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Cash Flow Statement1

The document discusses the cash flow statement and its advantages. It explains the differences between a cash flow statement and cash budget. It also provides details on IAS 7 requirements for the cash flow statement, including definitions of operating, investing and financing activities. The document also provides an example cash flow statement format and notes for its preparation.
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0% found this document useful (0 votes)
21 views12 pages

Cash Flow Statement1

The document discusses the cash flow statement and its advantages. It explains the differences between a cash flow statement and cash budget. It also provides details on IAS 7 requirements for the cash flow statement, including definitions of operating, investing and financing activities. The document also provides an example cash flow statement format and notes for its preparation.
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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Cash Flow Statement

Advantages

 Cash flow balances are a matter of fact and are not distorted by accounting policies
 Cash flow balances are objective, unlike profit which is subjective
 Users of financial statements can establish exactly the cash generation of a business
 Users can identify exactly how this cash has been utilised
 Users can assess the liquidity of a business and assess its ability to repay debts as they fall due
 Loans repaid and received are clearly listed in the cash flow statement
 Users can assess management attitude to capital expenditure
 Interest payments are highlighted in the cash flow

Difference between cash flow statement and cash budget

Cash flow statements are:

 Statutory requirements of plc


 Historic
 Prepared for external users
 Prepared to show resources and uses of cash

Cash budgets are:

 Prepared for internal users


 Forecasts
 Used to plan and control cash flows and to obtain finances when needed

I.A.S. 7 Cash Flow Statement

 Cash comprises 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.

 Cash flows are inflows and outflows of cash and cash equivalents.

 Operating activities are the principal revenue-producing activities of the enterprise and other
activities that are not investing or financing activities.

 Investing activities are the acquisition and disposal of non-current assets and other investments
not included in cash equivalents.

 Financing activities are activities that result in changes in the size and composition of the equity
capital and borrowings of the entity
Performa (IAS-7)

Statement of Cash Flow for the year ended …….


$ $
Cash flows from operating activities
Operating profit (PBIT) X
Adjustments:
Goodwill written off X
Current year Depreciation (calculation) X
(Profit) / loss on the disposal of a non current asset (X)/X
(Increase) / Decrease in inventories (X)/X
(Increase) / Decrease in receivables (X)/X
Increase / (Decrease) in payables X /(X)
Interest paid (P & L Interest + Op. Payables – Cl. Payables) (X)
Taxation paid (P & L Tax + Op. Payables – Cl. Payables) (X)
Net Cash Flow from Operating Activities X

Cash flow from investing activities

Purchase of a non-current asset (X)


Sale of a non-current asset X
Interest received X
Net Cash Flow from Investing Activities X

Cash flow from financing activities

Proceeds from the issue of shares with Premium X


Issue/Repayment of Debentures/Bank loan X/(X)
Dividends paid (X)
Cash Flow from Financing Activities X

Net increase/decrease in cash X/(X)


Cash and cash equivalents at the beginning of the period X
Cash and cash equivalents at the end of the period X
If operating Profit is not given in the question then it is to be calculated by the opening and closing
retained earning
$
Retained earnings (opening) X
Profit for the year X
X
Dividends paid (X)
Transfer to General Reserve (If any) (X)
Retained earnings (closing) X

Important

RE at start + profit for the year – dividend paid – transfer to GR = RP at end Profit for the

year = RE at end – RE at start – dividend paid – transfer to GR (if any)

If Operating Profit (PBIT) is to be calculated then add Interest Expense and Tax in Net Profit

$
Profit for the year X
Add: Interest Expense X
Tax X
Profit before Interest & Tax (PBIT) X

PBIT – interest paid – tax paid = profit for the year

ON/22/33
XY plc makes all of its sales and purchases on credit.

It provided the following summarised information for the year ended 31 December 2021.

