AAT FINANCIAL STATEMENTS COURSE BOOK AND QUESTION BANK SUPPLEMENTS

Some late amendments were incorporated into Chapter 5 Statement of Cash Flows and Chapter 9
Consolidated Statement of Financial Position. The amendments are as follows:

 The reconciliation to net cash from operating activities now starts with profit before tax, not
operating profit as previously.

 The goodwill working has been amended, resulting in the need for a separate working for
non-controlling interest at acquisition.

These amendments have been incorporated into two supplements, one for the Course Book and one
for the Question Bank.
 Financial Statements of
Limited Companies
Level 4
Course Book Supplement
For assessments from
1 September 2016
Contents

Chapter 5 The statement of cash flows 1

Chapter 9 Group accounts: the consolidated statement of financial position
(relevant extracts 43
Test your learning: answers
(relevant extracts) 81

ii
 The statement of
cash flows
Learning outcomes
1.1 Explain the regulatory framework that underpins financial reporting
 The purpose of financial statements
 Forms of equity, reserves and loan capital
2.1 Examine the effect of international accounting standards on the preparation of
financial statements
 Explain the effect of international accounting standards on the presentation, valuation
and disclosure of items within the financial statements
 Make any supporting calculations
3.4 Draft a statement of cash flows
 Make appropriate entries in the statement, using the indirect method, in respect of
information extracted from a statement of profit or loss and other comprehensive
income for a single year, and statements of financial position for two years, and any
additional information provided

Assessment context
Drafting a statement of cash flows may feature as a significant question in your exam. This topic can
also be tested in short-form, objective-style tasks.

Qualification context
This topic is new to the Level 4 Financial Statements of Limited Companies course.

Business context
All registered companies must prepare a set of financial statements on an annual basis. The
statement of cash flows is one of the primary components of a set of financial statements.

Supplement amendments
Amendments are highlighted.

1
Chapter overview

IAS 1: Set of Financial Statements

 Statement of financial position
 Statement of profit or loss and other comprehensive income
 Statement of changes in equity
 Statement of cash flows
 Notes to the financial statements

The statement of cash flows

Investing Financing
activities activities

Include: Include:
 Acquisition of  Share issues
PPE  Bank loans
 Disposal of PPE  Dividends paid
 Dividends
received
Operating activities

Indirect method Direct method

 Start with 'profit Calculate:

before tax'  Cash received from
 Adjustments customers (W)
(depreciation /  Cash paid to
working capital) suppliers and
employees (W)

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 5: The statement of cash flows

Introduction
In this chapter we introduce the statement of cash flows (sometimes called the
cash flow statement). The statement of profit or loss and other comprehensive
income and the statement of financial position provide information about an entity's
performance and financial position. The statement of cash flows, as its name
suggests, shows the way in which an entity has generated and spent cash. IAS 7
Statement of Cash Flows requires companies to include a statement of cash flows
in their financial statements and sets out the way in which the statement should be
prepared and presented (IAS 7: para. 1).
1 The importance of cash
However profitable a business may appear to be, it will not survive without adequate
cash. Businesses need cash to pay suppliers and employees, to pay dividends to
shareholders, to repay debt to lenders and to purchase property, plant, equipment
and inventories to enable them to go on producing goods or providing services.
The purpose of a statement of cash flows is to show the effect of a company's
commercial transactions on its cash balance.
It is thought that users of accounts can readily understand statements of cash flows,
as opposed to statements which are subject to manipulation by the use of different
accounting policies.
As the statement of profit or loss and other comprehensive income and statement
of financial position are prepared under the accruals concept, they do not indicate
the cash which has been received or paid at the reporting date. Therefore, the
statement of cash flows facilitates an assessment of a company's liquidity.
It also shows how the company uses cash and its ability to generate cash.

Cash Cash comprises cash on hand and demand deposits, less

Key term any bank overdrafts.
Cash equivalents 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 (for example, treasury bills and current asset
investments).
If a current asset investment is a cash equivalent, this will
be made clear in the assessment (IAS 7: para. 7.7–8).

The statement of cash flows identifies cash flows from three types of activity
(IAS 7: para. 7.10):
 Operating activities
 Investing activities
 Financing activities
Operating activities
This is a key part of the statement of cash flows because it shows whether the
business has generated cash from its operations. Do the operating activities result
in a net cash inflow?

3
IAS 7 (para. 7.14) defines operating activities as the principal revenue-producing
activities of the entity and other activities that are not investing or financing activities.
Cash flows from operating activities consist of:
 Cash received from customers (receipts from the sale of goods or the
rendering of services)
 Cash paid to suppliers for goods and services
 Cash paid to and on behalf of employees
In other words, the net cash flow from operating activities can be thought of as
profit before tax, adjusted for non-cash items.
Investing activities
This section shows the extent to which there has been investment in the business.
For example, there may be investment in property, plant and equipment resulting in
a net cash outflow to acquire new non-current assets.
Also, some older items of property, plant and equipment may have been disposed
of in return for cash proceeds. This will result in a cash inflow.
Financing activities
There are two main options here – equity and loan financing.
If the business issues shares for cash or borrows money from a bank then there is
a cash inflow. The cash proceeds enable the business to survive long term and fund
investment.
Conversely, if the business repays a bank loan, for example, then there is a cash
outflow.

1.1 Indirect and direct method

IAS 7 (para. 7.18) permits a choice of methods for reporting cash flows from
operating activities:
Indirect method – Profit before tax is adjusted for the effects of any non-cash
items and movement in working capital.
Direct method – Major classes of gross cash flows, ie gross cash receipts
and gross cash payments, are disclosed.
Note that the indirect and direct methods are only relevant to the cash flows from
operating activities. Cash flows from investing activities and cash flows from
financing activities are always reported in the same way.
We will consider both methods in turn.
2 Statement of cash flows – indirect method
With the indirect method of preparing a statement of cash flows we start with the
profit before tax figure, and adjust it to arrive at the net cash generated from
operating activities.
In the Assessment, the statement of cash flows is normally drafted in two parts, as
is illustrated in the proforma below.

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 5: The statement of cash flows

2.1 Proforma – Statement of cash flows

XYZ Ltd
Reconciliation of profit before tax to net cash from operating activities for the
year ended 31 December 20X2
£000
Profit before tax 20,500

Adjustments for:
Depreciation 2,500

Loss on disposal of property, plant and equipment 400

Finance costs 200

Dividends received (100)
(Increase)/decrease in inventories (3,000)

(Increase)/decrease in trade receivables (6,500)

Increase/(decrease) in trade payables 1,000

Cash generated by operations 15,000

Interest paid (200)

Tax paid (400)

Net cash from operating activities 14,400

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XYZ Ltd
Statement of cash flows for the year ended 31 December 20X2
£000

Net cash from operating activities 14,400

Investing activities
Purchase of plant (14,500)

Receipts from sale of non-current assets 400

Dividends received 100

Net cash used in investing activities (14,000)

Financing activities
Proceeds from loan 12,000

Issue of share capital 6,000

Dividends paid (1,200)

Net cash generated from financing activities 16,800

Net increase/(decrease) in cash and cash equivalents 17,200

Cash and cash equivalents at the beginning of the year 500

Cash and cash equivalent at the end of the year 17,700

Illustration 1 – Statement of cash flows using the indirect method

Bishop Ltd has a profit before tax of £20,500 for the year ended 31 December
20X2. The depreciation charge for the year is £4,000. Profit before tax also
includes a loss on disposal of £500 on an item of plant.
Extracts from the statement of financial position are shown below:
20X2 20X1
£ £
Inventories 17,400 16,100
Receivables 21,500 20,500
Trade payables 18,400 17,600

Ignore interest and tax.

The company's profit is adjusted for non-cash items in order to arrive at cash
generated from operations.
Step 1 Add back depreciation

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 5: The statement of cash flows

Depreciation has been charged in arriving at profit before tax, but

it does not involve the movement of cash. Therefore it is added
back to profit before tax.
Step 2 Adjust for any profits or losses on the disposal of assets
The cash received from the sale of an asset is not a cash flow from
operating activities. The profit or loss on sale must be removed
from profit before tax:
 A profit on disposal is deducted
 A loss on disposal is added back
Step 4 Adjust to add back interest (finance costs) (not given in this example)
Step 5 Adjust for changes in working capital (inventories, receivables and
payables)
The movements in working capital represent the differences
between sales and cash received and purchases and cash paid.
Suppose that sales for the year were £100,000. Opening
receivables were £20,500 and closing receivables were £21,500.
Therefore cash received was £99,000: £1,000 less than the sales
figure. The difference between sales and cash inflow is the
difference between opening receivables and closing receivables:
£1,000.
Suppose that total expenses were £75,000:
 Opening inventories were £16,100 and closing inventories were
£17,400. This means that total purchases were £76,300 (75,000 +
17,400 – 16,100).
 Opening payables were £17,600 and closing payables were
£18,400. Therefore cash paid was £75,500 (76,300 + 17,600 –
18,400).
 The difference between operating expenses and cash inflow is
£500, which is the difference between opening and closing
inventories (£1,300 increase) less the difference between opening
and closing payables (£800 increase).
In practice, we simply adjust profit for the differences between the
opening and closing amounts:
 Increase in inventories: deduct £1,300 (cash outflow)
 Increase in receivables: deduct £1,000 (cash outflow)
 Increase in trade payables: add £800 (cash inflow)

7
 We can now draw up a reconciliation of profit before tax to cash
generated from operations:
£
Profit before tax 20,500
Depreciation 4,000
Loss on disposal of property, plant and equipment 500
Increase in inventories (1,300)
Increase in receivables (1,000)
Decrease in payables 800
Cash generated from operations 23,500

Interest paid and tax paid (not given in this example) are then
deducted from cash generated from operations to give the net
cash from operating activities.
This reconciliation helps users of the financial statements to understand
the difference between profit and cash flow. It also shows the
movements on the individual items within working capital. This enables
users to see how successful or otherwise the entity has been in
managing inventories, receivables and payables in order to generate
cash.

