THEME 2

PREPARATION AND PRINCIPLES

THEME 2 OF FINANCIAL
STATEMENTS

UNIT 2.3 INTRODUCTION TO COMPANY ACCOUNTS

TOPIC 2.3.2 ACCOUNTING FOR LIMITED LIABILITY COMPANIES
CASHFLOWS
GENERAL
OBJECTIVES SPECIFIC OBJECTIVES
Learners will: Learners should be able to:

 demonstrate an  explain the purpose of a statement of cash flow

understanding  explain the difference between a statement of cash flow and
ofstatement of cash cashbudget
flows  prepare a statement of cash flow
(no calculations are required for dividends, tax and depreciation–
figureswill be provided)

A Cashflow statement showing the source and application of all cash sources during a financial year.

PURPOSE OF CASH FLOW STATEMENT

 Provide information about the company’s overall actual cash inflows and outflows, and the net
change in cash resulting from the operating, returns on investment, investing, and financing
activities during the period.
 Measure how well a company manages its cash position, hence, how well the company generates
cash to pay its debt obligations and fund its operating expenses.

DIFFERENCES BETWEEN

CASH BUDGET CASH FLOW STATEMENT

1. It concentrate on the future cash inflows and 1. It concentrate on the total cash inflows and
outflows outflowsduring the past year
2. It highlights the future cash position on the 2. It highlights the analysis of various inflows and
basis of future financial plan of action outflows of cash on the basis of past
information.
3. Calculate the projected cash balanceat the 3. Calculate the actual cash balance at the end
end of each month. of the financial period
4. Cash Budget helps the management to 4. Cash Flow Statement helps the management
know the estimated cash position and thus to know the actual cash position and thus
assist in takingcorrective steps to improve assist in takingcorrective steps to avoid future
the business cash flow in advance. cash flow problems.
5. Cash Budget is usually prepared for a short 5. Cash flow statement is prepared annually
period, such as monthly, quarterly, half- from the financial statements at the end of the
yearly, etc. financial period.

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 CASH BUDGET CASH FLOW STATEMENT

6. Cash budget is not a financial statement, 6. Cash flow statement forms part of the
but a working document to do financial company’s financial statements.
planning.

A statement of cash flows shows where the cash resources came from, and where they have gone to.
The following shows details of such cash flows:
CASH
CASH COMES FROM RESOURCES
CASH GOES TO
IN OUT
1 Profits 1 Losses
2 Sales of Non-current Assets 2 Purchase of Non-current Assets
3 Decrease in Inventory 3 Increase in Inventory
4 Decrease in Accounts receivable 4 Increase in Accounts receivable
5 Capital Introduced 5 Drawings/Dividends
6 Loans Received 6 Loans Repaid
7 Increase in Account payable 7 Decrease in Account payable

These can be explained as follow:

1 Profits bring a flow of cash into the business. Losses take cash out of it.

2 The cash received from sales of non-current assets comes into the business. Apurchase of
non- current assets takes it out.

3 Reducing inventory in the normal course of business means turning it into cash. An
increase in inventory ties up cash funds.

4 A reduction in accounts receivable means that the extra amount paid comes into the
business as cash. Letting accounts receivable increase stops that extra amount of cash
coming in.

5 An increase in sole proprietors’ capital, or issues of shares in a company, brings cash in.
Drawings or dividends take it out.

6 Loans received bring in cash, while their repayment reduces cash.

7 An increase in accounts payable keeps the extra cash in the business. A decrease in
accounts payable means that the extra payments take cash out.

If, therefore, we take the cash (and bank) balances at the start of a financial period, and adjust it
for cash flows in and out during the financial period, then we should arrive at the cash (and
bank) balances at the end of the period.
This can be shown as: Cash (cash + bank) per statement of financial position at the end of the
previous period + Changes, which must be the result of cash flows
during the current period =Cash (cash + bank) per statement of
financial position at the end of the current period

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STEPS TO FOLLOWING WHEN DOING A CASH FLOW STATEMENT

Step 1: Make comparisons todetermine the change in cash. Use information from
the current year's Income Statement and information from the comparative Statement
of financial positions(Capital, non-current liabilities, non-current assets, assets and
current liabilities-working capital)
Step 2: Calculate Net cash flows Operating activities:
 Adjustments will be done to the profit to show the cash inflow from the following
operating activities:
 Interest paid on a bank overdraft/loan (will be added back to the profit)/Interest on
current account/fixed deposit (will be subtracted from the profit)
 Tax (will be added back to the profit)
 Depreciation (will be added back to the net profit)
 Add Increase in the Provision for doubtful debts/Subtract Decrease in the Provision for
doubtful debts
 If there was a profit (subtract) or loss (add) on disposal of fixed assets during the year
you must adjust it back to profit for the year.

