June sitting 2022 Cash flow

statement
IAS 7
FINANCIAL ACCOUNTING
LEVEL 1
PAPER ONE

BY- KIMULI FRED

Lecture notes - 2022

0752818204 / 0787818404

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CASH FLOW STATEMENTS
Objectives
To provide users of financial statements information about the cash flows of an enterprise and its
ability to generate cash and cash equivalents as well as indicating the cash needs of the enterprise.
Scope
A cash flow statement should be presented as an integral part of the enterprise’s financial
statements. All enterprises are required by the standard to produce a cash flow statement.
The statement of cash flows is a useful document because it shows how much actual cash a
company has generated, helps to predict future cash inflows and outflows and allows management
and a company plan for the future which helps users see the positives and negatives of a company.
The purpose of the statement of cash flows is to provide information about cash receipts, cash
payments, and the net change in cash resulting from the operating, investing, and financing
activities of a company during the period.

There can be significant differences between the results shown in the income statement and the
cash flows in the statement, for the following reasons;
• There are timing differences between the recordation of transaction and when the related cash is
actually expended or received.
• Management may be using aggressive revenue recognition to report revenue for which cash
receipts are still some time in the future.
• The business may be asset intensive, and so requires large capital investments that do not
appear in the income statement, except on a delayed basis as depreciation.
Definitions

 Cash – comprises of cash on hand and demand deposits

 Cash equivalents – are short term, highly liquid investments that are readily convertible to known
amounts of cash and which are subject to an insignificant risk of changes in value e.g treasury
bills, postdated cheques, bills of exchange.
 Cash flows – are inflows and outflows of cash and cash equivalents.
Presentation
IAS 7 requires cash flow statements to report cash flows during the period classified by
 Operating
 Investing and
 Financing activities
Classification of cash flow statements:
Operating activities
This is perhaps the key part of the statement of cash flows because it shows whether, and to what
extent, companies can generate cash from their operations. It is these operating cash flows which
must, in the end, pay for all cash outflows relating to other activities, ie paying loan interest, dividends
and so on.
Most of the components of cash flows from operating activities will be those items which determine the
net profit or loss of the enterprise, ie they relate to the main revenue-producing activities of the
enterprise. The standard gives the following as examples of cash flows from operating activities.
✓ sale of goods and receipt of cash
✓ purchase of goods for resale and making cash payments
✓ 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 payments or refunds of income taxes unless they can be specifically identified
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✓ with financing and investing activities
✓ cash receipts and payments from contracts held for dealing or trading purposes
✓ cash receipts and cash payments of an insurance entity for premiums and claims,
✓ annuities and other policy benefits; etc

Investing activities
The cash flows classified under this heading show the extent of new investment in assets which will
generate future profit and cash flows. The standard gives the following examples of cash flows
arising from investing activities.
i. Cash payments to acquire property, plant and equipment, intangibles and other non-current
assets, including those relating to capitalised development costs and self-constructed property,
plant and equipment
ii. Cash receipts from sales of property, plant and equipment, intangibles and other non-current
assets
iii. Cash payments to acquire shares or debentures of other enterprises
iv. Cash receipts from sales of shares or debentures of other enterprises
v. Cash advances and loans made to other parties
vi. Cash receipts from the repayment of advances and loans made to other parties

Financing activities – this relates to cash flow from or towards the providers of finance. Examples;
✓ cash proceeds from issuing shares or other equity instruments
✓ cash payments to owners of to acquire or redeem the entity’s shares
✓ cash proceeds from issuing debentures, loans, notes, bonds, mortgages, and other
✓ short-term or long-term borrowings, cash repayments of amounts borrowed
✓ cash payments by a lessee for the reduction of the outstanding liability relating to a finance
lease.
Why a business should make positive cash flows from operating activates.
Cash flows from operating activities include cash received from sale of goods, cash paid to purchase
goods which are the routine activities of the business. These activities are expected to re-occur every
financial year. When compared with activities such as cash received from disposal of an asset, cash
from issue shares, cash from borrowing (these cash flows are not expected to occur every year)
therefore can’t be relied upon to predict future cash flows.

IAS 7 provides for cash flow statements to be prepared using either the DIRECT or the INDIRECT
method. The difference between the two methods lies in the presentation of the operating activities.
In the indirect method, the operating profit (profit before interest and tax) is adjusted for the effects
of transactions of non cash flow nature. E.g changes in working capital items, accruals and items of
income or expenses associated with investing or financing cash flows. Such other items include profit
or loss on disposal, depreciation, discounts and bad debts.
Working capital adjustments
Increase in current assets – outflow
Decrease in current assets – inflows
Increase in current liability – inflow
Decrease in current liability – outflow
Increase in stock – out flow
Decrease in stock – inflow

Indirect method
Here the net profit / loss for the period is adjusted for the effect of transactions of non-cash nature,
any accruals and other items of income or expenses in the period. To be specific the net profit / loss
for the period is adjusted for;
• Changes during the period in inventory, receivables and payables
• Non-cash items like depreciation, provisions, gain or loss on disposal etc.

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 • Any other items that may fall under investing and financing activities.

Interest and dividend

Cash-flows from interest and dividends received and paid should be disclosed separately IAS 7
allows interest and dividend paid or received to be classified under any of the three categories
provided that the classification is consist from year to year
However it is advisable to classify them as follows
• Interest received as cash flow from investing activities
• Interest paid as a cash flow from operating activities
• Dividend received as a cash flow from investing activities
• Dividends paid as a cash flow from operating activities

Operating activities
Shs Shs
Operating profits (profit before income and tax) XXX
Non cash flow items XXX
Depreciation / amortization XXX
Bad debts expeneses XXX
Increases in Provision for bad debts XXX
Loss on disposal of PPE XXX
Discount allowed XXX
Investment income (XXX)
Foreign exchange loss / gain XXX / (XXX)
Decrease in provision for bad debts (XXX)
Profit / gain on disposal of PPE (XXX)
Discount received (XXX) XXX
Operating profits before working capital adjustments XXX
Working capital adjustments
Increase in current liabilities XXX
Decrease in current assets XXX
Decrease in current liability (XXX)
Increase in current assets (XXX) XXX
Cash flows from operations XXX
Less: Interest paid (XXX)
Less: income Taxes paid (XXX)
Net cashflow from operating activiites XXX/(XXX)