Most UK companies use the indirect method.

3 Statement of cash flows – calculations in the
assessment
Assessment tasks will require you to calculate certain numbers (representing a cash
inflow or outflow). These figures will then be included in your statement of cash flow
proforma.
In some cases you will be provided with an on-screen working. If so, it is important
to complete this, as follow-through marks are available – even if the figure you
calculate is incorrect, you will be given credit for transferring your number to the
correct place in the statement of cash flow proforma.
Other numbers need to be calculated on scrap paper.
The following information is relevant to the preparation examples which follow.

3.1 Preparation examples for Silver Ltd – task information

You have been asked to prepare the statement of cash flows for Silver Ltd for the
year ended 31 December 20X2.
The most recent statement of profit or loss and other comprehensive income and
statement of financial position (with comparatives for the previous year) of Silver Ltd
are set out below.

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 5: The statement of cash flows

Silver Ltd
Statement of profit or loss for the year ended 31 December 20X2
£000
Revenue 2,553

Cost of sales (1,814)

Gross profit 739

Dividends received 43

Loss on disposal of property, plant and equipment (13)

Distribution costs (125)

Administrative expenses (294)

Profit from operations 350

Finance costs (66)

Profit before tax 284

Tax (140)

Profit for the year 144

Silver Ltd
Statement of financial position as at 31 December 20X2
20X2 20X1
£000 £000
Assets
Non-current assets
Property, plant and equipment 380 305

Current assets
Inventories 150 102

Trade receivables 390 315

Cash and cash equivalents 52 1

592 418

Total assets 972 723

Equity and liabilities

Equity
Share capital (£1 ordinary shares) 100 50

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 20X2 20X1
£000 £000
Share premium account 60 50

Retained earnings 210 166

370 266

Non-current liabilities
Bank loans 100 –

Current liabilities
Trade payables 227 199

Bank overdraft 85 98

Tax liability 190 160

502 457

Total liabilities 602 457

Total equity and liabilities 972 723

Further information:
• The total depreciation charge for the year was £90,000.
• Property, plant and equipment costing £85,000 with accumulated depreciation
of £40,000 were sold in the year.
• All sales and purchases were on credit. Other expenses were paid for in cash.
• A dividend of £100,000 was paid during the year.

3.2 Operating activities – working capital movement

The movements in working capital represent the differences between sales and
cash received, and purchases and cash paid.
When preparing the cash flows from operating activities, the profit before tax figure
is adjusted for working capital movement – ie differences between the opening and
closing amounts.
Note that the adjustments can be entered in any order. (The computer searches for
correct answers and awards marks accordingly.)

Activity 1: Silver Ltd – working capital movement

Required
Show the adjustments in respect of working capital movement in the extract
below for Silver Ltd for the year ended 31 December 20X2.

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 5: The statement of cash flows

Solution
Reconciliation of profit before tax to net cash from operating activities
(extract)
£000
Profit before tax X
Adjustments for:

Cash generated by operations X

3.3 Operating activities – interest paid and tax paid

The amount of interest paid in respect of bank loans or other financing arrangements
will be shown in the statement of profit or loss. It is referred to as 'finance costs'. To
prepare the statement of cash flows, interest paid may need to be calculated or
simply transferred to the proforma. The interest figure must be removed from (added
back to) profit before tax and inserted in the proforma after cash generated by
operations.
Tax paid may need to be calculated, as is illustrated in the next example.

Activity 2: Silver Ltd – interest and tax paid

Required
Include the amounts relating to interest paid and tax paid in the extract for
Silver Ltd for the year ended 31 December 20X2.
Solution
Reconciliation of profit before tax to net cash from operating activities
(extract)
£000
Cash generated by operations X

Net cash from operating activities X

11
Workings (not provided in the Assessment)
Tax paid £000

3.4 Operating activities and investing activities – property, plant

and equipment (PPE) and dividends received
Property, plant and equipment (PPE) affects cash flows from operating activities and
investing activities.
Operating activities
Depreciation is a non-cash expense which must be added back to profit before tax.
Further, profit before tax must be adjusted for any profit or loss arising on the sale
of PPE, as this is also a non-cash item.
Investing activities
Tasks will often ask you to calculate cash flows relating to the acquisition or disposal
of any non-current assets. These cash flows are included in investing activities.
The following on-screen workings may be provided:
Example working – proceeds on disposal on PPE
Proceeds on disposal of property, plant and equipment £000
Carrying amount of PPE sold X

Gain/(loss) on disposal X/(X)

X
Example working – purchases of PPE
Purchases of property, plant and equipment £000
Property, plant and equipment at start of year X

Depreciation charge (X)

Carrying amount of property, plant and equipment sold (X)

Property, plant and equipment at end of year (X)

(X)

The business may also receive a dividend from an investment it has made in another
company. Dividends received are included in cash flows from investing activities.

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 5: The statement of cash flows

Activity 3: Silver Ltd – PPE and dividend received

Required
Include the amounts relating to property, plant and equipment and the dividend
received in the extracts for Silver Ltd for the year ended 31 December 20X2.
Solution
Reconciliation of profit before tax to net cash from operating activities
(extract)
£000
Profit before tax 284
Adjustments for:

Adjustment in respect of inventories (150 – 102) (48)

Adjustment in respect of trade receivables (390 – 315) (75)
Adjustment in respect of trade payables (227 – 199) 28
Cash generated by operations
Interest paid (66)
Tax paid (110)
Net cash from operating activities

Statement of cash flows (extract) for the year ended

31 December 20X2
£000
Net cash from operating activities
Investing activities

Net cash used in investing activities

13
Workings
Proceeds on disposal of property, plant and equipment £000

Purchases of property, plant and equipment £000

3.5 Financing activities – bank loans, shares and dividends

Financing cash flows comprise receipts from, or repayments to, external providers
of finance as well as any changes to the contributed equity of the business.
Examples of financing cash flows are:
• Cash proceeds or repayments of bank loans
• Cash proceeds from issuing shares
• Dividends paid to shareholders
The cash proceeds or repayments of bank loans and issues of shares are calculated
by comparing the closing statement of financial position figures with the opening
position for the same items.
Information relating to dividends paid to the reporting company's own equity
shareholders will be provided in the 'further information'.
In Assessment questions, dividends paid to equity shareholders should be included
in 'financing activities'. However, IAS 7 also permits them to be included in operating
activities.

Activity 4: Silver Ltd – financing activities

Required
Include the amounts relating to shares, bank loans and dividend paid in the
statement of cash flows extract for Silver Ltd for the year ended 31 December
20X2.

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 5: The statement of cash flows

Solution
Statement of cash flows (extract) for the year ended
31 December 20X2
£000
Financing activities

Net cash from financing activities

3.6 Cash and cash equivalents

To complete the cash flow, the net increase or decrease in cash and cash
equivalents must be calculated.
The opening and closing cash and cash equivalent balances are also included.

Activity 5: Silver Ltd – cash

Required
Complete the statement of cash flows for Silver Ltd by including cash and
cash equivalents at the beginning and end of the period and the net cash
increase in cash and cash equivalents for the year ended 31 December 20X2.
Solution
Reconciliation of profit before tax to net cash from operating activities
£000
Profit before tax 284
Adjustments for:
Depreciation 90

Loss on sale of property, plant and equipment 13

Finance costs 66
Dividends received (43)

Adjustment in respect of inventories (150 – 102) (48)

Adjustment in respect of trade receivables (390 – 315) (75)

Adjustment in respect of trade payables (227 – 199) 28

Cash generated by operations 315

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 Interest paid (66)

Tax paid (110)

Net cash from operating activities 139

Statement of cash flows for the year ended 31 December 20X2

£000
Net cash from operating activities 139

Investing activities
Proceeds on disposal of property, plant and equipment (W) 32

Purchases of property, plant and equipment (W) (210)

Dividends received 43

Net cash used in investing activities (135)

Financing activities
Proceeds of share issue (160 – 100) 60

Proceeds from bank loans (100 – 0) 100

Dividends paid (100)

Net cash from financing activities 60

Net increase in cash and cash equivalents

Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year

4 Assessment tasks
4.1 Format
There is a lot of information provided in this type of task, including:
• Statement of profit or loss and other comprehensive income;
• Statement of financial position (including a comparative year); and
• Further information.
The requirements to prepare a 'reconciliation of profit before tax to net cash from
operating activities' and a 'statement of cash flows' may be split into parts (a) and
(b). However, you may find it more efficient to work on the proformas together.

4.2 Approach
When you are preparing a statement of cash flows it is important to have a logical
technique.

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 5: The statement of cash flows

A recommended approach is to:

(1) Read the requirement and the scenario information.
(2) Consider the additional information. Which numbers in the statement of financial
position and statement of profit or loss and other comprehensive income are
affected by this?
(3) Work down the statement of financial position, transferring numbers to the
proformas or a working. Take account of the additional information.
(4) Work down the statement of profit or loss, transferring numbers to the proformas
or a working. Take account of the additional information.
(5) Total your statement of cash flows.
(6) If it doesn't balance, don't worry! It is likely you still have enough marks to
obtain competency in the task. Time permitting, you could review your
workings to see if you can identify any necessary adjustments.

