ALWADI INTERNATIONAL SCHOOL ACCOUNTING GRADE 12

NOTES

STATEMENT OF CASH FLOWS

A Statement of cash flows is one that lists the cash flows of a business over a period of
time, usually the same period as that covered by the income statement. A cash flow is
any increase or decrease in cash in a business. Cash includes cash in hand and
deposits repayable on demand less overdrafts that are repayable on demand. For our
purpose, deposits and overdrafts will generally be balances at, and overdrafts with,
banks. The words on demand mean either immediately (e.g. current accounts) or within
24 hours of giving notice of repayment.
While it is necessary to know how much profit or loss a business has made, the
business does not pay its creditors out of the balance on its Profit and Loss Account.
Creditors are paid out of the money a business has at the bank. No business has ever
been forced by its creditors to close down because it has made a loss. But a business
can be forced to close down because it has insufficient money in the bank to pay its bills
when they fall due. The amount by which the ready money in a business exceeds its
immediate liabilities is its liquidity. There is a big difference between profit and liquidity.
A business may make a big profit but have less money in the bank than at the start of
the year. Over a period of time a business needs to generate cash inflows that at least
match its Cash Outflows. Outflows include:

Payment of Creditors and the running costs of carrying on business (e.g. wages etc.)

Renewal of, and additions to, fixed assets.

Interest on Loans and Debentures.

Payment of Tax on Profits (Companies).

Costs involved in the growth of the business (expansion and development).

Dividends payable to Shareholders, or Drawings of Sole traders and Partners.

IAS 7 STATEMENT OF CASH FLOWS

This statement is required to be produced as part of a companys financial statements.
The statement provides guidelines for the format of Statement Cash Flows. The
statement is divided into three categories:
1. Operating activities the main revenue generating activities of the business,
together with the payment of interest and tax.
2. Investing activities the acquisition and disposal of long term assets and other
investing activities.
3. Financing activities receipts from the issue of new shares, payments for the
redemption of shares and changes in long term borrowings.

STATEMENT OF CASH FLOWS

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ALWADI INTERNATIONAL SCHOOL ACCOUNTING GRADE 12

NOTES

At the end of the statement the net increase in cash and cash equivalent is shown, both
at the start and end of the period under review. For this purpose:

Cash is defined as: Cash on hand and demand deposits

Cash equivalents as: Short term, highly liquid investments that can easily be
converted into cash. This is usually taken to mean money held in a term deposit
account that can be withdrawn within three months from the date of deposit.

Bank overdrafts - usually repayable on demand are included as part of the

cash and cash equivalents.

FORMAT OF THE STATEMENT

1.

OPERATING ACTIVITIES

The cash flow from operating activities is calculated as:

Profit from operations (profit before deduction of interest and tax) / Operating
profit.

Add: Depreciation charge for the year.

Add: Loss on sale of non current assets (or deduct gain on sale of non
current assets).

Less: Investment income

Add or deduct changes in inventories, trade and other receivables or

payables

2.

Less: Interest paid

Less: Taxes paid on income (usually corporation tax)

INVESTING ACTIVITIES
This is calculated by including:

Inflows from:

Proceeds from sale of non current assets, both tangible and intangible,
together with other long term Investments.

Outflows for:

STATEMENT OF CASH FLOWS

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ALWADI INTERNATIONAL SCHOOL ACCOUNTING GRADE 12

-

NOTES

Cash used to purchase non current assets, both tangible and intangible,
together with other long term Investments.

3.

Interest received

Dividends received

FINANCING ACTIVITIES
This is calculated by including:

Inflows from:
-

Cash received from the issue of share capital

Raising or increasing loans

Outflows for:
-

Repayment of share capital

Repayment of loans and finance lease liabilities.

