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STATEMENT OF CASH FLOWS LECTURE QUESTIONS AND ANSWERS

QUESTION CCE Limited


The draft financial statements of CCE Limited for the year ended 31 st December 20X2 are as
follows:
Statement of Comprehensive Income for the Year Ended 31st December 20X2

30,650
(26,000)
4,650
(450)
(950)
(400)
500
3,350
(120)
3,230

Sales revenue
Cost of sales
Gross profit
Depreciation
Administrative and selling expenses
Interest expense
Investment income
Profit before tax
Income tax expense
Profit for the year
Statement of Financial Position as at 31st December 20X2
20X2

ASSETS
Property, plant and equipment at cost
Accumulated depreciation
Long-term investments
Inventory
Accounts receivable
Cash and cash equivalents (see note below)
Total assets

3,730
(1,450)

2,280
2,500
1,000
1,900
410
8,090

20X1

1,910
(1,060)

850
2,500
1,950
1,200
160
6,660

EQUITY AND LIABILITIES


Capital and Reserves
Share capital
Retained earnings
Total shareholders equity

1,500
3,410
4,910

1,250
1,380
2,630

Liabilities
Trade payables
Interest payable
Income taxes payable
Long-term debt (including finance leases)
Total liabilities

250
230
400
2,300
3,180

1,890
100
1,000
1,040
4,030

Total equity and liabilities

8,090

6,660

Cash and cash equivalents are made up as follows:

Cash
Short-term investments

31st December
20X2
20X1

40
25
370
135
410
160

The following additional information is also available.


1.

Interest expense was 400 of which 170 was paid during the period. 100 relating to
interest expense of the prior period was also paid during the period. 200 of interest was
received during the period.

2.

Dividends paid were 1,200.

3.

The liability for tax at the beginning and end of the period was 1,000 and 400
respectively.

4.

During the period, a further 20 tax was provided for. Withholding tax on dividends
received amounted to 100, thus leading to the total tax expense of 20 + 100 = 120.

5.

During the period, the group acquired property, plant and equipment with an aggregate
cost of 1,900 of which 900 was acquired by means of finance leases. Cash payments of
1,000 were made to purchase property, plant and equipment.

6.

90 of capital repayment was paid under the finance leases.

7.

Plant with an original cost of 80 and accumulated depreciation of 60 was sold for 20.

8.

Accounts receivable as at the end of 20X2 include 100 of interest receivable.

9.

250 was raised from the issue of share capital and a further 450 was raised form longterm borrowings.

Requirement
(a) Prepare a statement of cash flows for the year ended 31 st December 20X2 using the
indirect method in accordance with IAS 7 Statement of Cash Flows (i.e. starting the
statement of cash flows with the profit before tax); and
(b) Show the calculation of operating cash flow using the direct method.
(c) Discuss the decision usefulness of the required classifications of cash flows under IAS 7
Statement of Cash Flows.

SUGGESTED ANSWER CCE Limited


Suggested Approach:
Figures for the statement of cash flows are derived from the differences between the opening
and closing statement of financial position figures, using the information in the notes and in
the statement of comprehensive income to make necessary calculations. One approach to
developing the answer is to adopt a standard procedure. Here is a suggested procedure for the
indirect method (the more usual exam requirement).
Step 1
Set up the statement in outline (main headings only). Leave plenty of space to insert detail. A
whole page will be needed.
Step 2
Study the additional information and mark with a cross those items affecting statement of
financial position amounts.
Step 3
Begin the statement of cash flows by using the statement of comprehensive income to work
down to operating profit before working capital changes.
Step 4
Proceed line by line through the statement of financial position. If an item is not marked with
a cross, the difference may be entered direct to the statement; if it is marked, a working is
required. Use working ledger accounts to calculate missing figures. Insert the opening and
closing balances from the statement of financial position into the working accounts, and then
add information from the notes to complete the ledger account. Balancing figures on the
working accounts are then transferred to the statement of cash flows.

Suggested Answer:
(a)

Statement of Cash Flows for the Year Ended 31st December 20X2
Workings

Cash flows from operating activities


Net profit before tax
Adjustments for:
Depreciation
Investment income
Interest expense
Operating profit from working capital changes
Increase in trade receivables
Decrease in inventories
Decrease in trade payables
Cash generated from operations
Interest paid
Income taxes paid
Net cash from operating activities
Cash flows from investing activities
Purchases of property, plant and equipment
Proceeds of sale of equipment
Interest received
Dividends received
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issue of shares
Proceeds from long-term borrowings
Payment of finance lease liabilities
Dividends paid
Net cash used in financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period

3,350

3
4

450
(500)
400
3,700
(600)
950
(1,640)
2,410
(270)
(720)
1,420

5
7
2
2

(1,000)
20
200
200
(580)
250
450
(90)
(1,200)

Analysis of Cash and Cash Equivalents at 31st December


20X2

Cash on hand and balances with banks


40
Short term investments
370
Cash and cash equivalents
410

(590)
250
160
410
20X1

25
135
160

Workings:

Opening balances
Movement (bal fig)

(W1) Trade Receivables

1,200 Closing balance


600 (1,900 100)
1,800

(W2) Interest and dividends receivable

500 Interest receivable c/f


Dividend received (bal fig)
___ Interest received
500

SCI

Cash (bal fig)


Closing balance

Cash (bal fig)