4.3 Assessment standard question

Now that we have considered the knowledge and techniques required to be
successful in this topic we will work through a full Financial Statements of Limited
Companies Assessment standard question.

Activity 6: Statement of cash flow – Emma Ltd

The summarised accounts of Emma Ltd for the year ended 31 December 20X8 are
as follows:
Emma Ltd
Statement of profit or loss for the year ended 31 December 20X8
£000

Revenue 600

Cost of sales (319)

Gross profit 281

Dividends received 45

Gain on disposal of property, plant and equipment 15

Distribution costs (120)

Administrative expenses (126)

Profit from operations 95

Finance costs (8)

Profit before tax 87

Tax (31)

Profit for the year 56

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Emma Ltd
Statement of financial position as at 31 December 20X8
20X8 20X7
£000 £000
Assets
Non-current assets
Property, plant and equipment 628 514

Current assets
Inventories 214 210

Trade receivables 168 147

Cash and cash equivalents 7 0

389 357

Total assets 1,017 871

Equity and liabilities

Equity
Share capital (£1 ordinary shares) 250 200

Share premium account 180 160

Retained earnings 314 282

744 642

Non-current liabilities
Bank loans 80 50

Current liabilities
Bank overdraft 0 14

Trade payables 136 121

Tax liability 57 44

193 179

Total liabilities 273 229

Total equity and liabilities 1,017 871

Further information:
• The total depreciation charge for the year was £42,000.
• Property, plant and equipment costing £33,000 with accumulated depreciation
of £13,000 were sold in the year.

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 5: The statement of cash flows

• All sales and purchases were on credit. Other expenses were paid for in cash.
• A dividend of £24,000 was paid during the year.
Required
(a) Prepare a reconciliation of profit before tax to net cash from operating
activities for Emma Ltd for the year ended 31 December 20X8.
(b) Prepare the statement of cash flows for Emma Ltd for the year ended 31
December 20X8.
Note: You don't need to use the workings tables to achieve full marks on the task
but the data entered into the working tables will be taken into consideration if you
make errors in the proformas.
Solution
Reconciliation of profit before tax to net cash from operating activities
£000

Adjustments for:

Cash generated from operations

Reconciliation picklist: Adjustment in respect of inventories, Adjustment in respect

of trade payables, Adjustment in respect of trade receivables, Depreciation,
Dividends received, Gain on disposal of property, plant and equipment, Finance
costs, Interest paid, Profit before tax, Profit from operations, Profit for the year, Tax
paid
Note: In the Assessment picklists will also be provided for the on-screen workings.
Statement of cash flows for the year ended 31 December 20X8
£000
Net cash from operating activities
Investing activities

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 Net cash used in investing activities
Financing activities

Net cash from financing activities

Statement of cash flows picklist: Cash and cash equivalents at the beginning of
the year, Cash and cash equivalents at the end of the year, Dividends paid,
Dividends received, Net increase in cash and cash equivalents, Proceeds from bank
loans, Proceeds on disposal of property, plant and equipment, Proceeds from issue
of share capital, Purchases of property, plant and equipment

Workings (not provided in the Assessment)

Tax paid £000

Workings (on-screen proforma provided in the Assessment)

Proceeds on disposal of property, plant and equipment £000

Purchases of property, plant and equipment £000

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 5: The statement of cash flows

5 Statement of cash flows – direct method

As we have seen, IAS 7 provides a choice in the method used to report cash flows
from operating activities. The direct method requires companies to look back to their
accounting records and extract information relating to gross cash receipts and gross
cash payments.
The International Accounting Standard Board encourages use of the direct method
where the necessary information is not too costly to obtain, as it provides additional
information to users of the financial statements.
However, it is not mandatory under IAS 7 and therefore in practice it is rarely used.
In the Assessment you will not be asked to draft a statement of cash flows using this
method. However, you do need to understand how cash flows from operating
activities are reported under the direct method.
A proforma for the direct method is as follows:
£
Cash receipts from customers (W) X
Cash paid to suppliers and employees (W) (X)
Cash generated from operations X
Interest paid (X)
Tax paid (X)
Net cash from operating activities X

The figure for 'cash generated from operations' will be exactly the same as under
the indirect method. Also, interest paid and tax paid are calculated in exactly the
same way as under the indirect method.
The calculation of cash receipts from customers and cash paid to suppliers and
employees will be explained through an illustration.

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Illustration 2 – Cash generated from operations
Scenario
Extracts to the financial statements of Jane Ltd for the year ended 31 December
20X1 are as follows:
Jane Ltd
Statement of profit or loss and other comprehensive income (extract) for the
year ended 31 December 20X1

Revenue 80,500

Cost of sales (39,400)

Gross profit 41,100

Other expenses (23,000)

Profit from operations 18,100

Jane Ltd
Statement of financial position (extract) as at 31 December 20X1

20X1 20X0

£ £

Current a ssets

Inventories 16,000 15,300

Trade receivables 23,250 20,450

Current lia bilities

Trade payables 13,000 11,350

Further information:
• Other expenses includes depreciation of £5,000 and a loss on disposal of a
non-current asset of £200.
• Interest paid is £2,000.
• Tax paid is £3,000.
Required
Calculate the cash generated from operations using the direct method for
Jane Ltd for the year ended 31 December 20X1.
Step 1: Calculate cash received from customers by reconstructing the
receivables account

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 5: The statement of cash flows

Trade receivables balance b/ d 20,450

Revenue 80,500

Trade receivables balance c/ d (23,250)

Cash received 77,700

Step 2: Calculate purchases

Cost of sales (SPL) 39,400

Add closing inventories (SOFP) 16,000

Less opening inventories (SOFP) (15,300)

40,100

Operating expenses (SPL) 23,000

Less depreciation (5,000)

Less loss on disposal of non-current assets (200)

Purchases 57,900

Step 3: Calculate cash paid to suppliers and employees by reconstructing

the trade payables account

£000

Trade payables balance b/ d 11,350

Purchases (Step 2 – working) 57,900

Trade payables balance c/ d (13,000)

Cash paid 56,250

Step 4: Calculate net cash from operating activities

23
 £000

Cash receipts from customers (W ) 77,700

Cash paid to suppliers and employees (W ) (56,250)

Cash generated from operations 21,450

Interest paid (2,000)

Tax paid (3,000)

N et cash from operating activities 16,450

Therefore, where companies use the direct method to calculate net cash from
operating activities, this final proforma will replace the Reconciliation of profit
before tax to net cash from operating activities seen under the indirect method.

6 How useful is the statement of cash flows?

6.1 Useful information provided by a statement of cash flows
Most people agree that the statement of cash flows provides useful information. It
alerts users to possible liquidity problems by highlighting inflows and outflows of
cash.
IAS 7 (para. 4) explains that a statement of cash flows, used together with the rest
of the financial statements, can help users to assess:
 The changes in an entity's net assets and its liquidity and solvency
 An entity's ability to generate cash and cash equivalents and to affect the
amounts and timing of cash flows in order to adapt to changing circumstances
There are other advantages of presenting a statement of cash flows:
 It shows an entity's ability to turn profit into cash (by allowing users to compare
profit with cash flows from operating activities).
 Cash flow is a matter of fact and is difficult to manipulate.
 Cash flow information is not affected by an entity's choice of accounting
policies or by judgement.
 The statement may help users to predict future cash flows.
 Cash flow is easier to understand than profit.
 The standard format enables users to compare the cash flows of different
entities.

6.2 Limitations of the statement of cash flows

There are some important limits to the usefulness of the statement of cash flows:
 Cash balances are measured at a point in time and, therefore, they can be
manipulated. For example, customers may be offered prompt payment
discounts or other incentives to make early payment, or an entity may delay

24
 5: The statement of cash flows

paying suppliers until after the year end. These are legitimate ways of
managing cash flow (which is part of stewardship), but users may not be aware
that this is being done, and may believe that the entity's position is better than
it actually is.
 A high bank balance is not necessarily a sign of good cash management.
Entities sometimes have to sacrifice cash flow in the short term to generate
profits in the longer term by, for example, purchasing new plant and equipment.
A business must have cash if it is to survive in the short term; if it is to survive
in the longer term it must also make a profit. Focusing on cash may mean that
an entity has a healthy bank balance but makes a loss.
 The statement of cash flows is based on historical information and, therefore,
it is not necessarily a reliable indicator of future cash flows.
Neither the statement of profit or loss and other comprehensive income nor the
statement of cash flows provides a complete picture of an entity's performance or
position by itself.

6.3 Interpreting the statement of cash flows

You may wish to come back to this section after you have studied interpretation of
financial statements in Chapter 11.

Assessment focus point

You may be asked to interpret a statement of cash flows in the assessment. This
can be done by simple observation.

Look at the net cash flow for the period and then at each category of cash flows in
turn.

Net cash flow for the period

 Has cash increased or decreased in the period?
 How material is the increase/decrease in cash compared with the entity's cash
balances?
 Does the entity have a positive cash balance or an overdraft?
A decrease in cash is not always a bad sign, particularly if the entity has used the
cash to finance capital expenditure or has used surplus cash to purchase liquid
resources.

Operating activities
 Have inventories, receivables and payables increased or decreased?
A material increase in working capital is a worrying sign, particularly if the entity has
a cash outflow from operating activities.

Interest, tax and dividends

Is there enough cash to cover:
 Interest payments?
 Taxation?
 Dividends?

25
As well as looking at the current period's cash outflows, look at the liabilities in the
statement of financial position, if this information is available; these are the next
period's cash outflows.
Remember that interest and corporation tax have to be paid when they are due, but
the entity can delay payment of equity dividends until the cash is available.