Dividends paid

EXAMPLE

Although not part of the statement, questions are often set or require the calculation
of the:
Reconciliation of profit from operations to net cash flow from operating
activities
$
Profit from operations (before interest and tax)

50,000

Adjustments for:
Depreciation charge for the year

12,000

Increase in inventories

(3,000)

Decrease in trade receivables

2,000

Increase in trade payables

4,000

Cash (used in)/from operations

65,000

Interest paid (during the year)

(5,000)

Tax paid (during the year)

(8,000)

STATEMENT OF CASH FLOWS

Net cash (used in)/from operating activities

52,000

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ALWADI INTERNATIONAL SCHOOL ACCOUNTING GRADE 12

NOTES

It is the final figure from this calculation which is the start point for the Statement
of Cash Flows.

EXAMPLE
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED ..
$
Net cash (used in)/from operating activities (from above)

$
52,000

Cash flows from investing activities:

Purchase of non current assets

(20,000)

Proceeds from the sale of non current assets

1,000

Interest received

2,000

Dividends received

500

Net cash (used in)/from investing activities

(16,500)

Cash flows from financing activities:

Proceeds form issue of share capital

80,000

(this would include both the share and share

premium amounts)
Repayment of long term borrowings
Dividends paid

(30,000)
( 4,000)

Net cash (used in)/from financing activities

46,000

Net increase/(decrease) in cash and cash equivalents

81,500

Cash and cash equivalents at the beginning of the year

10,000

Allowable
variations:
Cash and
cash equivalents at the end of the year

STATEMENT OF CASH FLOWS

91,500

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ALWADI INTERNATIONAL SCHOOL ACCOUNTING GRADE 12

NOTES

IAS 7 allows some flexibility in the way in which statement of cash flows can be
presented:
1. Cash flows from interest and dividends received and paid can be shown as
operating or investing or financing activities. Whichever is chosen must be
applied consistently.
2. Cash flows arising from taxes on income are always classified as operating
activities unless they can be specifically identified with financing and/or investing
activities.
Step 1: Calculation of Operating Profit
Example:
The following are extracts from the balance sheets of Andrew Plc as at 31st March 2011
and 2012:
Current liabilities:
Taxation
Proposed dividends
Debenture Interest

31st March 2011

$000
700
340
100

Share Capital & Reserves:

Share capital
Share premium account
Asset revaluation reserve
Asset replacement reserve
General reserve
Retained profit

31st March 2012

$000
540
600
100

500
50
160
200
110

600
70
150
185
230
85

Required:
Calculate Profit before Taxation and Interest.
Answer:
[Note: Reverse the Companys Profit & Loss Appropriation Account]
Andrew plc
Calculation of Net Profit before Taxation and Interest
$000
Retained Profit for the year (2012)
85
(-) Retained Profit for the year (2011)
(110)
(+) Increase in General Reserve (230-200)
30

STATEMENT OF CASH FLOWS

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ALWADI INTERNATIONAL SCHOOL ACCOUNTING GRADE 12

Increase in Asset Replacement Reserve (185-160)
Proposed Dividends (Current year)
Provision for Taxation (Current year)
Debenture Interest (Current year)
Operating Profit /(Net Profit before Tax and Interest)
Step 2:

NOTES

25
600
540
100
1270

Tangible Non Current Assets Calculation of Purchases and Sale,

Depreciation and Profit or Loss on Disposal of Fixed Assets

When preparing Cash Flow Statements, take care to Account properly for:
(a)
(b)
(c)
(d)

Funds applied in the Purchase of Non Current Assets.

Proceeds of Sales of Non Current Assets.
Depreciation provided in the year.
Profit/Losses on Disposals of Non Current Assets.

Example:
The following are extracts from the balance sheets of Malini, Priya and Co. Ltd as at
30 June 2011 and 2012:
at 30 June 2011
$000
$000
750
400
220
180
250
175
75
1,005