Cash flows from investing activities

Assets purchased (XXX)

Assets sold / investments disposed XXX
Dividend received XXX
Interest received on investments XXX
Net cash flows from investing activities XXX / (XXX)

Cash flows from financing activities

Proceeds from issue Share capital / common stock XXX
Proceeds from issurance of long term debts XXX
Payment of long term debts (XXX)
Proceeds from bond issurance XXX
Payment of Dividend (XXX)
Net cash flows from financing activities XXX / (XXX)
Net increase / decrease in cash and cash equivalent XXX/ (XXX)
Add Opening cash and cash equivalent XXX

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Closing cash and cash equivalent XXX

Why certain items are added and others subtracted.

• Depreciation on assets. Depreciation does not result in outflow of cash and yet is charged in
the profit and loss account as an expense hence reducing on the net profit. Therefore the
depreciation on non-current assets must be added back to the net profit in order to find out the
real cash generated from operations.
• Amortization of intangible assets. Good will, preliminary expenses and other intangible
assets written off against profits reduces net profits without affecting the cash balance. The
amount written off should therefore be added back to the operating profit to find out the cash
from operations.
• Loss on sale of assets. In case of a loss on disposal it does not result in any cash outflow and
yet its charged against the profit and an expense. Such losses on disposal of assets must be
added back to net profit.
• Gain / profit from sale of non-current assets. These are taken to be profit earned as a
result of sale / disposal of an asset. The profit is always added on the profit of the year and yet
does not result in an extra inflow of cash. Therefore such profit on sale of asset must be
subtracted from the operating profits.
• Provision for bad debts. These are just mere book keeping entry and does not involve
payment out of cash. When preparing the profit and loss account an increase in provision for bad
debts is included in the expenses hence reducing the operating profit. Such increase must be
added back to the profit.

Adjustments for movement in working capital items

Accounts receivable. Increase in accounts receivable implies that there is a sale of goods on
credit, which has a positive effect on the operating profit. When account receivable increases it
means that receipts are being delayed the business is giving along credit period, and this reduces
the cash inflow and yet the profit and loss reflects a high profits figure. This increases account
receivable must be subtracted from the operating profits.
A decrease in accounts receivable implies that there are receipts from customers hence cash inflows
and therefore such reduction must be added back to the operating profit.

Accounts payable. An increase in account payable implies that there is purchase of goods on
credit and the business is delaying payment to its suppliers. This means that business is delaying
payment hence retaining cash, indirectly it’s taken to be an inflow of cash. Purchase of goods being
an element of cost of sales involves cash payment. An increase in trade payable for purchases
reduces the profit for the year and yet it does not involve any cash payment. An increase in
accounts payable must be added back to the operating profit.
The decrease in accounts payable from one period to another implies that the payment to suppliers
hence a decrease of cash from operation. This reduction must be subtracted from the operating
profit.

Outstanding expenses and incomes received in advance.

The effect of these items on cash from operation and operating profit is the same as the effect of
account payable. This means that any increase in these items will result in increase in cash from
operation while any decrease means decrease in cash from operations. This is because the
operating profit is computed after charging all-expense paid or outstanding.
In case certain expenses have not been paid this will result in decrease of operating without
corresponding decrease in cash from operation.

Similarly incomes received in advance is not taken into account while computing profit from
operations since it relates to next year. It means cash flow from operation will be higher than the

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actual net profit as shown by profit and loss account. This must be added back on the operating
profit.

Prepaid expenses and outstanding incomes.

The effect of prepaid expenses and outstanding incomes on cash from operations is similar to the
effect of accounts receivable.
While computing operating profit, the expenses for the accounting period are charged to the profit
or loss account
Expenses paid in advance are not charged to the income statement. This prepayment of expenses
does not decrease the operating profit for the year but it decreases cash flow from operations.
Similarly income earned during the year are credited to the profit and loss account whether it has
been received or not. Thus incomes which has become due / outstanding are added to the
operating profit for the year without increasing cash from operation, such must be deducted from
the operating profit.

Opening and closing inventory. The amount of opening inventory is charged to the debit side of
the income statement. It thus reduces the operating profit without reducing the cash from
operations.

Similarly, the amount of closing inventory is credited to the income statement it thus increases the
amount of operating profit without increasing the cash from operation. Put the other way around an
increase in inventory implies that cash have gone out for acquisition or purchase of trade inventory
(goods)

While a decrease means, there is a sale of inventory hence an inflow of cash on assumption that
there is cash sale of inventory.

Generally, any non-cash flow items and changes in working capital item that will have increased the
operating profit must be subtracted and any item that will have decreased the operating profit must
be added back so as to determine the net cash flow operations.

Net Income
Add Back: Non Cash Expenses (Depreciation, Depletion and Amortization Expense)
Add Back: Non Operating Losses (Loss on Sale of Fixed Assets)
Deduct: Non Operating Gains (Gains made on Sale of Fixed Assets)
Add Back: Decrease in Current Assets (Accounts Receivable, Inventory, Prepaid Expenses etc.)
Deduct: Increase in Current Assets (Accounts Receivable, Inventory, Prepaid Expenses etc.)
Add Back: An Increase in Current Liabilities (Accounts Payable, Accrued Expenses, Taxes Payable
among others)
Deduct: Decrease in Current Liabilities (Accounts Payable, Accrued Expenses, Taxes Payable among
others)
= Net Cash Flow from Operating Activities

NON-CASH TRANSACTIONS
Investing and financing transactions that do not require the use of cash or cash equivalents shall be
excluded from a statement of cash flow. Such transactions shall be disclosed elsewhere in the financial
statements in a way that provides all the relevant information about these investing and financing
activities.