Investing activities
A cash outflow to purchase assets is usually a good sign, because the assets will
generate profits (and cash inflows) in future periods.
If there has been capital expenditure, where has the cash come from? Usually it will
have come from several sources: operations; issuing shares or loan stock; taking
out a loan; taking out an overdraft.
If the entity has taken out or increased an overdraft, this is usually a worrying sign.
In theory, a bank overdraft is repayable on demand.

Financing activities
Ask the following questions:
 Is debt increasing or decreasing?
 Will the entity be able to pay its debt interest?
 Will the entity be able to repay the debt (if it falls due in the near future)?
 Is the entity likely to need additional long-term finance? (This might be the case
if the bank overdraft is rapidly increasing or nearing its limit, or if the entity has
plans to expand in the near future.)

Activity 7: Interpreting the statement of cash flows

Norwood Ltd made a profit from operations of £140,000 but cash generated from
operations for the same year was £160,000.
Which of the following is a possible reason for this?
A bonus issue of shares
An increase in inventories
An increase in trade payables
An increase in a long-term loan

26
 5: The statement of cash flows

Chapter summary

 Businesses need cash in order to survive.

 Users of the financial statements need information about the liquidity, solvency
and financial adaptability of an entity: this is provided by a statement of cash flows.
 IAS 7 requires all companies to include a statement of cash flows in their
published financial statements.
 Cash inflows and outflows must be presented under standard headings:
– Cash flows from operating activities
– Cash flows from investing activities
– Cash flows from financing activities
 IAS 7 also requires a note analysing changes in cash and cash equivalents.
 There are two methods of calculating net cash flow from operating activities:
– List and total the actual cash flows: the direct method
– Adjust profit for non-cash items: the indirect method
 IAS 7 allows either method.
 Main advantages of cash flow information:
– It shows an entity's liquidity, solvency and financial adaptability.
– It allows users to compare profit with net cash flow from operating
activities.
– Cash flow is difficult to manipulate.
– It is not affected by accounting policies or by estimates.
 Limitations of cash flow information:
– Cash balances can be manipulated.
– Businesses need to make profits as well as generate cash: short-term
cash management may affect profit in the longer term.
– It is based on historical information.
 To interpret a statement of cash flows: use simple observation; look at the net
cash flow for the period; and at each category of cash flows in turn.

27
Keywords
 Cash equivalents: 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: inflows and outflows of cash and cash equivalents
 Cash: cash in hand and demand deposits (normally) less overdrafts repayable on
demand
 Financing activities: activities that result in changes in the size and composition
of the contributed equity (share capital) and borrowings of the entity
 Gross cash flows: the individual cash flows that make up the net cash flows
reported under each of the headings in the statement of cash flows
 Investing activities: the acquisition and disposal of long-term assets and other
investments not included in cash equivalents
 Net cash flows: the total cash flows reported under each of the standard
headings in the statement of cash flows
 Operating activities: the principal revenue-producing activities of the entity and
other activities that are not investing or financing activities
 Statement of cash flows: primary statement that summarises all movements of
cash into and out of a business during the reporting period

28
 5: The statement of cash flows

Activity answers

Activity 1: Silver Ltd – working capital movement

Show the adjustments in respect of working capital movement in the extract
below for Silver Ltd for the year ended 31 December 20X2.
Reconciliation of profit before tax to net cash from operating activities
(extract)
£000

Profit before tax X

Adjustments for:
Adjustment in respect of inventories (150 – 102) (48)

Adjustment in respect of trade receivables (390 – 315) (75)

Adjustment in respect of trade payables (227 – 199) 28

Cash generated by operations X

Activity 2: Silver Ltd – interest and tax paid

Include the amounts relating to interest paid and tax paid in the extract for
Silver Ltd for the year ended 31 December 20X2.
Reconciliation of profit before tax to net cash from operating activities
(extract)
£000
Cash generated by operations X
Interest paid (66)
Tax paid (W) (110)
Net cash from operating activities X

29
Workings (not provided in the Assessment)
Tax paid £000
Balance b/d 160
Statement of profit or loss and other comprehensive income 140
charge
Balance c/d (190)
Tax paid 110

Activity 3: Silver Ltd – PPE and dividend received

Include the amounts relating to property, plant and equipment and the
dividend received in the extracts for Silver Ltd for the year ended 31 December
20X2.
Reconciliation of profit before tax to net cash from operating activities
£000
Profit before tax 284
Adjustments for:
Depreciation 90
Loss on disposal of property, plant and equipment 13
Finance costs 66
Dividends received (43)
Adjustment in respect of inventories (150 – 102) (48)
Adjustment in respect of trade receivables (390 – 315) (75)
Adjustment in respect of trade payables (227 – 199) 28
Cash generated by operations 315
Interest paid (66)
Tax paid (110)
Net cash from operating activities 139

30
 5: The statement of cash flows

Statement of cash flows (extract) for the year ended

31 December 20X2
£000
Net cash from operating activities 139

Investing activities
Proceeds on disposal of property, plant and equipment (W) 32

Purchases of property, plant and equipment (W) (210)

Dividends received 43

Net cash used in investing activities (135)

Workings
Proceeds on disposal of property, plant and equipment £000
Carrying amount of property, plant and equipment sold 45
(85 – 40)
Loss on disposal (13)

32

Purchases of property, plant and equipment £000

Property, plant and equipment at start of year 305

Depreciation charge (90)

Carrying amount of purchases of property, plant and equipment (45)

sold
Property, plant and equipment at end of year (380)

Total purchases of property, plant and equipment additions (210)

Activity 4: Silver Ltd – financing activities

Include the amounts relating to shares, bank loans and dividend paid in the
statement of cash flows extract for Silver Ltd for the year ended 31 December
20X2.

31
Statement of cash flows (extract) for the year ended
31 December 20X2
£000
Financing activities
Proceeds of share issue (160 – 100) 60

Proceeds from bank loans (100 – 0) 100

Dividends paid (100)

Net cash from financing activities 60

Activity 5: Silver Ltd – cash

Complete the statement of cash flows for Silver Ltd by including cash and
cash equivalents at the beginning and end of the period and the net cash
increase in cash and cash equivalents for the year ended 31 December 20X2.
Reconciliation of profit before tax to net cash from operating activities
£000
Profit before tax 284
Adjustments for:
Depreciation 90

Loss on sale of property, plant and equipment 13

Finance costs 66
Dividends received (43)

Adjustment in respect of inventories (150 – 102) (48)

Adjustment in respect of trade receivables (390 – 315) (75)

Adjustment in respect of trade payables (227 – 199) 28

Cash generated by operations 315

Interest paid (66)

Tax paid (W) (110)

Net cash from operating activities 139

32
 5: The statement of cash flows

Statement of cash flows for the year ended 31 December 20X2

£000
Net cash from operating activities 139

Investing activities
Proceeds on disposal of property, plant and equipment (W) 32

Purchases of property, plant and equipment (W) (210)

Dividends received 43

Net cash used in investing activities (135)

Financing activities
Proceeds of share issue (160 – 100) 60

Proceeds from bank loans (100 – 0) 100

Dividends paid (100)

Net cash from financing activities 60

Net increase in cash and cash equivalents 64

Cash and cash equivalents at the beginning of the year (98 – 1) (97)

Cash and cash equivalents at the end of the year (85 – 52) (33)

Activity 6: Statement of cash flow – Emma Ltd

(a) Prepare a reconciliation of profit before tax to net cash from operating
activities for Emma Ltd for the year ended 31 December 20X8.
(b) Prepare the statement of cash flows for Emma Ltd for the year ended
31 December 20X8.
Reconciliation of profit before tax to net cash from operating activities
£000
Profit before tax 87
Adjustments for:
Depreciation 42
Finance costs 8
Dividends received (45)
Gain on disposal of property, plant and equipment (15)
Adjustment in respect of trade receivables (168 – 147) (21)
Adjustment in respect of inventories (214 – 210) (4)
Adjustment in respect of trade payables (136 – 121) 15

33
 £000
Cash generated from operations 67
Interest paid (8)
Tax paid (W) (18)
41

Statement of cash flows for the year ended 31 December 20X8

£000
Net cash from operating activities 41
Investing activities
Proceeds on disposal of property, plant and equipment (W) 35
Purchases of property, plant and equipment (W) (176)
Dividends received 45
Net cash used in investing activities (96)
Financing activities
Proceeds from issue of share capital (250 + 180 – 200 – 160) 70
Proceeds from bank loans (80 – 50) 30
Dividends paid (24)
Net cash from financing activities 76
Net increase in cash and cash equivalents 21
Cash and cash equivalents at the beginning of the year (14)
Cash and cash equivalents at the end of the year 7

Workings (not provided in the Assessment)

Tax paid £000
Balance b/d (SOFP) 44
Tax charge (SPL) 31
Balance c/d (SOFP) (57)
18

Workings (on-screen proforma provided in the Assessment)

Proceeds on disposal of property, plant and equipment £000
Carrying amount of property, plant and equipment sold 20
(33 – 13)
Gain on disposal 15

35

34
 5: The statement of cash flows

Purchases of property, plant and equipment £000

Property, plant and equipment at start of year 514

Depreciation charge (42)

Carrying amount of property, plant and equipment sold (20)

Property, plant and equipment at the end of year (628)

(176)

Activity 7: Interpreting the statement of cash flows

Which of the following is a possible reason for this?

A bonus issue of shares

An increase in inventories
An increase in trade payables 
An increase in a long-term loan

An increase in inventories reduces cash generated from operations. A bonus issue

of shares does not affect cash. An increase in long-term loans increases the overall
cash balance for the year, but as it is a financing cash flow it is not included in cash
generated from operations.

