9/18/2023

Financial Statements –
Statement of Cash Flows

Minoli Jayasekera MBA (PIM-SJP), B.Sc. (Acct.) Hons., ACA, ACMA (UK), CGMA (UK), ACMA (SL)
077 984 8414 minoli.jayasekera@gmail.com 1
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Cash

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A business exists due to Cash

Assets Liabilities

Cash in Cash out

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Cash vs. Profit

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Cash vs. Profit

“Profit is a Concept, Cash is a Fact”
Cash
Cash Cash Paid
Received
Revenue Expenses
Profit
Earned Incurred5
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Why does Cash & Profit Differ?

Debtors & Creditors
Accrued Expenses & Prepaid Expenses
Income received in advance
Non-cash Items (Depreciation, Provisions)
Effects of Accounting Standards 6
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Profitability vs. Liquidity

What is more important?
Liquidity
Low High
High
Profitability

Die Slowly Thrive

Low

Die Quickly Survive

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Statement of Cash Flows

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A Statement of Cash Flows is prepared

for Decision Makers

to know about how
Cash was brought in and taken out!
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Statement of Cash Flows

Cash Flows
Operating
generated
Statement during the
from
that Investing period under
activities
presents consideration
categorized
into Financing
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Cash Cash Equivalents

Cash in Hand • Short term (3 months or less than 3)
• Highly Liquid
Cash at Bank • Investments
(Current Treasury Bills with a maturity period of up to 03
Accounts) months
Fixed Deposits with a maturity period of up to
03 months
Savings Accounts
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Cash Flow Activities

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Operating Activities
Cash Sales
Cash Purchases
Receipts from Debtors
Payments to Creditors
Payments to Employees
Cash Flows related to Utility Bill Payments
principal revenue generating
Tax Payments
activities of the entity 13
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Investing Activities
Disposal proceeds from sale of
Property, Plant and Equipment
Purchase of Property, Plant
and Equipment
Sale of Investments
Investments in Shares
Cash Flows related to acquisition
Dividend Income and disposal of non-current
Purchase of Intangible Assets assets 14
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Financing Activities
Ordinary Share Issue
Dividend Payments
Preference Share Issue
Loans Repaid
Loans Obtained

Cash Flows related to Rights Issue

financing of Equity and Debt Capital
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Cash Flow Preparation Methods

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Methods of Preparing Statement of Cash Flows

Direct Method Indirect Method

• Gross Cash Receipts • If there are large volume of
• Gross Cash Payments separately transactions, using direct method
disclosed is difficult
• The practical use is less • Therefore, we convert the profit
• Can be used if less transactions. before tax into cash from
operations by doing adjustments
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Direct Method and Indirect Method