The direct method (recommended by IAS 7)

Direct method: It is a method of preparing a statement of cash flows during a given reporting period.
The method uses actual cash flow information from the company's operations segment, instead of using

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accrual accounting values. The basic data are cash receipts and cash payments from operating activities
are disclosed

In this method you only consider major claims or gross cash receipts and gross cash payments

NB. The difference between the direct and indirect method is just the presentation of the operating
activities

Preparing the statement of cashflows using the direct method would be a simple task if all companies
maintained extremely detailed cash account records. Most companies record an extremely large number
of transactions in their cash account and do not record enough detail for the information to be
summarized. Therefore, the statement of cash flows is prepared by analyzing all accounts except the
cash accounts.

To prepare the operating activities section, certain accounts found in the current assets and current
liabilities section of the balance sheet are used to help identify the cash flows received and incurred in
generating net income.

Cash collection from customers / recieveables

This consists of sales made for cash (cash sales) and cash collected from credit customers. The activity
in the accounts recievable and sales account is used to determine the cash collection from customers. If
the accounts receivable balance had increased the cash collected from customers would be determined
by substracting the increase in the accounts receivable balance from sales balance because an increase
in accounts receivable means your customers owe you the cash for their puchases (your sales)

Cash payments to suppliers

This represents the amount paid by the company for merchandise it plans to sell to its customers. An
increase in inventory means a company purchased more than it sold. Because the amount paid for
merchandise includes what was sold as well as what still remain on hand in inventory to be sold, the
change in inventory effects the cash payment to suppliers.

Cash payments for income taxes.

This represents amounts paid by the company for income taxes. The amount is calculated by taking
income tax expense and increasing it by the amount of any decrease in the balance of income taxes
payable account or decreasing it by the amount of any increase in the balance of the income taxes
payable account. In this case, there are no accrued taxes so the income tax expense is the same as cash
paid for income taxes.

Cash paid for interest.

This represents the amount paid by the company for interest. The amount is calculated by taking interest
expense and increasing it be the amount of any decrease in balance of the interest payable account or
decreasing it by the amount of an increase in the balance of the interest payable account. In this case,
there is no balance in the accrued interest account at the end of the period so the cash paid for interest
is the same as the interest expense.

Cash payments for operating expenses.

This includes wages and salaries, rent, transport and other operating costs. Decreciaiton is reduced
because it is a non cash expense.

Format
Cash flows Operating activities
Shs Shs
Cash sales XXX
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Receipts from recievables XXX
Payment to suppliers or payables (XXX)
Other payments for business expenses (XXX)
Payment to labourers (XXX)
Cash flows from operations XXX
Less: Interest paid (XXX)
Less: Taxes paid (XXX)
Net cashflow from operating activiites XXX/(XXX)

Cash flows from investing activities

Assets purchased (XXX)

Assets sold / investments disposed XXX
Dividend received XXX
Interest received on investments XXX
Net cash flows from investing activities XXX / (XXX)

Cash flows from financing activities

Proceeds from issue Share capital XXX
Loans received / loan repayment XXX/(XXX)
Dividend paid (XXX)
Net cash flows from financing activities XXX / (XXX)
Net increase / decrease in cash and cash equivalent XXX/ (XXX)
Add Opening cash and cash equivalent XXX
Closing cash and cash equivalent XXX

The direct method is in effect an analysis of the cash book. This information does not appear
directly in the rest of the financial statements and so many companies may find it difficult to collect
it. Problems might include the need to re-analyse the cash book, to collate results from other cash
sources and so on. The direct method is therefore, much easier as it draws on figures which can
easily be got from other elements of the financial statements.

IAS 7 Direct method is preferred because it is easily understood; widely accepted by FASB and IFRS.
Many stakeholders advocate for the direct method because it provides information which may be
useful in estimating future cash flows that is not available under the direct method.
Advantages of direct method
✓ It shows operating receipts and payments individually
✓ It is most preferred for entities because it provides information for future prediction for cash
flows
✓ It provides a most accurate picture to investors of company’s future cash flows situations
✓ It is straight forward and easier to understand
Disadvantages

✓ It requires a lot of time in gathering information from the source documents.

Note
➢ share capital proceeds are normally split between share capital and share premium
➢ Bonus issues – these don’t involve cash.
➢ Revaluations of noncurrent assets – this must be taken into account in calculating acquisitions
and disposal.
➢ Movement on deferred tax. This must be taken into account when calculating tax paid.
➢ Finance leases. Assets acquired under finance leases must be adjusted for in non-current asset
calculations and the amount paid under the finance lease must appear as a cash flow.
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Non-current assets can include amounts for restorations/clean up costs which are not cash flows.

Why the direct method of ascertaining cash flows from operating activities is preferred
to the indirect method:
➢ It is easy to compute
➢ Helps to show the inflows into the company
➢ Helps identify the total cash outflows
➢ Its more realistic because it does not follow the working capital items
➢ Its less time consuming
➢ Provides information which may be useful in estimating future cash flows which is not available
under indirect method
➢ Easily understood by non-accountants.

Interpretation of Statements of cash flows:

• When analysing Cash flow, comparison should not be only with profits but also Cash flow over a
period of time /years.
• Profits is smoothed out through accruals, Prepayments, provisions and other accounting
conventions.
• You must analyse the trend which will appear over time.

Benefits of cash flow statements:

(i) Cash flow statements are useful for short term planning. A business needs sufficient cash to
meet its various obligations in the near future.
(ii) They help in efficient cash management. Cash flow analysis helps in evaluating financial
policies and cash proportions
(iii) They help in internal financial management; by providing information about funds which will
be available from operations.
(iv) They disclose a complete story of cash movement; the increase in or decrease of cash and
the reasons thereof can be known.
(v) They disclose success or failure of cash planning by comparing the projected cash flow
statement with the actual cash flow statement and necessary measures can be taken.