35
Test your learning
1 IAS 7 requires all companies to present a statement of cash flows.
Is this statement true or false?
True
False

2 Which of the following items does not meet the IAS 7 definition of cash?
Bank current account in foreign currency
Bank overdraft
Petty cash float
Short-term deposit

3 Listed below are four transactions that will result in cash inflows or outflows.
Complete the table to show the way in which each of the cash flows should be
classified in the statement of cash flows.
Transactions:
(a) Increase in short-term deposits classified as cash equivalents
(b) Issue of ordinary share capital
(c) Receipt from sale of property, plant and equipment
(d) Tax paid
Classification Items
Operating activities
Investing activities
Financing activities
Increase/decrease in cash and cash equivalents

4 (a) Alexander plc has calculated net cash flow from operating activities by listing
and totalling the actual cash flows as shown below:
£000
Cash receipts from customers 32,450
Cash paid to suppliers and employees (26,500)
Cash generated from operations 5,950
Interest paid (300)
Tax paid (800)
Net cash from operating activities 4,850
This method of calculating and presenting net cash from operating activities is
called:
The direct method
The indirect method

(b) IAS 7 does not allow the method illustrated above.

36
 5: The statement of cash flows

Is this statement true or false?

True
False

5 The following information relates to the property, plant and equipment of Bromley
Ltd:
20X2 20X1
£ £
Cost 480,000 400,000
Accumulated depreciation (86,000) (68,000)
Carrying amount at 31 December 394,000 332,000
During the year ended 31 December 20X2 an asset, which had originally cost
£20,000 and had a carrying amount of £8,000, was sold for £5,600.
(a) What amount should be included in the statement of cash flows for the year
ended 31 December 20X2 under the heading 'investing activities'?
Cash inflow of £5,600
Cash outflow of £64,400
Cash outflow of £94,400
Cash outflow of £100,000

(b) What amount of depreciation should be added back to profit before tax in the
reconciliation of profit before tax to net cash from operating activities?
£6,000
£18,000
£26,000
£30,000

6 The statement of financial position of Orion Ltd as at 30 June 20X5 is provided

below, together with comparative figures:
20X5 20X4
£000 £000 £000 £000
Assets
Non-current assets:
Property, plant and equipment 2,030 1,776
Current assets:
Inventories 1,009 960
Trade and other receivables 826 668
Cash 25 100
1,860 1,728
Total assets 3,890 3,504
Equity and liabilities
Equity:
Share capital 1,200 1,200
Share premium 200 200
Retained earnings 1,171 1,028

37
 2,571 2,428
Non-current liabilities:
Long-term loan 610 460
Current liabilities:
Trade and other payables 641 563
Tax liabilities 68 53
709 616
Total liabilities 1,319 1,076
Total equity and liabilities 3,890 3,504
Further information:
(a) No non-current assets were sold during the year. The depreciation charge for
the year amounted to £305,000.
(b) The profit before tax for the year ended 30 June 20X5 was £270,000. Interest
of £62,000 was charged in the year. The tax charge for the year was £68,000.
(c) A dividend of £59,000 was paid during the year.
Required
(a) Prepare a reconciliation of profit before tax to net cash from operating activities
for Orion Ltd for the year ended 30 June 20X5.
(b) Prepare a statement of cash flows for Orion Ltd for the year ended
30 June 20X5.
(Complete the left-hand columns by writing in the correct line item or narrative
from the list provided.)
Reconciliation of profit before tax to net cash from operating activities
for the year ended 30 June 20X5
£000






Cash generated from operations


Net cash from operating activities

Picklist for line items:

Depreciation
Increase/decrease in inventories
Increase/decrease in receivables
Increase/decrease in trade payables

38
 5: The statement of cash flows

Finance costs
Interest paid
Profit before tax
Tax paid
Statement of cash flows for the year ended 30 June 20X5
£000 £000
Net cash from operating activities
Investing activities:

Net cash used in investing activities
Financing activities:


Net cash from financing activities
Net increase/(decrease) in cash and cash equivalents
for the year
Cash and cash equivalents at the beginning of the
year
Cash and cash equivalents at the end of the year

Picklist for line items:

Dividends paid
Increase/decrease in long-term loan
Purchase of property, plant and equipment
Working
Property, plant and equipment £000


Picklist for line items:

Depreciation
Property, plant and equipment at the beginning of the year
Property, plant and equipment at the end of the year
7 The statement of cash flows of Keynes Ltd is shown below.
Reconciliation of profit before tax to net cash from operating activities for the
year ended 31 December 20X5
£000

39
 Profit before tax 3,654
Adjustments for:
Depreciation 1,400
Finance costs 560
Decrease in inventories 280
Increase in receivables (910)
Increase in trade payables 32
Cash generated from operations 5,016
Interest paid (560)
Tax paid (1,170)
Net cash from operating activities 3,286

40
 5: The statement of cash flows

Statement of cash flows for the year ended 31 December 20X5

£000 £000
Net cash from operating activities 3,286
Investing activities
Purchase of property, plant and equipment (2,830)
Proceeds on disposal of property, plant and 96
equipment
(2,734)
Net cash used in investing activities
Financing activities
Repayment of loan stock (310)
Dividends paid (480)
Net cash used in financing activities (790)
Net decrease in cash and cash (238)
equivalents for the year
Cash and cash equivalents at the 240
beginning of the year
Cash and cash equivalents at the end of 2
the year
Prepare brief notes to answer the questions below.
Do you think that the company is having problems in managing its cash flow? If not,
can you explain why?

41
42
 Group accounts: the
consolidated statement of
financial position
Learning outcomes
1.1 Explain the regulatory framework that underpins financial reporting
 The purpose of financial statements
 Forms of equity, reserves and loan capital
 Sources of regulation: international accounting standards and company law
(Companies Act 2006)
2.1 Examine the effect of international accounting standards on the preparation of
financial statements
 Explain the effect of international accounting standards on the presentation, valuation
and disclosure of items within the financial statements
 Make any supporting calculations
3.2 Draft a statement of financial position
• Make appropriate entries in the statement in respect of information extracted from a
trial balance and additional information
4.2 Draft a consolidated statement of financial position for a parent company with one
partly-owned subsidiary
 Consolidate each line item in the statement of financial position
 Calculate and treat goodwill, non-controlling interest, pre- and post-acquisition profits,
equity and unrealised profit on inventories
 Treat adjustment to fair value, impairment of goodwill and intercompany balances

Assessment context
You will be required to prepare a consolidated statement of financial position or a consolidated
statement of profit or loss. On-screen workings will be provided for some of the calculations.

Qualification context
Consolidated financial statements are only tested in this course.

Business context
Many larger businesses are part of a group of companies (ie there is a parent company and at least
one subsidiary). They are required to prepare financial statements for the shareholders of the group.

Supplement amendments
Amendments are highlighted.

43
44
 9: Group accounts: the consolidated statement of financial position

1 No changes
2 No changes
3 No changes
4 No changes
5 Goodwill
5.1 Position to date
So far in this chapter the cost of the investment equalled the value of the identifiable
net assets acquired and, accordingly, no surplus or deficit remained on cancellation.
In practice, where a parent acquires a subsidiary the cost of the investment is almost
always more than the total fair value of the subsidiary's individual assets and
liabilities. The difference represents goodwill.

5.2 Goodwill
Where the cost of the business combination is greater than the net assets
acquired, the investor has paid for something more than the net assets of the
acquired business.
The difference is called 'goodwill' and is measured as:
£
Consideration transferred X
Less fair value of identifiable assets and liabilities at acquisition (X)
X

Note: 'Consideration' is the price paid. In the Assessment, the net assets are
represented by share capital and reserves. (Fair-value adjustments are considered
in a later section.)

5.3 Accounting treatment

Goodwill is capitalised as an asset on the statement of financial position.
An example of the goodwill working is as follows:
Goodwill £000
Consideration X
Non-controlling interests at acquisition* X
Net assets acquired (X)
Impairment of goodwill (X)
X

*Non-controlling interest is discussed in the next section.

45
Note that the goodwill working has replaced the 'cancellation' working seen
previously.
As goodwill is an intangible non-current asset with an indefinite useful life, an
impairment test is conducted at least annually. Any resulting impairment loss is
recognised against consolidated goodwill.
The double entry to record an impairment of goodwill is:
Debit Credit
£ £
Retained earnings (reduce reserves) X
Goodwill (reduce asset) X

Activity 4: Thatch plc

Thatch Plc acquired 100% of the issued share capital and voting rights of Straw Ltd
on 1 January 20X6 for £8,000,000. At that date Straw Ltd had issued share capital
of £3,000,000 and retained earnings of £2,000,000.
Extracts of the statements of financial position for the two companies at
31 December 20X6, as well as further information, are shown below.
Thatch Straw
Plc Ltd
£000 £000
Assets
Property, plant and equipment 10,000 5,000

Investment in Straw Ltd 8,000 ___–

18,000 5,000

Current assets 4,000 5,000

Total assets 22,000 10,000

EQUITY AND LIABILITIES

Equity
Share capital (£1 ordinary shares) 9,000 3,000

Retained earnings 6,000 5,000

15,000 8,000

46
 9: Group accounts: the consolidated statement of financial position

Thatch Straw
Plc Ltd
£000 £000
Liabilities
Non-current liabilities 2,000 –

Current liabilities 5,000 2,000

7,000 2,000

Total equity and liabilities 22,000 10,000

Further information:
In the current year, the directors of Thatch Plc have concluded that goodwill is
impaired by £1,000,000.
Required
Draft the consolidated statement of financial position for Thatch Plc and its
subsidiary undertaking as at 31 December 20X6.
Solution
Thatch Plc
Consolidated statement of financial position as at 31 December 20X6
£000
ASSETS
Non-current assets

Total assets
EQUITY AND LIABILITIES
Equity

Liabilities

47
 £000
Total equity and liabilities

Workings (not provided in the CBT)

Group structure

Workings (on-screen proforma provided in the CBT)

Goodwill £000

Retained earnings £000

6 Non-controlling interests in the group statement of

financial position
6.1 What are non-controlling interests?
P
The parent
The parent
controls a
does not own
subsidiary because 80%
all of the
it has >50% of
subsidiary
the voting power
S
The non-controlling interest (NCI) is the 'equity in a subsidiary not attributable,
directly or indirectly, to a parent' (IFRS 10: para. 22), ie the non-group shareholders'
interest in the net assets of the subsidiary.

