of Share Capital and Premium Net Cash from/ (used in) Financing Activities (xx) XX (xx) Xx (xx) XX (XX) XX (XX) XX XX XX/ (XX) Xxx xx xx/ (xx) (xx)/ xx xx (xx) (xx)

Xxx = xxx

(xx)/ xx (xx)/ xx xx/ (xx)

+ Xxx = xxx

(xx)/ xx
(XX)/XX (XX) (XX)

Net Increase/ (Decrease) in Cash and Cash Equivalents Add: Cash and Cash Equivalents Beginning of the period Cash and Cash Equivalents End of the period

Xx/(XX) Xx XX

Relevant Accounts:
1.Fixed Assets (Cost) Opening balance Cash Revaluation Reserve Finance Lease Liabilities X X X X X Disposal Closing balance X X

2.Accumulated Depreciation Disposal Closing balance X X X Opening balance Depreciation X X X

3.Fixed Assets Disposal Fixed Asset Profit on disposal X X X Accumulated depreciation Cash Loss on disposal X X X X

4. FIXED ASSETS (NBV BASIS) Fixed Assets (NBV Basis) X Depreciation X NBV of disposal X Closing balance X X X X X X X

Opening balance Cash Revaluation Reserve Finance Lease Liabilities

5. Finance Lease Liabilities Cash paid on a/c of capital repayment of Fin. Lease Liab. Closing balance-short term Closing balance-long term X X X X Opening balance-short term Opening balance-long term Fixed Assets (Cost) Account X X X X

6. INTEREST PAYABLE This account is prepared to calculate cash paid on account of interest expense. Interest Payable Account Cash X Opening balance Closing balance X Interest Expense X

X X X

7. TAX PAYABLE This account is prepared to calculate cash paid on account of tax expense. Tax payable Cash X Opening balance-current Closing balance-current X Opening balance-deferred Tax Closing balance-deferred tax X Tax expense X 8. DIVIDEND PAYABLE This account is prepared to calculate cash paid on account of dividend appropriated. Dividend Payable Cash X Opening balance Closing balance X Dividend X 9. INTEREST RECEIVABLE This account is prepared to calculate cash received on account of interest income. Interest Receivable Opening balance X Cash Interest Income X Closing balance X 10. DIVIDEND RECEIVABLE This account is prepared to calculate cash received on account of dividend income. Dividend Receivable Opening balance X Cash Dividend X Closing balance X

X X X X

X X X

X X X

X X X

11. PROVISION FOR REPAIRS, MAINTENANCE, ENVIRONMENT ETC. This account is prepared to calculate cash paid on account of repairs, maintenance, environment and other provisions. Provision or Repairs, Maintenance, Environment etc. Cash X Opening balance X Closing balance X Repairs, Maintenance Expense X X X 12. GOVERNMENT GRANTS This account is prepared to calculate cash received on account of government grants. Government Grants P&L X Opening balance-short term Closing balance-short term X Opening balance-long term Closing balance-long term X Cash X

X X X X

SHARE CAPITAL AND PREMIUM This account is prepared to calculate cash received on account of share capital and premium. 13. Share Capital Opening balance Revaluation reserve/ Retained earnings Loan Cash X X X X X

Closing balance

X X

14. Share Premium Closing balance X X Opening balance Cash X X X

15. INTANGIBLE ASSETS This account is prepared to calculate cash paid on account of intangible asset/ goodwill purchased. Intangible Assets/ Goodwill Opening balance X Amortization/ Impairment Cash X Closing balance X

X X X

16. RETAINED EARNINGS/ ACCUMULATED PROFITS/ P&L APPROPRIATION If Profit before tax is not given, it can be found out by preparing the retained earnings/ P&L Appropriation Account Retained earnings/ P&L Appropriation Account Dividend appropriated X Opening balance X Tax expense X Profit before tax X Closing balance X X X 17. INVESTMENTS SOLD This account is prepared to calculate cash received on account of investments sold. If investments are sold at profit: Investments Opening balance X Cash X Closing balance X X X 18. Loss on Sale of investment Investments X Cash Loss on sale of investments Closing balance X X X X X

Opening balance

19. Gain on Sale of investments


Opening balance Gain on sale of investments Investments X Cash X Closing balance X X X X

20. INVESTMENTS PURCHASED This account is prepared to calculate cash paid on account of investments purchased. Investments Account Opening balance X Cash X Closing balance X 21. Loan, Debentures, Bonds Account Cash Closing balance X X Opening balance Cash

X X

X X X

Interpretation of Statement of Cash Flows


The statement of cash flows should be reviewed after preparation. In particular, cash flows in the following areas should be reviewed: Cash generation from trading operations Dividend and interest payments Capital expenditure Financial investment Management of financing Net cash flow

Advantages of the statement of cash flows


It may assist users of financial statements in making judgements on the amount, timing and degree of certainty of future cash flows. It gives an indication of the relationship between profitability and cash generating ability, and thus of the quality of the profit earned. Analysts and other users of financial information often, formally or informally, develop models to assess and compare the present value of the future cash flow of entities. Historical cash flow information could be useful to check the accuracy of past assessments. A statement of cash flows in conjunction with a statement of financial position provides information on liquidity, viability and adaptability. The statement of financial position is often used to obtain information on liquidity, but the information is incomplete for this purpose as the statement of financial position is drawn up at a particular point in time. Cash flows cannot be manipulated easily and are not affected by judgment or by accounting policies

Limitations of the statement of cash flows


Statements of cash flows are based on historical information and therefore do not provide complete information for assessing future cash flows. There is some scope for manipulation of cash flows, e.g. a business may delay paying suppliers until after the year end. Cash flow is necessary for survival in the short term, but in order to survive in the long term a business must be profitable. It is often necessary to sacrifice cash flow in the short term in order to generate profits in the long term (e.g. by investment in noncurrent assets). A huge cash balance is not a sign of good management if the cash could be invested elsewhere to generate profit.