Income statement

$ $ 722
Revenue 500
Sales returns (12 100)
710 400
Inventory at 1 January 2021 40 100
Purchases 426 800
466 900
Inventory at 31 December 2021 (50 000)
Cost of sales 416 900
Gross profit 293 500
Expenses (215 800)
Finance costs (11 200)
Profit for the year 66 500

Bank account

$ $
Credit customers 701 600 Balance b/d 22 600
Refunds from credit Dishonoured cheques 4 100
suppliers 1 900 Credit suppliers 431 700
Proceeds of sale of motor Fittings 3 700
vehicle 17 600 Interest 8 600
Dividend 24 000
Expenses 181 800
Loan repayment 32 000
Balance c/d 12 600
721 100 721 100

The company had considerable sales ledger balances and purchases ledger balances at both the start and the end
of the year.

The following information is also available.

1 An irrecoverable debt of $5000 had been written off during the year.

2 Fittings had a net book value of $44 000 at the start of the year and $40 600 at the end.

3 Expenses in the income statement included the depreciation charge on motor vehicles of $20 800. The
balance on the accumulated depreciation of motor vehicles was $53 200 at the start of the year and $66 800
at the end.

4 The original cost of the motor vehicle sold during the year was $25 900.

Answer the following questions in the question paper. Questions are printed here for reference
only.

(a) State three reasons why a business prepares a statement of cash flows. [3]

(b) Prepare the statement of cash flows for XY plc for the year ended 31 December 2021 in
accordance with IAS 7. [22]

ON/20/32
The books of account of RF plc for the year ended 31 December 2019 showed the following.

Plant and machinery Provision for depreciation of plant and


machinery
$000
$000 $000 $000
Balance b/d 100 Balance b/d 20
Balance c/d 32
Bank Balance c/d 138 Income 12
38 statement
138 32
138 32
3

Motor vehicles Provision for depreciation of motor


vehicles
$000 $000 $000 $000
Balance b/d 60 Disposal 16 Disposal 4 Balance b/d 25
Balance c/d 44 Balance c/d 31 Income 10
60 60 statement
35 35

Retained earnings Interest payable


$000 $000 $000 $000
Dividend 8 Balance b/d 33 Bank 5 Balance b/d 2
General 18 Profit for the 15 Balance c/d 1 Income 4
reserve year statement
Balance c/d 22 6 6
48 48

The following information is also available.

During the year ended 31 December 2019 the following had taken place.

1 Inventory had increased by $17 000.

2 Trade receivables had increased by $3000.

3 The bank balance had gone from an overdraft of $7000 to a positive balance.

4 The company had issued 72 000 ordinary shares of $0.50 each at par value.

5 A new bank loan of $5000 had been received.

6 Trade payables had decreased by $6000.

7 A motor vehicle had been sold for $15 000.

(a) Prepare the statement of cash flows for the year ended 31 December 2019. (Ignore taxation.)
[19]

(b) Explain how a premium on an issue of shares is dealt with differently in a statement of
cash flows as compared to the books of account of a company. [3]

(c) State three reasons why a company might prepare a statement of cash flows.

[3]

ON/20/33
The books of account of PM Limited contained the following summarised ledger accounts for the
year ended 31 March 2020.

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3

Premises Provision for depreciation of premises


$000 $000 $000 $000
Balance b/d 900 Balance c/d 900 Balance b/d 72
900 900 Balance c/d 90 Income 18
statement
90 90

Plant and machinery Provision for depreciation


of plant and
machinery
$000 $000 $000 $000
Balance b/d 405 Disposal 92 Disposal 46 Balance b/d 184
Bank 117 Balance c/d 430 Balance c/d 245 Income 107
522 522 statement
291 291

Motor vehicles Provision for depreciation of motor vehicles


$000 $000 $000 $000
Balance b/d 198 Disposal 44 Disposal 35 Balance b/d 103
Bank 76 Balance c/d 230 Balance c/d 114 Income 46
274 274 statement
149 149

Disposal of plant and machinery Disposal of motor vehicle


$000 $000 $000 $000
Plant and 92 Provision for 46 Motor 44 Provision for 35
machinery depreciation vehicles depreciation
of plant and Income 10 of motor
machinery statement vehicles
Bank 17 Bank 19
Income 29 54 54
statement
92 92

Answer the following questions in the question paper. Questions are printed here
for reference only.