Direct Method Indirect Method
Operating Activities Operating Activities
Investing Activities
Financing Activities
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ABC PLC
Statement of Cash Flows (Direct Method) Direct Method
For the year ended 31st March 20X3
Rs. Rs.
Cash Flows from Operating Activities
Cash Sales XX
Cash Purchases (XX)
Receipts from Debtors XX
Salary Payments (XX)
Payments to Creditors (XX)
Utility Payments (XX)
Taxes Paid (XX)
Net Cash Flows from Operating Activities
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ABC PLC
Statement of Cash Flows (Direct Method)
For the year ended 31st March 20X3
Rs. Rs.
Cash Flows from Investing Activities
Purchase of Property, Plant and Equipment (XX)
Proceeds from Disposal of
XX
Property, Plant and Equipment
New Investments (XX)
Interest Received XX
Dividend Received XX
Net Cash Flows from Investing Activities 20
XX
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ABC PLC
Statement of Cash Flows (Direct Method)
For the year ended 31st March 20X3
Rs. Rs.
Cash Flows from Financing Activities
Proceeds from Issue of Shares XX
Proceeds from Long-term Loans XX
Loans Repaid (XX)
Dividends Paid (XX)
Interest Paid (XX)
Net Cash Flows from Financing Activities XX
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Indirect Method
Profit Before Tax XX
Adjustments
Non-cash transactions X/(X)
Non-operating Income/Expenses X/(X)
Changes in Working Capital X/(X)
Cash generated from Operating Activities XX
Tax Paid (X)
Net Cash Flow from Operating Activities XX
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ABC PLC
Statement of Cash Flows (Indirect Method)
For the year ended 31st March 20X3
Rs. Rs.
Cash Flows from Operating Activities
Profit Before Tax XX
Adjustments
Depreciation XX
Unrealised Gain/Loss on Foreign Exchange X/(X)
Profit/Loss on Disposal of Assets X/(X)
Investment Income (XX)
Impairment Losses XX
Interest Expense XX 23
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Rs. Rs.
Cash from Operations prior to Changes in Working Capital
Changes in Working Capital
(Increase)/Decrease in Debtors (X)/X
(Increase)/Decrease in Inventory (X)/X
Increase/(Decrease) in Creditors X/(X)
Increase/(Decrease) in Accrued Expenses X/(X)
Cash generated from Operating Activities XX
Interest Paid (X)
Income Tax Paid (X)
Gratuity Paid (X)
Net Cash Flows from Operating Activities XX
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ABC PLC
Statement of Cash Flows (Indirect Method)
For the year ended 31st March 20X3
Rs. Rs.
Cash Flows from Investing Activities
Purchase of Property, Plant and Equipment (XX)
Disposal Proceeds of Property, Plant and Equipment XX
New Investments (XX)
Interest Received XX
Dividends Received XX
Net Cash Flows from Investing Activities XX
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ABC PLC
Statement of Cash Flows (Indirect Method)
For the year ended 31st March 20X3
Rs. Rs.
Cash Flows from Financing Activities
Proceeds from Issue of Shares XX
Long term Loans Obtained XX
Loans Repaid (XX)
Dividends Paid (XX)
Interest Paid (XX)
Net Cash Flows from Financing Activities XX
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Importance of
Statement of Cash Flows

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Importance of Statement of Cash Flows

To determine the survival, growth, and direction of the entity

To manage operations

To understand the business growth

To evaluate the ability to generate cash flows

Can use for Business Valuation

To remove accounting adjustments such as depreciation, impairment

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Question 1
Match the following items in the Statement of Financial Position to the Activities in the
Statement of Cash Flows
Non-current Assets Equity
Property, Plant and Equipment Stated Capital
Intangible Assets
Investment in Subsidiaries
Operating Retained Earnings
Non-current Liabilities
Interest bearing Borrowings
Other Financial Assets
Current Assets
Investing Preference Shares
Current Liabilities
Inventory
Trade Receivables
Financing Trade Payables

Cash and Cash Equivalents Accrued Expenses

Current portion of
Interest bearing Borrowings
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Question 2
Indicate which activity will be affected due to the following transactions:
Transaction Operating Investing Financing
1. Depreciation Expense
2. Proceeds from sale of equipment
3. Loss on sale of equipment
4. Payment of Dividends on company’s shares
5. Gain on sale of vehicle
6. Increase in Trade Creditors
7. Purchase of new delivery truck
8. Decrease in Trade Debtors
9. Decrease in Prepaid Insurance
10. Proceeds from issuing new ordinary shares
11. Amortisation of Intangible assets
12. Interest Paid
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13. Income Tax Paid Confidential

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Question 3
Indicate whether the following transactions will have a positive or negative effect on cash :
Transaction Positive Effect Negative Effect
1. An increase in Advances paid
2. Proceeds from sale of furniture
3. An increase in Income Tax Payable
4. A decrease in Trade Creditors
5. An increase in Trade Receivables
6. A decrease in Warranty Payable
7. Proceeds from issuing preference shares
8. Dividends paid
9. An increase in long term investments
10. Proceeds from long term loan obtained
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MCQs
1. According to the Statement of Cash Flows following are examples of investing activities
except,
a) Sale of machinery
b) Capital invested by owners
c) Purchase of vehicle for business purpose
d) Cash received from disposal of equipment