Closing balance

(W3) Interest paid

270 Opening balance


230 SCI
500
(W4) Income taxes

720 Opening balance


400 SCI (20 + 100)
1,120

1,800
_____
1,800

100
200
200
500

100
400
500

1,000
120
1,120

(W5) Property, plant and equipment - cost

Opening balance
1,910 Transfer disposal
Leases
900 Closing balance
Cash additions (bal fig)
1,000
3,810

80
3,730
_____
3,810

(W6) Property, plant and equipment - depreciation

Transfer disposal
60 Opening balance
Closings balance
1,450 SCI
1,510

1,060
450
1,510

Cost

(W7) Property, plant and equipment disposal

80 Depreciation
__ Cash
80

60
20
80

(b)

(W8) Long-term debt (to reconcile balances)

Payments under finance leases


90 Opening balance
Closing balance
2,300 Finance leases
____ Long-term borrowing
2,390

1,040
900
450
2,390

(W9) Retained earnings (to reconcile balances)

Dividend paid
1,200 Opening balance
Closing balance
3,410 SCI
4,610

1,380
3,230
4,610

Operating cash flow direct method

Cash receipts from customers


Cash paid to suppliers and employees
Cash generated from operations (as in (a))
Interest paid
Income taxes paid
Net cash from operating activities (as in (a))

Workings
1
2

30,050
(27,640)
2,410
(270)
(720)
1,420

Workings:
(W1) Cash receipts from customers
Opening trade receivables
Sales
Less: closing trade receivables (1,900 100)
(W2) Cash paid to suppliers and employees
Opening trade payables
Purchases (26,000 1,950 + 1,000)
Less: closing trade payables
Administrative and selling expenses

1,200
30,650
31,850
1,800
30,050
1,890
25,050
26,940
250
26,690
950
27,640

(c) Decision usefulness of the required classifications of cash flows


Cash flows must be classified into cash flows from operating, investing and financing
activities.
Operating cash flows are the principal revenue-producing activities of an entity and any other
activities that do not fall within investing and financing activities. Such cash flows include
6

receipts from customers, payments to suppliers and employees and income taxes. Operating
cash flows may also include interest and dividends received (though these items may be
classified as investing) and interest paid (though this item may be classified as financing).
Investing cash flows are the acquisition and disposal of long-term assets (such as property,
plant and equipment, subsidiaries, businesses and intangibles) and other investments not
included in cash equivalents (such as shares in other entities).
Financing activities are activities that result in changes in the size and composition of the
equity capital and borrowing of an entity (such as the issue of new shares, buyback of shares,
new borrowings, repayment of borrowings and the payment of dividends, though payment of
dividends are sometimes classified as an operating activity).

QUESTION LEPRECHAUN LIMITED (Question 3, August 2009) (Single Company)


Leprechaun Limited, an Irish company that sells garden furniture and related products throughout
Britain and Ireland to retail companies, prepares its financial statements to 31 December each year.
Leprechaun Limiteds statements of comprehensive income for the years ended 31 st December 2007
and 2008, and its statements of financial position as at those dates, are presented below.
Statements of Comprehensive Income for the Years Ended 31 December
2008
000
580,500
(435,400)
145,100
(99,800)
45,300
(15,600)
29,700
(14,000)
15,700

Revenue
Cost of sales
Gross profit
Operating expenses
Operating profit
Finance charges
Profit before tax
Income tax
Profit after tax

2007
000
484,800
(362,000)
122,800
(86,440)
36,360
(7,600)
28,760
(15,160)
13,600

Statements of Financial Position as at 31 December

ASSETS
Non Current Assets
Property, plant and equipment
Current Assets
Inventory
Trade receivables
Investments
Bank and cash

EQUITY AND LIABILITIES


Capital and Reserves
1 Ordinary shares
Retained earnings
Non Current Liabilities
Loan
Current Liabilities
Bank overdraft
Trade payables
Taxation
Accruals interest payable

2008
000

2007
000

277,900

206,600

119,000
98,000
18,000
32,000
267,000

114,000
108,000
14,000
24,500
260,500

544,900

467,100

100,000
115,300
215,300

100,000
109,600
209,600

130,100

57,600

11,200
179,700
5,200
3,400
199,500

8,100
185,600
4,100
2,100
199,900
8

544,900

467,100

Additional Information:
1.

All of LEPRECHAUNs sales and purchases are on credit.

2.

Plant and equipment, with an original cost of 400,000 and a net book value of 320,000,
was sold for 275,000 during 2008. The profit / loss on disposal is included in operating
expenses. There were no other disposals during 2008. All additions to property, plant and
equipment during 2008 were paid for in cash.

3.

Depreciation on property, plant and equipment during 2008, which is included in


operating expenses, amounted to 22,000,000.

4.

The current asset investments fall within the definition of cash equivalents under IAS 7
Statement of Cash Flows.

5.

Dividends amounting to 10,000,000 were proposed, approved and paid in each of the
years 2007 and 2008.

Requirement
(a) Prepare a statement of cash flows in accordance with IAS 7 Statement of Cash Flows for
LEPRECHAUN in respect of the year ended 31st December 2008 using the indirect
method of presenting operating cash flows.
20 Marks
(b) Notwithstanding the fact that statements of cash flows are a valuable source of
information for users of financial statements, important non-cash transactions may occur
which are not reported in a statement of cash flows.
Outline examples of such transactions.
5 Marks
Total 25 Marks