 Changes in Working Capital

Item Movement Effect on cash Adjustment to

profit
Inventory Increase Reduce cash Deducted
Decrease Increase cash Added
Tradereceivables/ Increase Reduce cash Deducted
accrued income/
prepaid expenses Decrease Increase cash Added

Tradepayables/ Increase Increase cash Added

Accrued expenses/
Income received in Decrease Reduce cash Deducted
advance

Step 3: Determine net cash flows from

 Taxation,
 Returns on and Servicing of finance,
 Investing and
 Financing activities.

Step 4: Show summary of net increase (decrease) in cash,

Analysis of changes in during the year to show cash at beginning and cash at end.

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 LAYOUT OF STATEMENT OF CASH FLOW
N$ N$
1. Operating activities
(Cash flow from normal trading activities)
Net profit before tax xxxxxx
Interest on debentures/loan/overdraft Add +
Interest on fixed deposit/current account Deduct -
Increase in provision for doubtful debts Add +
Decrease in provision for doubtful debts Deduct -
Depreciation Add +
Profit on sale of non-current assets Deduct -
Loss on sale of non-current assets Add +
Decrease in inventory Add +
Increase in inventory Deduct -
Decrease in trade receivables/other receivables Add +
Increase in trade receivables/other receivables Deduct -
Decrease in trade payables/other payables Deduct -
Increase in trade payables/other payables Add + *Add +/Deduct -
Net cash inflow from operating activities xxxxxx
2. Returns of investment and servicing of finance
(Cash in or outflow due to returns on investments and
interests)
Interest on debenture/loan/overdraft Deduct -
Interest on fixed deposit/current account Add +
Dividends paid Deduct -
Dividends received Add + *Add +/Deduct -
Net cash inflow before tax xxxxxx
3. Taxation
Deduct -
(Any tax paid during the year)
Net cash flow before investing activities xxxxxx
4. Investing activities
(Cash paid to buy non-current assets or cash received
on sale of non-current assets)
Non-current assets purchased Deduct -
Proceeds from sale of non-current assets Add + *Add +/Deduct -
Net cash flow before financing activities xxxxxx
5. Financing activities
(Cash received due to issue of shares, loans; cash paid
out due to repayment of share capital and loans)
Proceeds from issues of shares/loan Add +
Increase in reserves (share premium) Add +
Payment on loan/debentures Deduct - *Add +/Deduct
Net cash inflow or outflow for the year xxxxxx
Analysis of Cash and Cash Equivalents
Opening balance of cash and cash equivalents
xxxxxx
(cash + bank)
Add: net inflow of cash and cash equivalents or
*Add +/Deduct -
Less: net outflow of cash and cash equivalents
Closing balance of cash and cash equivalents (cash + bank) xxxxxx
 Depending on the outcome of the amounts added or subtracted,at each section; if the
answer is a positive it is added and if it is a negative it is subtracted.

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 ACTIVITIES – LIMITED COMPANIES
(STATEMENTS OF CASHFLOW)

1 The following are the statements of financial position of Zambezi Ltd for the two years
ended 31 July 2019 and 2020.

31 July 2019 31 July 2020

N$ N$ N$ N$
Non-current assets
Land at buildings 420 000 445 000
Equipment at book value 120 000 145 750
Vehicles at book value 39 500 23 500
579 500 614 250

Current assets 51 550 118 800

Inventory 21 600 20 500
Trade receivables 13 100 14 250
Bank 16 850 84 050
Total assets 631 050 733 050

Equity
Capital and reserves
Ordinary shares 512 000 547 000
General Reserves 50 000 55 000
Revaluation reserves 25 000
Retained earnings 15 900 41 500

Non-current liabilities
Debentures (5% per annum) 20 000 20 000

Current liabilities 33 150 44 550

Trade payables 16 150 13 550
Receiver of revenue (Tax) 17 000 31 000

Total Capital and Liabilities 631 050 733 050

Additional information at 31 July 2020
1 Profit before tax for the year amounted to N$89 600.
2 Equipment costing N$34 000 was purchased in 2020. There were no disposals
of equipment.
3 A second-hand vehicle was sold at a profit of N$1 500. Proceeds from the sale of
this vehicle amounted to N$8 500 cash.
4 Depreciation chargedfor the year was N$8 250 on equipment and N$9 000 on
vehicles.
5 Land and building was revalued in 2020.
6 Interest on debentures was paid for the year.
7 Income tax paid during the year was N$21 000.
8 Dividend paid during the year amounted to N$24 000.
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REQUIRED

(a) Prepare the cash flow statement of Zambezi Ltd for the year ended 31 July
2020.