Freehold premises
Plant and machinery at cost
(-) Provision for Depreciation
Motor vehicles at cost
(-) Provision for Depreciation
Capital and Reserves
Asset Revaluation Reserve

at 30 June 2012
$000
$000
1,000
430
230
200
281
205
76
1,276

250

In the year to 30 June 2012, Plant and machinery, which had cost $80,000 and had been
written down to $10,000 was sold for $7,000. In addition, Motor vehicles, which had cost
$33000 were sold for $8000 at a Profit of $2000.
Required:
Calculate the figures to be included in a Cash Flow Statement for the year to 30 June
2012 to account for the Movements in Tangible Fixed Assets.
Answer:
[Note: Reconstruct the ledger accounts to find the missing figures.]
Plant and machinery at Cost
$000
Balance b/f
400
*Plant purchased (balancing figure) 110
510

STATEMENT OF CASH FLOWS

Plant & machinery sold

Balance c/f (per question)

$000
80
430
510

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ALWADI INTERNATIONAL SCHOOL ACCOUNTING GRADE 12

NOTES

Provision for Depreciation of Plant and machinery

$000
70
230
300

Disposal
Balance c/f (per question)

Balance b/f
*Profit & loss (balancing figure)

$000
220
80
300

Plant & machinery Disposal account

$000
80

Plant and machinery at cost

Provision for depreciation

Sale proceeds
*Loss on sale (P&L a/c)

80

$000
70
7
3
80

Motor vehicles at Cost

$000
250

Balance b/f
*Motor vehicles purchased
(balancing figure)

64
314

$000
33

Motor vehicles sold

Balance c/f (per question)

281
314

Provision for Depreciation of Motor vehicles

*Disposal (per disposal account)
Balance c/f (per question)

$000
27
205
232

Balance b/f
*Profit & loss (balancing figure)

$000
175
57
232

Motor vehicles Disposal Account

Motor vehicles (at cost)

$000
33

Profit on sale (profit & loss a/c)

2
35

$000
*Provision for depreciation
(balancing figure)
Sale proceeds

27
8
35

[Note: the items marked * are balancing figures]

Reconciliation of Operating Profit to Net cash flow (extract):
Operating Profit
(+) Depreciation for year to be added to Operating Profit:

STATEMENT OF CASH FLOWS

$000

$000

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ALWADI INTERNATIONAL SCHOOL ACCOUNTING GRADE 12

Plant and machinery
Motor vehicles

NOTES

80
57

137
Loss on Disposal of Tangible Fixed Assets $(32)

Cash Flow Statement (extract)

Capital expenditure:
Purchases of Fixed Assets ($110,000 + $6400)
Proceeds of Sales of Fixed Assets ($7,000 + $8,000)

(174)
15

159

Step 3: Calculation of Taxation paid

Example:
The taxation liability shown in Albrind Balance sheet at 31 December 2011 was
$345,000. The liability for taxation shown in the balance sheet at 31 December 2012
was $410,000. In the companys Profit and Loss Account for the year ended 31
December 2012 the following item appeared:
$000
Taxation
398
Required:
A Calculation of the Taxation paid in the year to 31 December 2012.
Answer:
Taxation Account
Bal c/f
*Tax paid during the year
(balancing figure)

$000
410
333
743

Bal b/f
Profit and Loss a/c

$000
345
398
743

Step 3: Calculation of Dividend paid

Example:
The following extracts are taken from the balance sheets of Limitation Bunting Ltd.
At 30 April 2011
$000
Creditors: amounts falling due within one year
Proposed dividends
75

At 30 April 2012
$000
120

The Profit and Loss Account for the year to 30 April 2012 contained the following:
Dividends Paid and Proposed $170,000.
Required:

STATEMENT OF CASH FLOWS

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ALWADI INTERNATIONAL SCHOOL ACCOUNTING GRADE 12

NOTES

Calculate the amount paid as Dividends by Imitation Bunting Ltd. the year to 30
ApriL 2012.
Answer:
Dividends Account
Bal c/f
*Paid during the year

$000
120 Bal b/f
125 Profit and loss account
245

$000
75
170
245

Dividends paid during the year to 30 April 2012 $125,000 (ie. Final Proposed
Dividend for 2007 $75,000 plus Interim dividend for 2012 $50,000).
How to prepare a Balance Sheet from a Cash Flow Statement
Examination questions sometimes require Balance Sheets to be prepared from a cash
flow statement and the technique for doing this is shown in the next example.
Reasons for Producing a Cash Flow Statement:

It is a requirement of the Companies Act.