Limitations of cash flow statements:

✓ Cash flow statement can-not be equated with the statement of profit or loss. This is because
the statement of profit or loss takes into consideration cash and no-cash items.
✓ Cash flow statement can-not replace statement of profit or loss. Each of them has a separate
function.
✓ The cash balance disclosed by the cash flow statement may not represent the real liquid
position of the business since it can be easily influenced by later payment of purchases and
other payments.
Note
✓ When preparing the statement from comparative balance sheet you will usually have to
calculate such items such as depreciation, loss on sale of assets and profit for the year.
✓ Work out the profit if not already given using opening and closing balance, interest expenses,
tax charge and dividends.
Closing balances (P& L)/ retained earning XXX
Add: dividends (proposed and paid) XXX
Provision for taxation XXX
Interest expenses XXX
Less: Opening balance (P&L) / retained earning XXX
Profit for the year (PBIT) XXX

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 Retained earning

Interest expense xxx Balance b/d xxx

Taxation xxx Operating profits for the year
Dividends xxx (balancing figure) xxx
Balance b/d xxx
xxx xxx

Difference between statement of cash flows and statement of profit or loss and other
comprehensive income:
Statement of Cash Flows Statement of Profit or Loss and
other Comprehensive Income
Shows cash flows and cash out flows. Shows incomes and expenses.
Prepared on a cash basis. Prepared on an accrual basis.
Reveals the net increase or decrease in Reveals the net profit or loss for the
cash and cash equivalents. period.
Deals with both revenue and capital items. Deals with only revenue items.
The statement of profit or loss and other Does not require a statement of cash
comprehensive income feeds into the flows before it is prepared.
preparation of the statement of cash
flows.

Objectives
1. All of the following constitute cashflows from investing activities except:
A. cash payments to acquire plant, property, intangibles, equipment and other long-term assets;
B. cash advances and loans made to other parties (other than those by financial institutions).
C. Cash payments to acquire equity or debt instruments of other enterprises and interests in joint
ventures.
D. Proceeds from sales of non-dealing securities.

2. Which one of the following statements is false?

A. Cash equivalents are short-term, highly liquid investments that are readily convertible into cash.
B. “Cash” comprises cash on hand and fixed deposits.
C. Operating activities are the principal revenue-producing activities of the enterprise.
D. Financing activities are those activities that result in changes in size and composition of the
equity capital and borrowings of the enterprise.

3. Which of the following would not be a cash inflow from financing activities for Karen Courts Ltd.?
A. Cash from issuing Karen Courts Common stock.
B. Cash from issuing Karen Courts preferred stock
C. Cash from issuing Karen Courts bonds payable.
D. Cash from sale of Kimara Ltd. common stock.

4. In accordance with IAS 7 – Cash Flow Statements, an investment whose maturity periods is 80
days is classified under:
A. Cash and cash equivalents.
B. Financing activities.
C. Investing activities.
D. Operating activities.

5. The following information was extracted from the books of Juwa Kali Trading business as at 31
March 2003.
Shs ‘000’
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 Cash sales 28,500
Profit for the year 5,000
Depreciation 950
Increase in inventory 1,000
Decrease in trade receivables 500
Decrease in trade payables 1,200
Payments to employees 10,000
Payment for expenses 5,000
Which of the following is the net cash flow from operating activities, assuming use of the
direct method?
A. Shs 7,650.
B. Shs 13,500.
C. Shs 21,150.
D. Shs 18,500.

6. According to IAS 7: Cash Flow Statements, the repayment of the capital element of a loan is
classified under:
A. Financing activities.
B. Operating activities.
C. Investing activities.
D. Cash and cash equivalents.

7. In accordance with IAS 7 – Cash Flow Statements, interest received on short term debt is
classified under:
A. Investing activities.
B. Operating activities.
C. Financing activities.
D. Cash and cash equivalents.

8. According to IAS 7: Cash Flow Statements, the item classified as a financing activity is:
A. Cash payment to acquire shares of another company.
B. Cash receipts from sale of goods.
C. Cash receipts from sale of debentures of another company.
D. Cash payments to shareholders to redeem their shares in the company.

9. IAS 7: Cash Flow Statements, requires the cash flow statement (Indirect method) to open with
a computation of net cash from operating activities, arrived at by adjusting net profit before
taxation. Which of the following lists consists only of items which might appear in such
computation?
A. Depreciation, increase in receivables, increase in payables, proceeds from the sale of equipment
and increase in inventories.
B. Increase in payables, decrease in inventories, profit on the sale of machinery, depreciation and
decrease in receivables.
C. Increase in payables, proceeds from the sale of equipment, depreciation, decrease in receivables
and increase in inventories.
D. Depreciation, interest paid, proceeds from the sale of equipment and decrease in inventories.

10. Which of the following will be treated as an investing activity when preparing a cash flow
statement under IAS 17: Cash Flow Statements?
A. Installation fees of plant and machinery in a factory.
B. Cost of replacing a broken part of factory machinery.
C. The issue of shares to finance future non-current assets.
D. Payment of dividends declared by the directors.

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11. Which of the following meets the definition of cash and cash equivalent under IAS 7: Cash Flow
Statements?
i. An investment whose maturity date is three months or less from the date of acquisition.
ii. An investment whose maturity date is more than six months from the date of acquisition.
iii. A loan repayable on demand only when it matures.
iv. An investment which is highly liquid and readily convertible to cash.
A. (i) and (iii).
B. (i) and (ii).
C. (i) and (iv).
D. (i), (ii) and (iv).

12. Which of the following is NOT an investing activity in a statement of cash flows?
A. Redemption of shares during the period.
B. Disposal of motor vehicles during the period.
C. Purchase of land during the period.
D. Purchase of furniture during the period.

13. The three major classifications of activities in a statement of cash flows are:
A. Revenue, expenses and net income.
B. Operating, investing and financing.
C. Opening balance, closing balance and net change.
D. Inflows, outflows and net balance.

14. Which of the following is NOT prepared on accrual basis?

A. Statement of financial reporting.
B. Statement of comprehensive income.
C. Statement of cash flows.
D. Statement of recognised gains and losses.

15. Which of the following is FALSE about a statement of cash flows?

A. Cash equivalents are liquid investments that are not readily convertible into known amounts of
cash.
B. Cash comprises of cash on hand and demand deposits.
C. Cash flows are inflows and outflows of cash and cash equivalents.
D. Investing activities are the acquisition and disposed of long-term assets and other investments
not included in cash equivalents.