Zambezi Ltd
Statement of cash flow for the year ended 31 July 2020

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2 Skimbleshanks Limited is a company listed on the JSE Securities Exchange and is
involved in distributing components for the railways.Statements of financial position at
30 June 2017 and 2018 and additional information at 30 June 2018 were as follows:

Skimbleshanks Limited
Statement of Financial Position at 30 June

2017 2018
N$ N$ N$ N$
Non-current Assets at net book value
Land and Buildings 160160
000000 160 000
Machinery at Book Value 175 000 235 000
335 000 395 000
Fixed deposit 130 000 151 000
Current Assets 288 000 503300
Inventory 145 000 225 000
Trade receivables 109 000 202 000
Cash 34 000 76 300
Total assets 753 000 1 049 300

EQUITY
N$1 Ordinary shares issued 290 000 290 000
Share Premium 115 000 115 000
Retained earnings 195 000 351 000
600 000 756 000
Non-current Liabilities
10% Debentures 73 000 73 000

Current Liabilities 80 000 220 300

Trade payables 40 000 158 000
Bank overdraft 40 000 62 300
Total equity and liabilities 753 000 1 049 300

Additional information

1. The depreciation on machinery was N$31 000 for the year ended 30 June 2018.
2. Skimbleshanks Limited paid N$34 000 in dividends during the year.
3. Profit for the year was N$190 000.
4. Ignore taxation.

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REQUIRED:

(a) Prepare the Statement of cash flow of Skimbleshanks Limited for the year
ended 30 June 2018 and reconcile the opening and closing balances.

SkimbleshanksLtd
Statement of cash flow for the year ended 30 June 2018

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 (b) Suggest three ways the company might use to raise sufficient cash for it to
reduce the bank overdraft.

1…………………………………………………………………………………………..
……………………………………………...……………………………………………..
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2…………………………………………………………………………………………..
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3…………………………………………………………………………………………..
……………………………………………...……………………………………………..
……………………………………………...……………………………………………..

(c) Between 30 June 2017 and 30 June 2018, the cash and bank balances of
Skimbleshanks Limited will have increased by the amount of the net profit of
the accounting period ended 30 June 2018.Explain whether you agree or
disagree with this statement. Give two reasons for your answer.
……………………………………………...……………………………………………..
……………………………………………...……………………………………………..
……………………………………………...……………………………………………..
……………………………………………...……………………………………………..
……………………………………………...……………………………………………..
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……………………………………………...……………………………………………..
……………………………………………...……………………………………………..
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3 The given information for the accounting period 1 March 2017 to 28 February
2018 was taken from the books of Awesome Ltd.

Extract from the Income Statement for the year ended 28 February 2018
N$
Interest on overdraft 2 000
Interest on loan 19 000
Net profit before tax 227 800
Income tax 151 500

Awesome Ltd
Statement of Financial Position)
2017 2018
N$ N$
Non-Current Assets (Book value)
Premises 450 000 500 000
Vehicles 0 69 200
Equipment 86 000 90 000
536 000 659 200
Current Assets 227 300 190 300
Inventory 158 000 121 000
Trade receivables 59 300 62 500
Other receivables (Accrued income) 2 000 3 000
Receiver of revenue 8 000
Bank (Cash and cash equivalents) 3 800
Total assets 763 300 849 500

Capital and reserves

Ordinary share capital 540 000 678 000
Share Premium 10 000 25 000
Retained Profits 13 400 11 700
563 400 714 700
Non-Current Liabilities
Loan: Namibia Bank 150 000 100 000

Current Liabilities 49 900 34 800

Trade payables 31 800 25 400
Other payables(Accrued Expenses) 2 900 4 600
Receiver of Revenue 4 800
Bank overdraft 15 200
Total Equity and Liabilities 763 300 849 500

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 [26]
Additional information
Proposed dividend, N$40 000 for 2017 was paid during the year.
Interim dividends of N$50 000 were declared and paid on 1 September 2017.
During the financial year equipment costing N$20 000 was sold at book value of
N$8 000. On the same day new equipment of N$30 000 was bought.
Depreciation for the year is N$28 800.
REQUIRED
(a) Draw up the cash flow statement of Awesome Ltd for the year ended
28 February 2018.
Awesome Ltd
Statement of cash flow for the year ended 28 February 2018

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(b) Ltd made a profit before tax of N$227 800 and the bank balance only
increased with N$19 000. The shareholders do not understand this
because they expected the bank balance to increase with the same
amount.

Advise the shareholders why the two amounts differ.