48
 9: Group accounts: the consolidated statement of financial position

6.2 Points to note

(a) You do not have to own 100% of a company to control it.
(b) The group accounts will need to show the extent to which the assets and
liabilities are controlled by the parent so we still add across, line by line, the
parent and 100% of the subsidiary.
(c) The group accounts will also need to show the extent that the subsidiary's net
assets are owned by other parties, namely the non-controlling interest. This
results in a new working for the non-controlling interest (NCI).
For background information it is useful to be aware that there are two methods of
valuing the non-controlling interest at acquisition (IFRS 3: para. 19):
 Fair value method
 Proportionate share method
In the Financial Statements of Limited Companies CBT the proportionate share
method will be used. Therefore, task data will state that:
'Parent Plc has decided that non-controlling interest will be valued at their
proportionate share of net assets.'
An example of the NCI working is as follows:
NCI £000
Share capital – attributable to NCI X
Share premium – attributable to NCI X
Retained earnings – attributable to NCI X
Revaluation reserve – attributable to NCI X
X

Activity 5: Apple Ltd

Apple Ltd acquired 600,000 £1 ordinary shares in Orange Ltd for £4,000,000 on 1
January 20X2. At that date, the capital and reserves of Orange Ltd were:
£000
Share capital (£1 ordinary shares) 1,000
Retained earnings 5,000
6,000
Calculate the amount of goodwill arising on the acquisition.

49
Activity 6: Church plc
Church Plc acquired 75% of the issued share capital and voting rights of Steeple
Ltd at the date of the latter's incorporation on 1 January 20X5. The consideration
was £5,000,000.
Extracts of the statements of financial position for the two companies at
31 December 20X6 are shown below.
Church Plc Steeple Ltd
£000 £000
ASSETS
Non-current assets
Property, plant and equipment 10,000 7,000

Investment in Steeple Ltd 5,000 –

15,000 7,000

Current assets 8,500 5,000

Total assets 23,500 12,000

EQUITY AND LIABILITIES

Equity
Share capital (£1 ordinary shares) 12,000 4,000

Retained earnings 1,500 1,000

13,500 5,000

Liabilities
Non-current liabilities 4,000 2,000

Current liabilities 6,000 5,000

10,000 7,000

Total equity and liabilities 23,500 12,000

Further information:
 Church Plc has decided that non-controlling interest will be valued at its
proportionate share of net assets.
Required
Draft the consolidated statement of financial position for Church Plc and its
subsidiary undertaking as at 31 December 20X6.

50
 9: Group accounts: the consolidated statement of financial position

Solution
Church Plc
Consolidated statement of financial position as at 31 December 20X6
£000
ASSETS
Non-current assets

Total assets
EQUITY AND LIABILITIES
Equity

Total equity
Liabilities

Total equity and liabilities

Workings (not provided in the CBT)

Group structure

Non-controlling interest at acquisition £000

51
 Non-controlling interest at year end £000

Workings (on-screen proforma provided in the CBT)

Goodwill £000

Retained earnings £000

7 Intra-group adjustments
7.1 to 7.5
No changes

52
 9: Group accounts: the consolidated statement of financial position

Activity 8: Door plc

Door Plc acquired 60% of the issued share capital and voting rights of Window Ltd
on 31 December 20X0 for £27,000,000. At that date, Window Ltd had issued share
capital of £10,000,000 and retained earnings of £32,000,000.
Below are the statements of financial position for both companies at 31 December
20X1.
Window
Door Plc Ltd
£000 £000
ASSETS
Non-current assets
Property, plant and equipment 200,000 40,000
Investment in Window Ltd 27,000 –
227,000 40,000
Current assets
Inventories 22,000 18,000
Trade and other receivables 75,000 49,000
Cash and cash equivalents 4,000 15,000
101,000 82,000
Total assets 328,000 122,000
EQUITY AND LIABILITIES
Equity
Share capital 100,000 10,000
Retained earnings 147,000 42,000
247,000 52,000
Non-current liabilities
Bank loan – 20,000
Current liabilities
Trade and other payables 81,000 50,000
Total liabilities 81,000 70,000
Total equity and liabilities 328,000 122,000

53
Further information:
(a) There was cash in transit of £4,000,000 from Door Plc to Window Ltd at year
end.
(b) Included in Window Ltd's trade and other receivables is £40,000,000 owed
from Door Plc. Included in Door Plc's trade and other payables is £36,000,000
due to Window Ltd.
(c) During the year, Window Ltd sold some inventory to Door Plc for £40,000,000.
These goods had cost Window Ltd £30,000,000. Half of these goods still
remain in inventories at the year end. There were no intra-group balances
outstanding at the end of the year in respect of this transaction in trade
receivables or trade payables.
(d) Door Plc has decided that non-controlling interest will be valued at its
proportionate share of net assets.
Required
Draft the consolidated statement of financial position for Door Plc and its
subsidiary undertaking as at 31 December 20X1.

Solution
Door Plc
Consolidated statement of financial position
£000
ASSETS
Non-current assets

Current assets

Total assets
EQUITY AND LIABILITIES

Total equity
Non-current liabilities

54
 9: Group accounts: the consolidated statement of financial position

£000

Current liabilities

Total liabilities
Total equity and liabilities

Workings (not provided in the CBT)

Group structure

Non-controlling interest at acquisition £000

Non-controlling interest at year end £000

Adjustment for cash in transit

Debit Credit
Adjustment for cash in transit £000 £000

Intra-group cancellation
Eliminate intra-group payables and Debit Credit
receivables £000 £000

55
 Trade receivables £000

Workings (on-screen proforma provided in the CBT)

Goodwill £000

Inventories £000
Consolidated inventories (prior to any company adjustment)
Inter-company adjustment

Retained earnings £000

7.2 Intra-group loans

A company may make a loan to another member of the group. Where this arises it
must be eliminated in the consolidated financial statements.
For example, if a parent has made a loan of £10,000 to a subsidiary, and this is
outstanding at the year end, the journal to eliminate it in the group statement of
financial position is:

56
 9: Group accounts: the consolidated statement of financial position

Intra-group cancellation
Eliminate intra-group loan and loan receivable Debit Credit
£ £
Intra-group loan payable (subsidiary – SOFP) 10,000
Intra-group loan receivable (parent – SOFP) 10,000

8 Fair value adjustments

Let us remind ourselves that goodwill is defined as:
£
Consideration transferred X
Less fair value of identifiable assets and liabilities at acquisition (X)
X

Assets and liabilities in an entity's own financial statements are often not stated at
their fair value.
The identifiable assets and liabilities of subsidiaries are, therefore, required to be
brought into the consolidated financial statements at their fair value rather than their
book value.
The difference between fair values and book values is a consolidation adjustment.
In the group financial statements adjustments need to be made to:
 Non-current assets (which reflects control of assets on the SOFP)
 Goodwill (amount attributable to the parent in respect of the fair value
adjustment)
 Non-controlling interest (amount attributable to NCI in respect of the fair value
adjustment)

57
Illustration 5 – Fair value adjustments
Hardy Plc acquired 80% of the issued share capital and voting rights of Woolf Ltd
on 31 December 20X1 for £3,000,000.

Sta tem ents of fina ncia l position (ex tra ct) a s a t 3 1 December 2 0 X 1

Ha rdy Plc W oolf Ltd

£000 £000

N on-current a ssets

Property, plant and equipment 5,000 2,200

Investment in W oolf Ltd 3,000

8,000 2,200

Equity

Share capital 5,000 2,000

Retained earnings 900 500

5,900 2,500

Further information:
• At 31 December 20X1 the fair value of the non-current assets of Woolf Ltd
was £300,000 more than carrying value. This valuation has not been
recorded in the books of Woolf Ltd (ignore any effect of depreciation for the
year).
• Hardy Plc has decided that non-controlling interest will be valued at their
proportionate share of net assets.
Complete the extracts to the consolidated statement of financial position for
Hardy Plc and its subsidiary undertaking for the year ended 31 December
20X1.