16. The following are examples of financing activities under IAS 7: Statement of Cash Flows
EXCEPT:
A. Cash proceeds from the issue of shares.
B. Cash receipts from the repayment of advances and loans made to other parties other than
financial institutions.
C. Cash proceeds from the issue of debentures.
D. Cash repayments of amounts borrowed.

17. The elements directly related to the measurement of the results from operating activities are:
A. Assets and liabilities.
B. Equity and liabilities.
C. Incomes and liabilities.
D. Incomes and expenses.

18. Which of the following is NOT a cash flow from operating activities under IAS 7: Statement of
Cash Flows?
A. Cash receipts from sale of goods and rendering services.
B. Cash payments to suppliers of goods and services.

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C. Cash payments to and on behalf of employees.
D. Cash repayments of amounts borrowed.

19. According to IAS 7: Statement of Cash Flows, which of the following activities would generally
be regarded as a financing activity in preparing a statement of cash flows?
A. Dividend distribution.
B. Proceeds from sale of shares of other firms.
C. Loans made by the company to other businesses.
D. Employee’s salaries and wages paid.

20. Which of the following headings is not a classification of cash flows in IAS 7?
A Operating
B Investing
C Administration
D Financing

21. A company has the following information about property, plant and equipment.
20X7 20X6
Shs '000 shs'000
Cost 750 600
Accumulated depreciation 250 150
Carrying amount 500 450
Plant with a carrying amount of shs 75,000 (original cost shs 90,000) was sold for shs 30,000 during the
year.
What is the cash flow from investing activities for the year?
A shs 95,000 inflow
B shs 210,000 inflow
C shs 210,000 outflow
D shs 95,000 outflow

Question 22
You have been provided with the following financial statements for Mwaka Ltd for the year ended
31 December, 2018:
Statement of profit or loss:
Shs '000'
Sales revenue 377,900
Cost of sales (220,700)
Gross profit 157,200
Investment income received 23,000
Administrative expenses (35,700)
Distribution expenses (43,900)
Operating profit 100,600
Interest paid (17,000)
Taxation (17,500)
Dividends (20,000)
Net profit 46,100

Statements of financial position:

2018 2017
Shs ‘000’ Shs '000'
Assets
Non-current assets 475,000 346,000
Accumulated depreciation (122,250) (51,900)

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 Net book value 352,750 294,100
Investments 60,000
Current assets:
Inventory 138,000 95,000
Accounts receivable 45,600 35,500
Cash and bank - 30,600
Total assets: 596,350 455,200

Equity and liabilities:

Equity
Ordinary shares of Shs 4,000 each 300,000 260,000
Share premium 34,000 27,000
Retained profits 84,800 38,700
Non-current liabilities:
Bank loan 57,400 55,000
Current liabilities
Accounts payable 35,550 43,000
Taxation 17,000 13,500
Dividends 25,000 18,000
Bank overdraft 42,600
596,350 455,200

Additional information:
1. During the year ended 31 December 2018, a non-current asset which cost Shs 50,000,000
and with net book value Shs 35,000,000 was sold for Shs 18,000,000.
2. The increase in share capital was a result of issue of shares which were paid for fully.
Required:
Prepare, for Mwaka Ltd, for the year ended 31 December 2018, a statement of cash flows using
the indirect method, in accordance with IAS 7: statement of cash flow
(Hint: Show all the workings)

Question 23
Hashua Ltd. Is involved in the manufacture of plastic products and its financial statements are
as follows
Hushua Ltd. Statement of financial position as at 31 December 2018
2018 2017
Details 000 (shs) 000 (shs)
Non – current assets
Property , plant and Equipment 86,300 74,600
Intangible assets 4,560 1,200
Total non – current assets 90,860 75,800

Current assets
Inventories 14,320 11,300
Trade receivables 2,170 1,200
Cash and cash equivalent 8,900 9,200
Total currents assets 25,390 21,700
Total assets 116,250 97,500

Equity and liabilities

Equity

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 Share capitals 50,000 40,000
Share premium 8,000 5,000
Retained earnings 26,220 23,590
Revaluation surplus 2,800 800
Total equity 87,020 69,390

Non – current liabilities

Long term Loan 20,000 18,000
Total Non – current liabilities 20,000 18,000

Current liabilities
Trade payable 7,730 8,910
Current tax payables 1,500 1,200
Total current liabilities 9,230 10,110
Total Equity and Liabilities 116,250 97,500

Hashua Ltd.
Statement of profit or loss and other comprehensive income
For the year ended 31-12-2018
Details Shs
Revenue 26,200
Cost of sales 20,200
Gross profit 6,000
Administrative expenses 1,100
Distribution costs 1,600
Finance costs 200
Profit / (loss) before tax 3,100
Income tax Expenses 380
Profit / (loss) for the year 2,720
Other comprehensive income
Revaluation gain 2,000
Other comprehensive income for the year, net of tax 2,000
Total comprehensive income for the year 4,720

Notes:
i. Hashua Ltd. sold a property with a carrying value of shs 1,400,000 for shs 1,500,000
during the financial year ended 31 December 2018. Depreciation for the same financial
year amounted to shs 320,000.
ii. Hashua Ltd. paid a dividend of shs 90,000 in 2018.
REQUIREMENT:
a) Prepare a Statement of Cash Flows for the year-ended 31 December 2018 for Hashua Ltd.
in accordance with IAS 7 - Statement of Cash Flows.
Briefly discuss the usefulness of Statements of Cash Flows in financial reporting.