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 MARK SCHEME WITH COMMENTS FROM EXAMINERS REPORT
(STATEMENT OF CASH FLOWS)

1 Zambezi Ltd
Statement of cash flow for the year ended 31 July 2020
N$ N$
Operating activities
Profit for the year before tax 89 600
Interest on debentures 1 000
Depreciation (8 250 + 9 000) 17 250
Profit on sale of vehicles (1 500)
Decrease in inventory 1 100
Increase in trade receivables (1 150)
Decrease in trade payables (2 600)
Net cash inflow from operating activities 103 700
Returns of investment and servicing of finance (25 000)
Debenture interest paid (20 000 x 5/100) (1 000)
Dividend paid (24 000)
Net cash inflow before tax 78 700
Taxation (21 000)
Net cash flow before investing activities 57 700
Investing activities (25 500)
Equipment purchased (34 000)
Proceeds from sale of vehicles 8 500
Net cash flow before financing activities 32 200
Financing activities 35 000
Proceeds from issues of shares 35 000
Net cash inflow for the year 67 200
Analysis of Cash and Cash Equivalents
Opening balance of cash and cash equivalents 16 850
Add: net inflow of cash and cash equivalents 67 200
Closing balance of cash and cash equivalents 84 050

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2 (a) SkimbleshanksLtd
Statement of cash flow for the year ended 30 June 2018
Operating activities
Profit for the year 190 000
Depreciation 31 000
Interest on debentures (73000 * 10/100) 7 300
Increase in inventory (80 000)
Increase in trade receivables (93000)
Increase in trade payables 118 000 (16 700)
Net cash inflow from operating activities 173 300
Returns on investments and servicing of finance
Less: Dividends Paid (34 000)
Interest on debentures (7 300) (41 300)
Net cash inflow before investing activities 132 000
Investing Activities
Purchasing of machinery/ assets
(235000-175000+31000) (91 000)
Increase fixed deposit – investment (21 000) (112 000)
Net inflow 20 000
Analysis of Cash and Cash Equivalents
Opening balance of cash and cash equivalents (6 000)
(34 000 – 40 000)
Inflow of cash and cash equivalents 20 000
Closing balance of cash and cash equivalents 14 000

(b) * New issue of shares

* Obtain a long-term loan
* Tighter credit control (i.e.: trade receivables payment period)
* Sale of non-current assets no longer required
* Extend credit taken from suppliers

(c) Disagree (1)

1. Because profit for the year includes non-cash items e.g. depreciation, profit or
loss on sale of non-current assets, increase or decrease in provision for doubtful
debts, etc.(2)

2. Profit for the year includes accruals and prepayments for the current period.(2)

3. Profit for the year does not include capital expenditure,e.g. purchases of non-
current assets. (2)
[5]

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3 (a) Fairly well answered.

The layout of the cash flow statement was very bad and the headings are still aproblem. Lot of
entries were under the wrong headings.
The amounts in the cash flow which decrease your cash flow must be shown in brackets.
Opening cash balance and closing cash balance were swapped.

Answer

Awesome Ltd
Statement of cash flow for the year ended 28 February 2018
N$ N$
OPERATING ACTIVITIES
Profit for the year before tax 227 800 (1)
Interest on overdraft 2 000 (1)
Interest on loan 19 000 (1)
Depreciation 28 800 (3)
Decrease in inventory 37 000 (1)
Increase in trade receivables (3 200) (1)
Increase in accrued income (1 000) (1)
Decrease in trade payables (6 400) (1)
Increase in accrued expenses 1 700 (1)
Net cash inflow from operating activities 305 700
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest paid (2 000 + 19 000) (21 000) (1)
Dividends paid (40 000 + 50 000) (90 000) (2)
Net cash inflow before tax 194 700
Taxation (151 000 ‒ 8 000 ‒ 4 800) (138 700) (2)
Net cash inflow after tax 56 000
INVESTING ACTIVITIES
Non-current assets purchased (30 000 + 80 000 + 50 000) (160 000) (3)
Proceeds of sale of non-current assets 8 000 (1) (152 000)
Cash outflow before financing (96 000)
FINANCING
Increase in share capital 150 000 (1)
Increase in share premium 15 000 (1)
Decrease in loan (50 000) (1)
Increase in cash (Inflow of cash) 19 000 (1)
Opening balance of cash (15 200) (1)
Closing balance of cash 3 800 (1)
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(b) Answered poorly. Learners did not compare the income statement with the cashbook

Answer
Profit is not cash in the bank. (1)
Profit includes non monetary items e.g. depreciation (1) where as bank only deals
with cash received and paid. (1)
The owner had capital expenditure of N$152 000 which would not influence his
profit but decrease the money in his bank account. (1)
Also receipts from accounts receivable and payments to accounts payable also
influence his bank but have no effect on his profit. (1)
The Income statement does not have any capital expenditure. (1)
Profit includes accruals and prepayments and the bank balance not. (1)
Tax and dividends are paid in Cash Book and is not included in net profit before tax. (1)

Any four

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