58
 9: Group accounts: the consolidated statement of financial position

Ha rdy Plc
Consolida ted sta tement of fina ncia l position (ex tra ct) a s a t
3 1 December 2 0 X 1

Ha rdy Plc
£000
N on-current a ssets
Goodwill 760

Property, plant and equipment (5,000 + 2,200 + 300) 7,500

8,260

Equity
Share capital – £1 ordinary shares 5,000

Retained earnings 900

N on-controlling interest 560

6,460

W ork ings (not provided in the CBT)

Group structure

Workings (on-screen proforma provided in the CBT)

Goodwill £000
Consideration 3,000

Non-controlling interest at acquisition 560

Net assets acquired (2,800)

760

59
 Non-controlling interest (NCI) at acquisition/ £000
year end
Share capital – attributable to NCI (2,000 × 400
20%)
Retained earnings – attributable to NCI (500 × 100
20%)
Revaluation reserve – attributable to NCI (300 60
× 20%)
560

9 Assessment-standard question
Now that we have considered a range of consolidation adjustments we will work
through an Assessment-standard question.
The next example provides the necessary practice in preparing a consolidated
statement of financial position.
In group accounts questions you will be required to process a number of
adjustments in one question.
To be successful in these tasks, a solid method is vital. The steps you should follow are
to:
(1) Read the requirement(s) and scan the task.
(2) Review the 'further information' carefully and identify which on-screen
workings are available.
(3) Work methodically down the statements of financial position for the parent and
the subsidiary. Enter the figures:
 In a financial statement proforma (if they require no further adjustment)
 In an on-screen working (if they require adjustment and an on-screen
working is provided)
 On scrap paper (if they require adjustment and an on-screen working is
not provided)
(4) Complete the workings and include your totals in the proforma.
(5) Then, total your consolidated statement of financial position.
(6) Review your answer carefully, checking you have dealt with all the items. Does
it make sense?
Note: In the Assessment you will need to click on a pop-up box for the 'further
information'.

60
 9: Group accounts: the consolidated statement of financial position

Activity 9: Morse Plc

Morse Plc acquired 60% of the issued share capital and voting rights of Lewis Ltd
on 1 January 20X0 for £24,000,000. At that date, Lewis Ltd had issued share capital
of £10,000,000, share premium of £5,000,000 and retained earnings of
£11,263,000.
Extracts of the statements of financial position for the two companies at
31 December 20X0 are shown below.
Statements of financial position as at 31 December 20X0
Morse Plc Lewis Ltd
£000 £000
ASSETS
Non-current assets
Property, plant and equipment 63,781 27,184

Investment in Lewis Ltd 24,000 –

87,781 27,184

Current assets
Inventories 18,283 14,684

Trade and other receivables 29,474 14,023

Cash and cash equivalents 2,872 88

50,629 28,795

Total assets 138,410 55,979

EQUITY AND LIABILITIES

Equity
Share capital 45,000 10,000

Share premium 13,000 5,000

Retained earnings 33,416 17,763

Total equity 91,416 32,763

Non-current liabilities
Long-term loans 25,000 8,000

Current liabilities
Trade and other payables 16,231 15,042

Tax liability 5,763 174

61
 Morse Plc Lewis Ltd
£000 £000
21,994 15,216

Total liabilities 46,994 23,216

Total equity and liabilities 138,410 55,979

Further information:
(a) At 1 January 20X0 the fair value of the non-current assets of Lewis Ltd was
£2,500,000 more than carrying amount. This valuation has not been recorded
in the books of Lewis Ltd (ignore any effect of depreciation for the year).
(b) Included in Morse Plc's trade and other receivables is £13,000,000 owed from
Lewis Ltd. Included in Lewis Ltd's trade and other payables is £13,000,000 due
to Morse Plc.
(c) During the year Morse Plc sold some inventory to Lewis Ltd for £50,000,000.
These goods had cost Morse Plc £30,000,000. A quarter of these goods still
remain in inventories at the year end. There were no intra-group balances
outstanding at the end of the year in respect of this transaction in trade
receivables or trade payables.
(d) The directors of Morse Plc have concluded that goodwill has been impaired by
£674,000 during the year.
(e) Morse Plc has decided that non-controlling interest will be valued at its
proportionate share of net assets.
Required
Draft the consolidated statement of financial position for Morse Plc and its
subsidiary undertaking as at 31 December 20X0.

62
 9: Group accounts: the consolidated statement of financial position

Solution
Morse Plc
Consolidated statement of financial position as at 31 December 20X0
£000
ASSETS
Non-current assets

Current assets

Total assets
EQUITY AND LIABILITIES

Total equity
Non-current liabilities

Current liabilities

Total liabilities
Total equity and liabilities

63
Picklist: Cash and cash equivalents, Goodwill, Inventories, Long-term loans,
Property, plant and equipment, Non-controlling interest, Retained earnings, Share
capital, Share premium, Tax liability, Trade and other payables, Trade and other
receivables, Non-controlling interest at acquisition, Non-controlling interest at year
end, Net assets acquired
Workings (not provided in the CBT)
Group structure

Non-controlling interest at acquisition £000

Non-controlling interest at year end £000

Eliminate intra-group receivable and Debit Credit

payable £000 £000

64
 9: Group accounts: the consolidated statement of financial position

Workings (on-screen proforma provided in the CBT)

Goodwill £000

Inventories £000
Consolidated inventories (prior to any company adjustment)
Inter-company adjustment

Retained earnings £000

Note: In the Assessment picklists for the narrative entries are provided for the on-
screen workings.

65
Activity answers

Activities 1 to 3 - no changes
Activity 4: Thatch plc
Draft the consolidated statement of financial position for Thatch Plc and its
subsidiary undertaking as at 31 December 20X6.
Thatch Plc
Consolidated statement of financial position as at 31 December 20X6
£000
ASSETS
Non-current assets
Property, plant and equipment (10,000 + 5,000) 15,000

Goodwill (W) 2,000

17,000

Current assets (4,000 + 5,000) 9,000

Total assets 26,000

EQUITY AND LIABILITIES

Equity
Share capital 9,000

Retained earnings (W) 8,000

17,000

Liabilities
Non-current liabilities 2,000

Current liabilities (5,000 + 2,000) 7,000

9,000

Total equity and liabilities 26,000

Workings (not provided in the CBT)

Group structure
Thatch Plc
100%
Straw Ltd

66
 9: Group accounts: the consolidated statement of financial position

Workings (on-screen proforma provided in the Assessment)

Goodwill £000
Consideration 8,000

Net assets acquired: £3m + £2m (5,000)

Impairment (1,000)

2,000

Retained earnings £000

Parent 6,000

Subsidiary – attributable to Thatch Plc (5,000 – 2,000) × 100% 3,000

Less impairment (1,000)

8,000

Activity 5: Apple Ltd

Calculate the amount of goodwill arising on the acquisition.
£ 400,000

Goodwill:
£000
Consideration (price paid) 4,000
Non-controlling interest at acquisition 2,400
Net assets acquired: £1m + £5m (6,000)
400

Working: non-controlling interest at acquisition £000

Share capital attributable to NCI (40%  1,000) 400

Retained earnings attributable to NCI (40%  5,000) 2,000
2,400

67
Activity 6: Church plc
Draft the consolidated statement of financial position for Church Plc and its
subsidiary undertaking as at 31 December 20X6.
Church Plc
Consolidated statement of financial position as at 31 December 20X6
£000
ASSETS
Non-current assets
Property, plant and equipment (10,000 + 7,000) 17,000

Goodwill (W) 2,000

19,000

Current assets (8,500 + 5,000) 13,500

Total assets 32,500

EQUITY AND LIABILITIES

Equity
Share capital 12,000

Retained earnings (W) 2,250

Non-controlling interest (W) 1,250

Total equity 15,500

Liabilities
Non-current liabilities (4,000 + 2,000) 6,000

Current liabilities (6,000 + 5,000) 11,000

17,000

Total equity and liabilities 32,500

Workings (not provided in the CBT)

Group structure
Church Plc
75%
Steeple Ltd

68
 9: Group accounts: the consolidated statement of financial position

Non-controlling interest at acquisition £000

Share capital – attributable to NCI (4,000 × 25%) 1,000

Retained earnings – attributable to NCI (acquired on incorporation 0

1,000

Non-controlling interest at year end £000

Share capital – attributable to NCI (4,000 × 25%) 1,000

Retained earnings – attributable to NCI (1,000 × 25%) 250

1,250

69
Workings (on-screen proforma provided in the CBT)
Goodwill £000
Consideration 5,000

Non-controlling interest at acquisition 1,000

Net assets acquired (share capital only) (4,000)

2,000

Retained earnings £000

Parent 1,500

Subsidiary – attributable to Church Plc (1,000 × 75%) 750

2,250

Activity 7: Intra-group balances

Calculate the amount for trade receivables included in the consolidated
statement of financial position.

£ 33,500

Trade receivables:
£
X Ltd 20,000
Y Ltd 15,000
Less inter-company balance (1,500)
33,500
Note: Don't make the mistake of taking 80% of Y's receivables!