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Question 24

Kenron Ltd which deals in general merchandise, has provided the following financial statements for
the year ended 30 April, 2018.
Statement of profit or loss
Shs ‘000’
Revenue 158,205
Cost of sales (121,200)
Gross profit 37,005
Interest received 25,000
Distribution costs (7,515)
Administration costs (9,750)
Profit before interest and tax 44,740
Finance costs (1,530)
Profit before tax 43,210
Tax (8,250)
Profit for the period 34,960
Dividends (25,160)
Profit retained during the year 9,800

Statement of financial position as at 30 April:

2018 2017
Non-current assets: Shs ‘000’ Shs ‘000’ Shs ‘000’ Shs ‘000’
Non-current assets (net
book value) 456,150 400,000
Investments at cost 235,000
Current assets:
78,365 103,300
Inventory
Trade receivables 52,085 48,295
Bank - 130,450 15,105 166,700
Total assets 821,600 566,700
Equity & liabilities:
Ordinary share capital
450,000 302,500
(Shs 1,100 nominal)
Share premium 113,400 79,050
Revaluation reserve 56,500 35,500
Retained earnings 56,150 676,050 46,350 463,400
Non-current liabilities:
71,250 56,250
Bank loan
Current liabilities
Trade payables 18,555 25,500
Taxation 8,250 6,750
Bank overdraft 34,995 -
Dividends payable 12,500 74,300 14,800 47,050
Total equity & liabilities 821,600 566,700
Additional information:

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 1. Property, plant & equipment as at 1 May, 2017 had a cost of Shs 500 million. During the
year, property that had been acquired on 1 May, 2016 and had cost Shs 50 million was
disposed of on 1 November, 2017 at Shs 36 million. The profit or loss on disposal has been
accounted for in the statement of profit or loss. The accounting policy is to depreciate
property, plant & equipment at 20% on cost and it is time apportioned.
2. During the year there was a cash issue of 90,925 shares at Shs 2,000 per share.
3. A revaluation of property, plant & equipment was carried out in April 2018 and is
incorporated in financial reports.
Required:
Prepare a statement of cash flows for Kenron Ltd for the financial year ended 30 April, 2018
using the indirect method.

Question 25

The accounts assistant of Twekembe Enterprises Ltd prepared the statement of profit or loss and
the statement of financial position as at 30 June, 2018 and 2019.
Statement of profit or loss for the year ended 30 June, 2019.
Shs ‘000’
Sales revenue 780,600
Cost of sales (320,000)
Gross profit 460,600
Gain on disposal of equipment 34,000
Administration costs (124,500)
Distribution costs (135,000)
Operation profit 235,100
Finance costs (67,500)
Profit before tax 167,600
Tax (50,280)
Profit for the period 117,320
Statement of financial position as at 30 June:
2019 2018
Shs ‘000’ Shs ‘000’
Non – current assets:
Cost 5,840,000 4,600,500
Accumulated depreciation (1,980,000) (1,800,000)
Net book value 3,860,000 2,800,500
Investments at cost 1,100,400 800,400
Current assets:
Inventory 67,500 50,500
Trade receivables 205,400 386,400
Other receivables 46,400 34,500
Cash and bank 34,500 -
Total assets 5,314,200 4,072,300

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 Equity and liabilities:
Share capital 2,540,000 2,300,400
Share premium 800,340 576,390
Retained earnings 645,050 703,972
Revaluation reserve 404,560 240,340

Non-current liabilities: 769,870 105,678

Bank loan
Current liabilities:
Trade payables 86,400 75,400
Taxes payable 35,450 24,560
Finance costs payable 32,530 45,560
Total equity & liabilities 5,314,200 4,072,300
Other information:
1. Equipment disposed of during the year had a cost and carrying value of Shs 105 million and
Shs 60,506,000 respectively.
2. A cash issue of shares was made during the year.
3. Changes in retained earnings were as a result of payment of dividends to shareholders.
Required:
Assist the accounts assistant of Twekembe Enterprises Ltd in determining the following
balances to be included in the statement of cash flow for the year ended 30 June, 2019.
i. Property plant and equipment acquired during the year
ii. Annual depreciation charge
iii. Taxes paid
iv. Finance costs paid
v. Dividend paid
vi. Proceeds from disposal of equipment
vii. Proceeds from issue of shares

Question 26
Owor Ltd’s statement of comprehensive income for the period ended 31 October 2012 was as
follows:
Shs ‘000’ Shs ‘000’
Sales 189,300
Cost of sales
Opening inventory 29,000

Purchases 95,300
Less closing inventory (31,100) 93,200
Gross profit 96,100
Expenses:
Wages 28,700
Electricity 3,400
Rent 15,000
Salaries 21,400
Office expenses 950

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 Loss on disposal of furniture 400
Depreciation on machinery 4,050
Depreciation on furniture 1,200
Goodwill written off 2,000
Preliminary expenses written off 1,000
Provision for income tax 9,000 87,100
Net profit 9,000
Proposed dividend 7,800
General reserve 1,200 9,000
Statements of financial position as at 31 October:
2012 2011
Shs ‘000’ Shs ‘000’
Goodwill 4,000 6,000
Machinery 22,950 17,000
Furniture 10,800 13,500
Inventory 31,100 29,000
Receivables 8,300 8,000
Cash 11,700 7,800
Prepaid expenses 250
Other accounts receivable 9,500 8,000
Preliminary expenses 1,000 2,000
Total assets 99,600 91,300
Capital and liabilities
Share capital 65,000 60,000
General reserve 11,200 10,000
Payables 6,220 6,500
Expenses due 380 200
Provision for taxation 9,000 8,000
Proposed dividend 7,800 6,600
99,600 91,300
Additional information:
1. During the year Owor Ltd sold furniture whose book value was Shs 1,500,000 for Shs
1,100,000 and new machinery costing Shs 10,000,000 was bought.
2. New equity shares were allotted at par for Shs 5,000,000.
3. The tax liability for the year ended 31 October 2011 was agreed with the tax authorities in
May 2012 at Shs 8,000,000.
4. Dividends of Shs 6,600,000 for the year ending 31 October 2012 were paid.
Required
Using the indirect method, prepare a statement of cash flows for Owor Ltd for the year ended 31
October 2012.

