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Statement of Cash Flows

cashflow

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30 views5 pages

Statement of Cash Flows

cashflow

Uploaded by

Tarusenga
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Statement of cash flows

1. Purpose of Statement of Cash flows

In addition to the importance of a company’s profitability to its stakeholders is its liquidity as clearly
shown by a statement of cash flows. This is so because even if a company’s income statement may
show a high level of profits, it may NOT necessarily imply any of the following:

 Ability to pay dividends


 Ability to pay higher salaries
 Ability to pay debts as they fall due.

Whether or not a company is able to fulfil above expectations is NOT shown by the income
statement but by the cash flow statement.

A statement of cash flows provides historical information about cash and cash equivalents,
classifying cash flows under main categories of operating activities, investing activities and financing
activities.

2. Terms associated with cash flow statements

Cash

cash equivalents

cash flows

operating activities

Investing activities

Financing activities

Assignment: Carefully study and write notes on meanings of the above terms

3. Two methods of reporting operating activities


i. Direct method
ii. Indirect method

Assignment: carefully study and write notes on each of these methods

4. Items added/subtracted to net profit when using an indirect method of reporting


operating activities.
In order to ascertain the correct net cash flow from operating activities, following
adjustments have to be made in net profit:
a) Non cash items included in the calculation of net profit:
 Depreciation – is deducted in arriving at net cash represented by net profit,
yet it is an expense which does NOT involve movement of cash out of
business as is the case with other expenses. Hence it has to be added back
to net profit so as to arrive at a correct figure of net cash after operations.
 Profit on sale of an asset – is added in arriving at net cash represented by
net profit yet it does not involve any inflow of funds into the business.
Hence it has to be deducted from net profit so as to get a correct figure of
net cash after operations.
 Loss on sale of an asset – is deducted in arriving at net cash represented by
net profit yet it does not involve any outflow of funds. Hence it has to be
added to net profit so as to get a correct figure of net cash after operations
 Provision – is deducted in arriving at net cash represented by net profit yet
it does not involve any outflow of funds. Hence it has to be added back to
net profit so as to get a correct figure of net cash after operations
b) Changes in inventory
 An increase in inventory is an amount by which closing stock is higher than
opening stock. It represents part of the current year’s purchases (outflow of
cash in the trading account) which are excluded in the determination of
cost of goods sold (final figure of cash outflow in the trading account) when
calculating profit. Therefore, the given net profit figure in the income
statement represents a net cash which is higher than the actual net cash by
the amount of the increase in inventory. Accordingly, an increase in
inventory has to be subtracted from net profit so as to get a correct figure
of net cash after operations
 Decrease in inventory is an amount by which closing stock is lower than
opening stock. It represents some additional inflow of funds as a result of
part of the opening stock being sold in the current period. This inflow is not
accounted for in the calculation of profit in the trading account. Therefore,
the given net profit figure in the income statement represents net cash
which is lower than the actual net cash by the amount of the decrease in
inventory. Accordingly, a decrease in inventory has to be added to net profit
so as to get a correct figure of net cash after operations.
c) Changes in receivables
 Increase in receivables is an amount by which closing receivables are higher
than opening receivables. It represents part of the amount of current year’s
sales (inflow of cash in the trading account) for which the business does not
receive payment from customers. This non-payment by customers is not
accounted for in the trading account. Therefore, the given net profit figure
in the income statement represents net cash which is higher than the actual
net cash by the amount of the increase in receivables. Accordingly, an
increase in receivables has to be subtracted from net profit so as to get a
correct figure of net cash after operations
 Decrease in receivables is an amount by which closing receivables are lower
than opening receivables. It represents an inflow of cash as a result of
previous years’ credit customers paying what they owe in the current
period. This is inflow is not accounted for in the calculation of profit in the
trading account. Accordingly, a decrease in receivables must be added to
net profit so as to get a correct figure of net cash from operations
5. Format of a cash flow statement

Susan Limited

Statement of Cash Flows for the Year Ended 31 December 2020

$ $

Cash from Operating Activities

Profit before tax xxxxx

Depreciation charges xx

Loss on sale of tangible non-current assets xx

Interest expense xx

Increase in inventory (xx)

Increase in payables xx

Increase in receivables (xx)

Cash generated from operations xxxx

Interest paid xx

Dividends paid xx

Tax paid xx

Net cash from operating activities xxxx

Cash flows from investing activities

Payments to acquire tangible non- current assets (xx)

Receipts from sale of tangible non-current assets xx

Net cash used in investing activities (xx)

Cash flows from financing activities

Issues of share capital xx

Long term loans repaid (xx)

Net cash used in financing activities (xx)


Decrease in cash and cash equivalents (xx)

Cash and cash equivalents at 1 January 2020 xx

Cash and cash equivalents at 31 December 2020 xx

Calculations related to cash flows:

Values of some of the items of cash flows are not evident by a mere reading of given financial
statements. There is a need to do calculations for determining specific items of cash flows depending
upon how information is given in a question. Items such as, but not limited to, the period’s amount
of tax paid, profit for the year before tax, depreciation, loss on sale of non-current assets, purchase
or disposal of non-current assets may be determined through calculations. The following is a
guidance on how to calculate the first two of these. Otherwise, make use of the available relevant
information to make appropriate calculations.

a) Amount of tax paid


Open a Taxation T account and enter all the figures pertaining to taxation in their respective
sides following double entry rules – i.e. Opening balance(s) closing balances, and other given
debit or credit entries. The difference between the two sides would represent the tax
amount paid during the period.
b) Profit for the year before tax
This may be given. If not, ascertain it by use of given relevant figure e.g. by deducting the
year’s taxation from the given profit of the year.

Question 4

The following are Statement of profit and loss account for the year ended 31 December 2018 and
statements of financial position as at 31 December 2017 and 31 December 2018 for Mkhemeswane
Limited

Mkhemeswane Limited
Profit and Loss Account for the Year Ended 31 December
2018
$'000 $'000
Sales 720
Raw materials consumed 70
Staff costs 94
Depreciation 118
Interest payable 28
Profit before tax 392
Taxation 124
Profit for the year 268
Mkhemeswane Limited
Statement of Financial Position for the year Ended 31 December :
2018 2017
$'000 $'000
Non current assets
Cost 1596 1560
Depreciation -318 -224
1278 1336
Current assets
Inventory 24 20
Trade receivables 76 58
Bank 48 56
148 134
Total assets 1426 1470

Equity and Liabilities


Equity
Share capital 360 340
Share premium 36 24
Retained earnings 716 514
1112 878
Non current liabilities
Long term loans 200 500
Current liabilities
Trade payables 12 6
Taxation 102 86
114 92
Total equity and liabilities 1426 1470

Additional information
Dividends paid were $66 000
During the year the company paid $90 000 for a new piece of machinery

Required
Prepare a statement of cash flow for Mkhemeswane Limited for the
year ended 31 December 2018 in accordance with IAS 7, using the
indirect method.

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