It serves as a link between two Balance Sheets.
It shows the causes of the change in Cash and Cash Equivalents during the year.
The Shareholders have a right to know how much cash has been received by the
Company and how it has been used by the Directors.
Cash Flow Statements provide information about the liquidity, viability and
financial adaptability of the Company.
Cash Flow Statements give an indication of the relationship between the Profitability
and the Liquidity of the Company.
Cash Flow Statements are a useful source of information for Management.

POINTS TO REMEMBER

Profits bring a flow of Cash into the firm. Losses take Cash out of it.
When Retained Profit is given we need to calculate Operating Profit i.e. (Profit
before Interest & Tax).
Depreciation charged in the income statement does not result in a Cash outflow. It
must be added back to Profit.
Profit & losses on Sale of non current Assets must be treated similarly to
Depreciation. Losses must be added back to profit, Profits deducted.
Reducing inventory means turning it into Cash. An increase in inventory ties up
Cash funds.
A reduction in trade receivables means that Cash comes into the firm. Letting trade
receivables increase stops that extra amount of Cash coming in.

STATEMENT OF CASH FLOWS

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ALWADI INTERNATIONAL SCHOOL ACCOUNTING GRADE 12

NOTES

An increase in trade payables keeps the extra Cash in the firm. A Decrease in
trade payables means that the extra payments take Cash out.
The Cash received from Disposal of non current Assets comes into the firm. A
Purchase of non current Assets takes it out.
An Increase in Issues of Shares brings Cash in. Dividends take it out.
Loans received bring in Cash, while their repayment reduces Cash.
Interest paid / received must be stated on a Cash basis.
Dividend paid must include the Proposed Dividend for the Previous Year & any
Interim dividends paid in the Current year. It will not include the Proposed
Dividend shown as a Current Liability in the Balance Sheet as at the end of the
Current year.
Financing from an issue of Share Capital will include Share Premium received.
Redemption of Shares & Debentures will include any Premium payable on
Redemption.
LAYOUTS

Step 1: Calculation of Operating Profit (Profit before Interest and Taxation)

Backward Method (Starting up with Retained Profit)
$
Retained Profit (Current year) (as given in the Balance Sheet)
(-) Retained Profit b/d from Previous year
(+) Debenture Interest (Current year)
(+) Taxation (Current year)
(+) Interim Dividend
Preference Dividend (Current year)
Ordinary Dividend (Current year)
(+) Final / Proposed Dividend
Preference Dividend (Current year)
Ordinary Dividend (Current year)
(+) Transfer to General Reserve (Current year)
Transfer to Asset Replacement Reserve (Current year)
(+) Bonus issue (Charged from the Profit & Loss account)
(+) Premium paid on Redemption of Shares & Debentures
(Charged from the Profit & Loss account)
(+) Transfer to Capital Redemption Reserve (Current year)
Operating Profit before Interest & Taxation

xxx
xxx
xxx
xxx

$
xxx
(xxx)
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx

Step 2: Prepare Accounts for Non Current Assets, Depreciation, Disposal of Fixed
Assets, Dividends, Taxation, Interest and Share Premium.
NON CURRENT ASSETS ACCOUNT (AT COST)
$
Bal b/d
xxx
Disposal (At Cost)
Additions During the Year (bal. fig.)
xxx
Increase in Revaluation Reserve
xxx
Bal c/d
xxx

$
xxx
xxx
xxx

PROVISION FOR DEPRECIATION ACCOUNT

STATEMENT OF CASH FLOWS

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ALWADI INTERNATIONAL SCHOOL ACCOUNTING GRADE 12

Disposal (To Date Depreciation)

Bal c/d

$
xxx
xxx
xxx

NOTES
$
xxx
xxx
xxx

Bal b/d
P & L Account (bal. fig.)
Bal c/d

DISPOSAL ACCOUNT (AT COST)

$
Cost of Fixed Asset Sold
xxx
Depreciation (to Date)
* Profit on Disposal
xxx
Bank (Selling Price)
*Loss on Disposal
xxx

$
xxx
xxx
xxx
xxx

* Note: There will be either Profit or Loss on Disposal of Fixed Assets.