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 Question 27
(a) Explain three benefits and two limitations of cash flow statements.
(b) The following information was extracted from the books of Mukisa Ltd. Statement of
financial position as at 31 December, 2017 and 2018.
2018 2017
Shs '000' Shs '000'
Non-current assets:
Property plant & equipment 400,000 330,000
Current assets:
Inventory 468,000 460,000
Receivables 468,000 568,000
Short term investments 45,000 -
Bank balance 31,640 0
Cash at hand 2,000 8,000
Total assets 1,414,640 1,366,000
Equity & liabilities:
Share capital 719,000 535,000
Share premium 180,000 150,000
Retained earnings 99,280 25,140
Non-current liabilities:
10% Loan 160,000 140,000
Current liabilities:
Payables 236,000 461,380
Accrued salaries 3,200 4,700
Dividends 4,800 6,800
Taxation 12,360 11,380
Bank - 31,600
1,414,640 1,366,000

Statement of profit or loss for the year ended 31 December, 2018.

Shs '000' Shs '000'
Sales 980,000
Cost of sales (772,000)
Gross profit 208,000
Operating expenses:
Depreciation 36,200
Salaries & wages 64,500
Total expenses (100,700)
Earnings before interest & tax (EBIT) 107,300
Interest on loan (16,000)
91,300
Taxation (12,360)
78,940

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 Proposed dividends (4,800)
Net profits for the year 74,140

Additional information:

The following information related to the property, plant and equipment

2018 2017
Shs '000' Shs '000'
Cost 726,200 620,000
Accumulated depreciation 326,200 290,000
Net book value 400,000 330,000

Required:
Prepare for Mukisa Ltd, a statement of cash flows for the year ended 31 December, 2018
using direct method, in accordance with IAS 7: Statement of cashflows.
(Hint: Provide all the workings)

Question 28

Mensah & Co. Ltd

Statement of Financial Position as at 31 December 2017
2017 2016
Notes shs shs
Non-Current Assets (i) 16,000 18,000
Current Assets
Inventory 15,400 12,000
Trade Receivables 18,500 22,400
Cash and Bank Balance 9,500 5,000
Total Current Assets 43,400 39,400
Current Liabilities
Trade Payables 800 12,300
Other payables and accruals 2,000 2,500
Taxation (ii) 500 2,000
Short term loan (iii) 10,000 15,000
Total Current Liabilities 13,300 31,800

Net Current Assets 30,100 7,600

Total Assets 46,100 25,600

Financed by:
Share Capital 25,000 20,000
Retained Earnings 21,100 5,600
46,100 25,600

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 Statement of Comprehensive Income for the year ended 31 December 2017
shs
Sales 185,000
Cost of Sales (111,000)
Gross Profit 74,000
General Administrative Expense 52,000
Operating profit 22,000
Other Income 2,000
Profit before tax 24,000
Taxation (8,500)
Profit after Tax 15,500

Notes to the accounts:

i. Non – Current assets Schedule
Cost Shs Shs
Opening 45,000
Additions during the year 10,000
Disposal (5,000)
Closing balance 50,000
Depreciation
Opening balance 27,000
Charge for the year 10,000
Disposal (3,000)
Closing balance 34,000
Net Book Value 16,000

ii. Taxation
Taxation
Details Shs Details Shs
Tax paid 10,000 Balance c/f 2,000
Balance c/d 500 Tax charge for the year 8,500
10,500 10,500

iii. Short term loan

Loan
Details Shs Details Shs
Interest paid 6,500 Balance c/f 15,000
Balance c/d 10,000 Interest charge for the year 1,500
16,500 16,500

Required
a) Prepare a statement of cash flow as at 31 December 2017 for Mensah and Co. Ltd using
indirect method
b) Differentiate between Direct and Indirect Method of reporting cash flow from operating
activities

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 Question 29

African Ltd. Is involved in the manufacture of plastic products and its financial statements
are as follows

African Ltd. Statement of financial position as at 31 December 2016

2016 2015
Details (shs) (shs)
Non – current assets
Property , plant and Equipment 5,120,000 3,940,000
Total non – current assets 5,120,000 3,940,000

Current assets
Inventories 1,380,000 1,220,000
Trade receivables 780,000 680,000
Bank 50,000 112,000
Total currents assets 2,210,000 2,012,000
Total assets 7,330,000 5,952,000

Equity and liabilities

Equity
Share capital 240,000 200,000
Share premium 60,000 50,000
Retained earnings 3,798,000 2,402,000
Revaluation surplus 120,000 80,000
Total equity 4,218,000 2,732,000

Non – current liabilities

Long term Loan 1,500,000 1,600,000
Total Non – current liabilities 1,500,000 1,600,000

Current liabilities
Trade payable 1,470,000 1,500,000
Current tax payables 110,000 60,000
Bank overdraft 32,000 60,000
Total current liabilities 1,612,000 1,620,000
Total Equity and Liabilities 7,330,000 5,952,000

Additional information
i. The company’s profit for the year before tax amounted to shs 1,476,000
ii. The company’s income tax expense for the year was shs 80,000
iii. The cost of PPE as at 1st January 2016 amounted to shs 4,860,000. The company’s
depreciation policy is to depreciate all assets at 20% straight line on cost from the date of
purchase to the date of sale. The additions to PPE occurred on 31 December 2016. On 1
July 2016, the company sold PPE which originally had cost shs 1,000,000. On the date this
PPE was sold, its carrying value was shs 600,000 and the firm made a loss on the sale of
the PPE of shs 40,000. The revaluation was performed on 31st December 2016.
iv. The company’s finance cost for the year equals its cash payment of shs 92,000
REQUIREMENT:

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 b) Prepare a Statement of Cash Flows for the year-ended 31 December 2016 for Africana
Ltd. in accordance with IAS 7 - Statement of Cash Flows.