(a) Prepare a schedule of non-current assets for the year ended 31 March 2020 in
accordance with the provisions of IAS16, suitable for inclusion in the notes to the
accounts. [9]

(b) Identify the total figures from the summarised ledger accounts which would appear in
the statement of cash flows for the year ended 31 March 2020. State the section of the
statement of cash flows in which each figure would be recorded. [10]

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3

(c) Explain how your answer to (a) would be different if the premises had been revalued
upwards at the end of the year. [2]

(d) Explain how your answer to (b) would be different if the premises had been revalued
upwards at the end of the year. [2]

(e) State two items (other than the initial purchase price) which can be included in the total
cost of a non-current asset when following IAS16. [2]

MJ/20/32
The statements of financial position of P plc at 31 December were as follows.

2019 2018
$ $
Non-current assets
Plant and machinery 344 250 225 000
Motor vehicles 90 000 136 000
434 250 361 000
Current assets
Inventory 34 650 44 600
Trade receivables 49 700 38 900
Cash and cash equivalents Nil 12 400
84 350 95 900

Total assets 518 600 456 900

Equity and liabilities


Equity
Ordinary share capital
($1 shares) 300 000 300 000
Share premium 40 000 40 000
Retained earnings 61 700 88 200
401 700 428 200
Non-current liabilities
Bank loan 80 000 Nil

Current liabilities
Trade payables 21 600 20 100
Other payables 6 800 8 600
Bank overdraft 8 500 Nil
36 900 28 700

Total equity and liabilities 518 600 456 900

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3

Other payables included the following:


2019 2018
$ $
Accrued expenses 1100 3400
Accrued interest 2600 Nil
Tax payable 3100 5200
6800 8600

The following information relating to the year ended 31 December 2019 is also available.

1 A motor vehicle with net book value of $7000 was sold for $8300.

2 Additional machines costing $180 000 were purchased.

3 Interest expenses, $4800, were incurred.

4 Tax charge was $3100.

5 An interim dividend of $0.08 per share was paid in August 2019.

Answer the following questions in the Question Paper. Questions are printed here
for reference only.

(a) State the usefulness of a statement of cash flows to potential shareholders.

[3]

(b) Calculate the profit from operations for the year ended 31 December 2019.

[5]

(c) Prepare a reconciliation of the profit from operations to the cash from operations or
cash used in operations for the year ended 31 December 2019. [7]

(d) Prepare an extract of statement of cash flows for the year ended 31 December 2019,
showing the net cash from or used in:

(i) operating activities [3]

(ii) financing activities. [2]

Additional information

During a directors’ meeting in April 2020, one of the directors said:

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3

‘We have to make our shareholders happy. Even though the bank overdraft has increased
since 31 December 2019, we still have to pay cash dividends for 2020 to our shareholders.’

All the directors agreed with this view.

(e) Discuss whether or not it is appropriate for P plc to pay out cash dividends to
shareholders in 2020. Justify your answer. [5]

MJ/20/31
The following are the statements of financial position for W Limited at 31 December.

2019 2018
$ $
Non-current assets
Premises 380 000 320 000
Machinery 203 000 202 000
Motor vehicles 113 200 118 000
696 200 640 000
Current assets
Inventory 32 550 36 500
Trade receivables 49 300 46 200
Cash at bank 16 400 8 100
98 250 90 800

Total assets 794 450 730 800

Equity and liabilities


Equity
Ordinary share capital ($1 shares) 440 000 400 000
Share premium 60 000 40 000
General reserve 50 000 35 000
Retained earnings 79 300 104 000
Revaluation reserve 80 000 Nil
709 300 579 000
Non-current liabilities
Bank loan 30 000 100 000

Current liabilities
Trade payables 41 000 36 700
Tax payable 13 400 12 600
Accrued interest 750 2 500
55 150 51 800

Total equity and liabilities 794 450 730 800

The following information relates to the year ended 31 December 2019.