ALBERT LIMITED The summarized Statements of Financial Position of Albert Limited at 31 December 2007 and 2008 are as follows: 2008 000 150,000 35,000 38,000 30,000 18,000 48,000 15,000 20,000 54,000 15,000 423,000 130,000 151,000 29,000 51,000 44,000 4,600 13,400 423,000 2007 000 100,000 15,000 11,500 70,000 11,000 34,000 14,000 10,500 10,000 45,000 13,000 334,000 110.000 120,000 24,000 37,000 42,800 200 334,000

Paid up share capital Share premium Profit and loss appropriation account Debentures Deferred taxation Creditors Bank overdraft Corporation tax payable Proposed dividends Depreciation on plant and machinery Depreciation on fixtures and fittings Total Equity and Liabilities Freehold property at cost Plant and machinery at cost Fixtures and fittings at cost Stock Debtors Government stock Cash at bank Total Assets

The following information is relevant: (a) There had been no disposal of freehold property in the year. (b) A machine tool which had cost 8,000,000 (in respect of which 6,000,000 depreciation had been provided) was sold for 3,000,000 and fixtures which had cost 5,000,000 (in respect of which depreciation of 2,000,000 had been provided) were sold for 1,000,000. Profit and losses on those transactions had been dealt with through the profit and loss account. (c) The profit and loss account charges in respect of tax were: corporation tax 12,500,000; deferred tax 9,500,000. (d) The proposed dividend at 31 December 2007 had been paid during the year. (e) Interest received during the year was 450,000. Interest charged in the profit and loss account for the year was 6,400,000. Accrued interest of 440,000 is included in creditors at 31 December 2007 (Nil at 31 December 2008). REQUIRED: Prepare Statement of Cash Flows for the year ended 31 December 2008.

ANSWER: ALBERT LIMITED STATEMENT OF CASH FLOWS FOR THE YEAR TO 31 DECEMBER 19X8 000 CASHFLOWS FROM OPERATING ACTIVITIES Profit Before Tax (W1) Add/ (Less): Adjustments for: Depreciation Interest expense Interest income Loss on disposal of Fixed Asset (W2) Operating profit before Working Capital Changes Add/ (Less): Working Capital Changes Increase in Inventory Increase in Debtors Increase in Creditors Cash generated from Operations Add/Less: Interest paid (W3) Interest received Tax paid (W4) Dividend paid (W5) Net Cash from Operating Activities CASHFLOWS FROM INVESTONG ACTIVITIES Purchase of Fixed Assets (W6) Sale of Fixed Assets Purchase of Govt. Stocks Net Cash used in Investing Activities CASHFLOWS FROM FINANCING ACTIVITIES Share Capital and Premium Debentures Net cash flows from Financing Activities Net increase in cash and cash equivalents Cash and cash equivalents beginning of the period Cash and cash equivalents End of the period 000 68,500 19,000 6,400 (450) 1,000

27,950 94,450

(14,000) (1,200) 14,440

(760) 93,690

(6,840) 450 (10,500) (10,000) 66,800

(69,000) 4,000 (4,600) (69,600)

70,000 (40,000) 30,000 27,200 (13,800) 13,400

Workings: W1 P&L Appropriation 000 20,000 Opening balance 22,000 Profit Before Tax (Bal. fig.) 38,000 80,000 W6 Fixed Assets (Cost) 000 254,000 Disposal (8,000 + 5,000) 69,000 Closing balance 323,000 Accumulated Depreciation 000 8,000 Opening balance 69,000 Depreciation Expense P&L (Bal. fig.) 77,000 W2 Disposal 000 13,000 Accumulated Depreciation (6,000 + 2,000) Cash Loss (Bal. fig.) 6,000 W3 Interest Payable 000 6,840 Opening balance 0 Interest Expense P&L 6,840 W4 Tax payable 000 10,500 Opening balance current years tax Opening balance deferred tax 15,000 Tax Expense P&L 18,000 Tax Expense P&L 43,500 W5 Dividend Payable 000 10,000 Opening balance 20,000 Dividend P&L Appropriation 30,000 000 11,500 68,500 80,000 000 13,000 310,000 323,000 000 58,000 19,000 77,000 000 8,000 4,000 1000 6,000 000 440 6,400 6,840 000 10,500 11,000 12,500 9,500 43,500 000 10,000 20,000 30,000

Dividend (See Div. Payable Account) Tax expense (12,500 + 9,500) Closing balance

Opening balance Cash (Bal. fig.)

Disposal (6,000 + 2,000) Closing balance

Fixed Asset (8,000 + 5,000)

Cash (Bal. fig.) Closing balance

Cash (Bal. fig.) Closing balance current years tax Closing balance deferred tax

Cash Closing balance