QUESTION 30
The Statements of Financial Position for the last two years for AO Ltd are shown below.
AO Ltd implemented an expansion programme during the year ended 31st May 2015.
31st May 31st May
2014 2015
shs shs shs shs
Non-current assets (net) 380,000 530,000

Current assets
Inventory 80,000 108,000
Receivables 32,000 37,000
Bank 13,000 -
Cash 1,000 3,000
126,000 148,000
Total assets 506,000 678,000

Current liabilities
Payables 26,000 30,000
Corporation Tax 22,000 28,000
Overdraft - 5,000
Dividends 18,000 21,000
Accruals 2,000 4,000

Total liabilities 68,000 88,000

Capital and Reserves

Shs 1 Ordinary shares 350,000 490,000
General reserve 62,000 62,000
Revaluation reserve - 28,000
Profit and loss 26,000 10,000
Total capital and liabilities 506,000 678,000

Additional information:
i. The total depreciation provision incorporated in the statements of financial position was shs
48,000 at 31st May 2014 and shs 122,000 at 31st May 2015.
ii. During the year ended 31st May 2015 a non-current asset costing shs 22,000 with a carrying
of shs 6,000 was sold for shs 1,000. No other disposals took place.
iii. The revaluation surplus, represents a revaluation of premises during the year ended 31st
May 2015.
Required:
a) Prepare a Statement of Cash Flow for AO Ltd for the year ended 31st May 2015 in accordance
with IAS 7 ( using indirect method )

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Question 31
The statements of financial position as at 31 December, 2019 and 2020 respectively below were
extracted from the books of Kitu-kidogo Enterprises Ltd.
Statement of financial position as at 31 December:
2020 2019
Non-current assets: Shs ‘000’ Shs ‘000’
Property, plant & equipment 1,600,000 850,000
Accumulated depreciation (112,500) (100,000)
Investments - 350,000
Current assets:
Inventory 800,000 550,000
Accounts receivable 497,500 135,000
Bank balance - 65,000
Total assets 2,785,000 1,850,000
Capital and liabilities:
Share capital 1,000,000 700,000
Retained earnings 500,000 100,000
Non-current liabilities:
Bank loan 300,000 500,000
Current liabilities:
Accounts payable 400,000 550,000
Bank overdraft 585,000 -
Total capital & liabilities 2,785,000 1,850,000

Additional information:
1. During the year the company sold off its investments for Shs 500 million
2. An item of property, plant and equipment that had cost Shs 50 million was disposed of for
Shs 17.5 million. At the time of disposal, it had a net book value of Shs 12.5 million.
Required:
In accordance with IAS 7: Statement of Cash flow

a) Prepare a statement of cash flows for Kitu-Kidogo Enterprises Limited for the year ended 31
December, 2020 using indirect method.
b) Explain any three limitations of the statement of cash flows

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Question 32
a) The objective of IAS 7ꟷStatement of Cash Flows is to require presentation of information about
the historical changes in cash and cash equivalents of an entity by means of a statement of cash
flows which classifies cash flows during the period according to activities.
Required:
Explain, with examples, the different activities as prescribed by the Standard.
b) Kamulinda Company Limited (KCL) has provided the following financial information that relates
to the year ended 31 December 2020:
Statement of profit or loss
Shs ‘000’
Sales revenue 250,400
Cost of sales (87,900)
Gross profit 162,500
Administrative costs (35,000)
Distribution costs (50,000)
Operating profit 77,500
Interest received 45,000
Shs ‘000’
Interest paid (25,000)

Profit before tax 97,500

Taxation (20,000)
Profit after tax 77,500

Statement of position as at 31 December:

2020 2019
Shs ‘000’ Shs ‘000’
Assets:
Non-current assets 459,000 246,000
Accumulated depreciation (125,000) (89,000)
Netbook value 334,000 157,000
Investments 76,000
Current assets:
Inventory 156,000 100,000
Accounts receivable 24,450 68,000
Cash at hand 65,000 40,000
Cash at bank 35,000
Total assets 655,450 400,000
Equity and liabilities:
Share capital 200,000 150,000
Share premium 85,000 52,000
Retained earnings 117,500 40,000
Revaluation 61,000 36,000
Non-current liabilities:

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 Long term loan 80,000 45,000
Current liabilities:
Accounts payable 36,450 47,000
Interest payable 18,500
Tax 32,000 30,000
Bank overdraft 25,000
655,450 400,000

Additional information:
On 31 July 2020, a non-current asset that had cost Shs 35,000,000 was disposed of for Shs
24,500,000. The asset had accumulated depreciation Shs 15,000,000.
Required:
Prepare KCL’s statement of cash flows for the year ended 31 December 2020, using the
indirect method in accordance with the relevant financial reporting standard.
(Show all necessary workings)

QUESTION 33
Below are the statement of financial position for Saasa Company Limited at 31 December 2015 and
31 December 2016 and the income statement for the year ended 31 December, 2016.

2016 2015
Shs ’000 Shs ’000
ASSETS
Non-current assets:
Property, plant and equipment 528 447
Development costs 110 93
638 540
Current assets:
Inventories 413 380
Trade receivables 238 215
Investments 28 -
Cash 111 4
790 599
TOTAL ASSETS 1,428 1,139

EQUITY AND LIABILITIES

Equity :
Shs 1 ordinary shares 240 200
Capital surplus 140 120
Revaluation surplus 100 -
Retained earnings 538 530
1,018 850
Non-current liabilities
Provision for warranties 30 25
6% debentures 150 -
180 25
Current liabilities
Income tax payable 37 32

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Trade payables 193 232
230 264
TOTAL EQUITY AND LIABILITIES 1,428 1,139

Statement of profit or loss for the year ended 31 December, 2016

Shs ’000
Revenue 900
Cost of sales (550)
Gross profit 350
Expenses (245)
Finance costs (9)
Profit on sale of equipment 7
Profit before tax 103
Income tax expense (30)
Profit for the period 73

Additional information
1. Deferred development expenditure amortized during 2016 was shs 25,000.
2. Additions to property, plant and equipment totalling shs 167,000 were made. Proceeds from the
sale of equipment were shs 58,000, giving rise to a profit of shs 7,000. No other items of
property, plant and equipment were disposed of during the year.
3. Finance costs represent interest paid on the new 6% debentures (2016-2022) issued on 1
January 2016.
4. Current asset investments represent treasury bills acquired. The company deems these to
represent cash equivalents.
5. Dividends paid during the year amounted to shs 65,000.

Required:
Prepare a statement of cash flow for Saasa Company for the year ended 31 December 2016, using
the indirect method in accordance with IAS 7: Statement of Cash Flows

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