2. What is the formula to calculate operating cash flows under the indirect method?
a) Net Profit + Depreciation + Increase in Creditors - Increase in Debtors
b) Net Profit - Depreciation + Increase in Creditors - Increase in Debtors
c) Net Profit - Depreciation + Cash
d) Net Profit + Cash + Increase in Creditors - Increase in Debtors
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MCQs
3. Which of the following will appear as a negative amount on the Statement of Cash
Flows prepared using the indirect method?
a) A decrease in Inventory
b) An increase in Creditors
c) An increase in Debtors
d) Depreciation expense

4. The amount spent for capital expenditure will be reported as,

a) Cash provided/used in Financing Activities
b) Cash provided/used in Investing Activities
c) Cash provided/used in Operating Activities
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d) Increase in Amounts Payable Confidential

MCQs
5. Which of the following will appear as a positive amount on the Statement of Cash Flows
prepared using the indirect method?
a) An increase in Accounts Receivable
b) An increase in Inventory
c) A decrease in Accounts Payable
d) Depreciation expense

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MCQs

Financial Statements of Bernard PLC reported the following:

Net Profit Rs. 100,000 6. Based on the information given, what is

Depreciation Rs. 10,000 the amount of Net Cash from Operating
Increase in Trade Debtors Rs. 30,000
Activities?
Decrease in Trade Creditors Rs. 15,000
a) Rs. 65,000
b) Rs. 125,000
c) Rs. 155,000
d) Rs. 145,000

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MCQs

Financial Statements of Sports Unlimited PLC reported the following:

7. Based on the information given, what is
Net Profit Rs. 150,000
Depreciation Rs. 80,000 the amount of Net Cash from Operating
Increase in Receivables Rs. 78,000 Activities?
Increase in Inventory Rs. 26,000 a) Rs. 284,000
Increase in Payables Rs. 30,000
b) Rs. 364,000
c) Rs. 156,000
d) Rs. 96,000

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MCQs

Financial Statements of David PLC reported the following:

Net Profit Rs. 200,000 8. Based on the information given, what is

Depreciation Rs. 30,000 the amount of Net Cash from Operating
Gain on sale of truck Rs. 5,000 Activities?
Proceeds from sale of truck Rs. 8,000
a) Rs. 225,000
Decrease in Debtors Rs. 10,000
b) Rs. 235,000
c) Rs. 253,000
d) Rs. 255,000

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MCQs
9. Using the information in the previous question no. 8, what will be the amount reported
as Net Cash from Investing Activities?
a) Rs. 3,000
b) Rs. 8,000
c) Rs. 13,000
d) Rs. 5,000

10. Which of the following transactions will not have an effect on Operating Activities?
a) Provision for Doubtful Debt
b) Gain or Loss on Foreign Exchange
c) Depreciation charged on fixed assets
d) Amount received for disposal of fixed assets
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Main Business Activities Operating

Activities Gross Cash Receipts
Acquisition and Disposal
of Non-Current Assets
Investing
Cash Inflows Gross Cash Payments
Equity and Debt Capital Financing and Outflows Direct Methods

Cash Flow Statement

Cash Cash Equivalents Indirect Method
Cash in Hand Less than 03 Months Operating Profit Before Tax
Net Cash Non- Non- Working
Cash in Bank Highly Liquid Investments Relevant Cash Capital
Items Items Adjustments
Demand Deposits T. Bills FDs with <03 months 39
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Thank You

Minoli Jayasekera MBA (PIM-SJP), B.Sc. (Acct.) Hons., ACA, ACMA (UK), CGMA (UK), ACMA (SL)
077 984 8414 minoli.jayasekera@gmail.com 40
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