70
 9: Group accounts: the consolidated statement of financial position

Activity 8: Door Plc

Draft the consolidated statement of financial position for Door Plc and its
subsidiary undertaking as at 31 December 20X1.
Door Plc
Consolidated statement of financial position
£000
ASSETS
Non-current assets
Property, plant and equipment (200,000 + 40,000) 240,000

Goodwill (W) 1,800

241,800

Current assets
Inventories (W) 35,000

Trade receivables (W) 84,000

Cash and cash equivalents (4,000 + 15,000 + 4,000) 23,000

142,000

Total assets 383,800

EQUITY AND LIABILITIES

Share capital 100,000

Retained earnings (W) 150,000

Non-controlling interest (W) 18,800

Total equity 268,800

Non-current liabilities
Bank loan 20,000

Current liabilities
Trade payables (81,000 + 50,000 – 36,000) 95,000

Total liabilities 115,000

Total equity and liabilities 383,800

Workings (not provided in the CBT)

Group structure
Door Plc

71
 60%
Window Ltd

Non-controlling interest at acquisition £000

Share capital – attributable to NCI (10,000 × 40%) 4,000
Retained earnings – attributable to NCI 32,000 × 40%) 12,800
16,800

Non-controlling interest at year end £000

Share capital – attributable to NCI (10,000 × 40%) 4,000
Retained earnings – attributable to NCI ((42,000 – 5,000) × 40%) 14,800
18,800

Adjustment for cash in transit

Adjustment for cash in transit Debit Credit
£000 £000
Cash 4,000
Trade receivables 4,000

Intra-group cancellation
Eliminate intra-group payables and Debit Credit
receivables £000 £000
Trade payables (Window Ltd) 36,000
Trade receivables (Door Plc) 36,000

Trade receivables £000

Door Plc 75,000

Window Ltd 49,000

Cash in transit from Door Plc to Window Ltd (4,000)

Intra-group receivables (36,000)

84,000

72
 9: Group accounts: the consolidated statement of financial position

Workings (on-screen proforma provided in the CBT)

Goodwill £000
Consideration 27,000

Non-controlling interests at acquisition 16,800

Net assets acquired: £10m + £32m) (42,000)

1,800

Inventories £000
Consolidated inventories (prior to any company adjustment) 40,000
Inter-company adjustment (5,000)
35,000

Retained earnings £000

Parent 147,000
Subsidiary – attributable to Door Plc ((42,000 – 32,000 – 5,000)
× 60%) 3,000
150,000

Activity 9: Morse Plc

Draft the consolidated statement of financial position for Morse Plc and its
subsidiary undertaking as at 31 December 20X0.
Morse Plc
Consolidated statement of financial position as at 31 December 20X0
£000
ASSETS
Non-current assets
Goodwill (W) 6,068

Property, plant and equipment (63,781 + 27,184 + 2,500) 93,465

99,533

Current assets
Inventories (W) 27,967

Trade and other receivables (29,474 + 14,023 – 13,000) 30,497

Cash and cash equivalents (2,872 + 88) 2,960

73
 £000
61,424

Total assets 160,957

EQUITY AND LIABILITIES

Share capital 45,000

Share premium 13,000

Retained earnings (W) 31,642

Non-controlling interest (W) 14,105

Total equity 103,747

Non-current liabilities
Long-term loans (25,000 + 8,000) 33,000

Current liabilities
Trade and other payables (16,231 + 15,042 – 13,000) 18,273

Tax liability (5,763 + 174) 5,937

24,210

Total liabilities 57,210

Total equity and liabilities 160,957

Workings (not provided in the CBT)

Group structure
Morse Plc
60%
Lewis Ltd

Non-controlling interest at acquisition £000

Share capital – attributable to NCI (40% of 10,000) 4,000

Share premium – attributable to NCI (40% of 5,000) 2,000

Retained earnings – attributable to NCI (40% of 11,263) 4,505

Revaluation reserve – attributable to NCI (40% of 2,500) 1,000

11,505

74
 9: Group accounts: the consolidated statement of financial position

Non-controlling interest at year end £000

Share capital – attributable to NCI (40% of 10,000) 4,000

Share premium – attributable to NCI (40% of 5,000) 2,000

Retained earnings – attributable to NCI (40% of 17,763) 7,105

Revaluation reserve – attributable to NCI (40% of 2,500) 1,000

14,105

Eliminate intra-group receivable and Debit Credit

payable £000 £000
Trade payable to Morse Plc 13,000
Trade receivable from Lewis Ltd 13,000

75
Workings (on-screen proforma provided in the CBT)
Goodwill £000
Consideration 24,000

Non-controlling interest at acquisition 11,505

Net assets acquired (10,000 + 5,000 + 11,263 + 2,500) (28,763)

Impairment (674)

6,068

Inventories £000
Consolidated inventories (prior to any company adjustment) 32,967

Inter-company adjustment (1/4 × (50,000 – 30,000)) (5,000)

27,967

Retained earnings £000

Parent (33,416 – 5,000) 28,416

Subsidiary – attributable to Parent (17,763 – 11,263) × 60% 3,900

Impairment (674)

31,642

76
 9: Group accounts: the consolidated statement of financial position

Test your learning

6 The following statements of financial position relate to Salt plc and its subsidiary,
Pepper Ltd, at 31 March 20X7:
Salt plc Pepper Ltd
£000 £000
Assets
Non-current assets:
Property, plant and equipment 8,000 6,000
Investment in Pepper Ltd 4,000 –
12,000 6,000
Current assets:
Inventories 2,400 1,440
Trade and other receivables 2,640 2,400
Cash and cash equivalents 480 360
5,520 4,200
Total assets 17,520 10,200
Equity and liabilities
Equity:
Share capital (£1 ordinary shares) 5,000 1,000
Retained earnings 7,960 6,200
Total equity 12,960 7,200
Non-current liabilities 1,200 1,080
Current liabilities:
Trade payables 2,500 1,700
Tax payable 860 220
3,360 1,920
Total liabilities 4,560 3,000
Total equity and liabilities 17,520 10,200
Additional data:
(1) Salt plc purchased 800,000 ordinary shares in Pepper Ltd on 1 April 20X5
when the retained earnings reserve of Pepper Ltd was £2,500,000.
(2) At 31 March 20X7, the trade payables of Salt plc included £960,000 which
was owed to Pepper Ltd.
Required
Prepare the consolidated statement of financial position of Salt plc and its
subsidiary as at 31 March 20X7.
Consolidated statement of financial position as at 31 March 20X7
£000
Assets
Non-current assets:
Intangible assets: Goodwill
Property, plant and equipment

77
 £000

Current assets:
Inventories
Trade and other receivables
Cash and cash equivalents

Total assets
Equity and liabilities
Equity attributable to owners of the parent:
Share capital
Retained earnings

Non-controlling interest
Total equity
Non-current liabilities
Current liabilities:
Trade payables
Tax payable

Total liabilities
Total equity and liabilities

Workings
(Complete the left-hand column by writing in the correct narrative from the list
provided.)
Goodwill £000


Picklist for line items:

Consideration
Non-controlling interest at acquisition

78
 9: Group accounts: the consolidated statement of financial position

Net assets acquired

Retained earnings £000


Picklist for line items:

Pepper Ltd attributable to Salt plc
Salt plc

Non-controlling interest at acquisition £000



Non-controlling interest at year end £000



Picklist for line items:

Current assets attributable to NCI
Non-current assets attributable to NCI
Consideration
Retained earnings attributable to NCI
Share capital attributable to NCI

79
80
Test your learning: Answers (relevant extracts)
Supplement amendments
Amendments are highlighted.

CHAPTER 5 The statement of cash flows

6 (a) Reconciliation of profit before tax to net cash from operating
activities for the year ended 30 June 20X5
£000
Profit before tax 270
Depreciation 305
Finance costs 62
Increase in inventories (1,009 – 960) (49)
Increase in receivables (826 – 668) (158)
Increase in trade payables (641 – 563) 78
Cash generated from operations 508
Interest paid (62)
Tax paid (53)
Net cash from operating activities 393

81
 (b) Statement of cash flows for the year ended 30 June 20X5
£000 £000
Net cash from operating activities 393
Investing activities:
Purchase of property, plant and equipment (W) (559)
Net cash used in investing activities (559)
Financing activities:
Increase in long-term loan (610 – 460) 150
Dividends paid (59)
Net cash from financing activities 91
Net increase (decrease) in cash and cash (75)
equivalents for the year
Cash and cash equivalents at the beginning of 100
the year
Cash and cash equivalents at the end of the 25
year

Working
Property, plant and equipment £000
Property, plant and equipment at the beginning of the year 1,776
Depreciation (305)
Property, plant and equipment at the end of the year (2,030)
(559)

Alternative working
Property, plant and equipment
£000 £000
Balance b/f 1,776 Depreciation 305
Additions (bal fig) 559 Balance c/f 2,030
2,335 2,335

82
 Test your learning: Answers

CHAPTER 9 Group accounts: the consolidated statement of

financial position
3 (a) Goodwill
£1,000,000
£1,400,000
£2,000,000
£2,350,000 
£000
Consideration 9,000
NCI on acquisition 5% × (5,000 + 2,000) 350
Net assets acquired (5,000 + 2,000) (7,000)
2,350
6 Consolidated statement of financial position as at
31 March 20X7
£000
Assets
Non-current assets:
Intangible assets: Goodwill (W2) 1,200

Property, plant and equipment (8,000 + 6,000) 14,000

15,200

Current assets:
Inventories (2,400 + 1,440) 3,840

Trade and other receivables (2,640 + 2,400 – 960) 4,080

Cash and cash equivalents (480 + 360) 840

8,760

Total assets 23,960

83
 £000
Equity and liabilities
Equity attributable to owners of the parent:
Share capital 5,000

Retained earnings (W3) 10,920

15,920

Non-controlling interest (W4) 1,440

Total equity 17,360

Non-current liabilities (1,200 + 1,080) 2,280

Current liabilities:
Trade payables (2,500 + 1,700 – 960) 3,240

Tax payable (860 + 220) 1,080

4,320

Total liabilities 6,600

Total equity and liabilities 23,960

Workings
(1) Group structure
Salt plc owns 80% (800,000/1,000,000) of the equity share capital of
Pepper Ltd.

(2)
Goodwill £000
Consideration 4,000
Non-controlling interest at acquisition 700
Net assets acquired: £1m + £2.5m (3,500)
1,200

(3)
Retained earnings £000
Salt plc 7,960
Pepper Ltd attributable to Salt plc (80%  6,200 – 2,500) 2,960
10,920

84
 Test your learning: Answers

(4)
Non-controlling interest at acquisition £000
Share capital attributable to NCI (20%  1,000) 200

Retained earnings attributable to NCI (20%  2,500) 500

700

(5)
Non-controlling interest at year end £000
Share capital attributable to NCI (20%  1,000) 200

Retained earnings attributable to NCI (20%  6,200) 1,240

1,440

85