1 Premises were revalued at $400 000 on 1 January 2019. There were no purchases or

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3

disposals of premises during the year.

2 Additional machines costing $28 000 were purchased during the year.

3 A motor vehicle costing $65 000, with an accumulated depreciation of $26 000, was sold
during the year for $32 500. It was replaced by a new motor vehicle at a cost of $74 000.

4 Tax and interest charged for the year amounted to $13 400 and $8250 respectively.

5 Interim dividend of $0.11 per share was paid in August 2019 before 40 000 additional
ordinary shares were issued for cash.

6 Profit from operations for the year ended 31 December 2019 was $55 950.

Answer the following questions in the Question Paper. Questions are printed here
for reference only.

(a) State three differences between a statement of cash flows and a cash budget. [3]

(b) Prepare a statement reconciling the profit from operations with the cash from
operations for the year ended 31 December 2019. [9]

(c) Prepare a statement of cash flows for the year ended 31 December 2019. Start your
answer with cash from operations from (b). [7]

(d) Discuss the effect of an increase in general reserve during the year on cash flow. [2]

Additional information

The bank loan of $100 000 was to be repaid in 2022. The directors made an early repayment
in part on 30 September 2019.

(e) Discuss whether or not the directors were right in repaying part of the bank loan
during the year ended 31 December 2019. Justify your answer. [4]

MJ/20/33
he following are the statements of financial position for W Limited at 31 December.

2019 2018
$ $
Non-current assets
Premises 380 000 320 000
Machinery 203 000 202 000
Motor vehicles 113 200 118 000
696 200 640 000
Current assets
Inventory 32 550 36 500

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3

Trade receivables 49 300 46 200


Cash at bank 16 400 8 100
98 250 90 800

Total assets 794 450 730 800

Equity and liabilities


Equity
Ordinary share capital ($1 shares) 440 000 400 000
Share premium 60 000 40 000
General reserve 50 000 35 000
Retained earnings 79 300 104 000
Revaluation reserve 80 000 Nil
709 300 579 000
Non-current liabilities
Bank loan 30 000 100 000

Current liabilities
Trade payables 41 000 36 700
Tax payable 13 400 12 600
Accrued interest 750 2 500
55 150 51 800

Total equity and liabilities 794 450 730 800

The following information relates to the year ended 31 December 2019.

1 Premises were revalued at $400 000 on 1 January 2019. There were no purchases or
disposals of premises during the year.

2 Additional machines costing $28 000 were purchased during the year.

3 A motor vehicle costing $65 000, with an accumulated depreciation of $26 000, was sold
during the year for $32 500. It was replaced by a new motor vehicle at a cost of $74 000.

4 Tax and interest charged for the year amounted to $13 400 and $8250 respectively.

5 Interim dividend of $0.11 per share was paid in August 2019 before 40 000 additional
ordinary shares were issued for cash.

6 Profit from operations for the year ended 31 December 2019 was $55 950.

Answer the following questions in the Question Paper. Questions are printed here
for reference only.

(a) State three differences between a statement of cash flows and a cash budget. [3]

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3

(b) Prepare a statement reconciling the profit from operations with the cash from
operations for the year ended 31 December 2019. [9]

(c) Prepare a statement of cash flows for the year ended 31 December 2019. Start your
answer with cash from operations from (b). [7]

(d) Discuss the effect of an increase in general reserve during the year on cash flow. [2]

Additional information

The bank loan of $100 000 was to be repaid in 2022. The directors made an early repayment
in part on 30 September 2019.

(e) Discuss whether or not the directors were right in repaying part of the bank loan
during the year ended 31 December 2019. Justify your answer. [4]

© UCLES 2020 9706/33/INSERT/M/J/20 [Turn over

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