NON CURRENT ASSETS ACCOUNT (AT NBV)

$
Bal b/d (At NBV)
xxx
Disposal (At NBV)
Additions During the Year (bal. fig.)
xxx
Depreciation (Current Year)
Increase in Revaluation Reserve
xxx
Bal c/d (At NBV)
xxx
DISPOSAL ACCOUNT (AT NBV)
$
NBV of Fixed Asset Sold
xxx Bank (Selling Price)
* Profit on Disposal
xxx *Loss on Disposal
xxx

Dividends Paid (bal. fig.)

Bal c/d

$
xxx
xxx
xxx
xxx

$
xxx
xxx
xxx

PROPOSED DIVIDENDS ACCOUNT

$
xxx Bal b/d
xxx P & L Account (Interim &
Proposed)
xxx

DEBENTURE INTEREST ACCOUNT

$
Interest Paid (Current Year bal. fig.)
xxx Bal b/d
Bal c/d
xxx P & L Account (Current
Year)
xxx
TAXATION ACCOUNT
$

STATEMENT OF CASH FLOWS

$
xxx
xxx
xxx

$
xxx
xxx
xxx

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ALWADI INTERNATIONAL SCHOOL ACCOUNTING GRADE 12

Taxation Paid (Current Year bal. fig.)
Bal c/d

xxx
xxx
xxx

NOTES

Bal b/d
P & L Account (Current Year)

SHARE PREMIUM ACCOUNT

$
Premium Paid on Redemption
xxx Bal b/d
Premium Paid on Bonus issue
xxx Premium earned on Shares
issue
Bal c/d
xxx
xxx

xxx
xxx
xxx

$
xxx
xxx
xxx
xxx

STEP 3: Reconciliation of Operating Profit to Net Cash Inflow/(Outflow) from

Operating Activities
$
Operating Profit (before Interest & Taxation) [Check Step 1]
(+) Depreciation charges on Tangible Fixed Assets [Check Step 2]
Increase in Doubtful Debts
Loss on Disposal of Non Current Assets [Check Step 2]
Amortization on Intangible Non Current Assets (Goodwill written off)
Decrease in inventory
Decrease in trade receivables
Increase in trade payables
Increase in other payables

$
xxx

xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx

(-) Decrease in Doubtful Debts

Profit on Disposal of Non Current Assets [Check Step 2]
Increase in inventory
Increase in trade receivables
Increase in other receivables
Decrease in trade payables
Decrease in other payables

(xxx)
(xxx)
(xxx)
(xxx)
(xxx)
(xxx)
(xxx)

(-) Interest paid

(-) Taxation paid

(xxx)
xxx
(xxx)
(xxx)

Net Cash Inflow/(Outflow) from Operating Activities

xxx

Reconciliation of Net Cash Flow to Movement in Net Debts

$
$
Increase in cash (from Cash Flow Statement)
xxx
(+) Increase in short term Investments (Current year)
xxx
Redemption of Debentures (Current year)
xxx
Repayment of Long Term Loans (Current Year)
xxx
(-) Decrease in Short Term Investments (Current Year)
(xxx)
Long Term Loans Received
(xxx)
Debentures issued (Current year)
(xxx) xxx
(+) Net debts ( Previous year ) *
xxx
Net debts (Current year) *
xxx

STATEMENT OF CASH FLOWS

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ALWADI INTERNATIONAL SCHOOL ACCOUNTING GRADE 12

NOTES

* NET DEBTS = CASH + BANK + SHORT TERM INVESTMENTS DEBENTURE LOAN

STATEMENT OF CASH FLOWS

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ALWADI INTERNATIONAL SCHOOL ACCOUNTING GRADE 12

NOTES

STATEMENT OF CASH FLOWS

Page 14