Topic VI : Statement of Cash Flow IAS 7

A cash flow statement may easily be understood as a summary of the cashbook – set out using
standard formats. The standard formats require the cash movements as per cashbook to be
summarised in the cash flow statement in 3 categories:
1) Operating activities
2) Investing activities
3) Financing activities

Operating activities
The amount of cash flows arising from operating activities is a key indicator of the extent to which the
operations of the enterprise have generated sufficient cash flows to repay loans, maintain the operating
capability of the enterprise, pay dividends and make new investments without recourse to external
sources of financing. Information about the specific components of historical operating cash flows is
useful, in conjunction with other information, in forecasting future operating cash flows.

Cash flows from operating activities are primarily derived from the principal revenue-producing activities
of the enterprise. Therefore, they generally result from the transactions and other events that enter into
the determination of net profit or loss. Examples of cash flows from operating activities are:
(a) Cash receipts from the sale of goods and the rendering of services;
(b) Cash receipts from royalties, fees, commissions and other revenue;
(c) Cash payments to suppliers for goods and services;
(d) Cash payments to and on behalf of employees;
(e) Cash receipts and cash payments of an insurance enterprise for premiums and claims, annuit-
ies and other policy benefits;
(f) Cash payments or refunds of income taxes unless they can be specifically identified with finan-
cing and investing activities; and
(g) Cash receipts and payments from contracts held for dealing or trading purposes.

Some transactions, such as the sale of an item of plant, may give rise to a gain or loss which is
included in the determination of net profit or loss. However, the cash flows relating to such transactions
are cash flows from investing activities.

An enterprise may hold securities and loans for dealing or trading purposes, in which case they are
similar to inventory acquired specifically for resale. Therefore, cash flows arising from the purchase
and sale of dealing or trading securities are classified as operating activities. Similarly, cash advances
and loans made by financial institutions are usually classified as operating activities since they relate to
the main revenue-producing activity of that enterprise.

Investing Activities
The separate disclosure of cash flows arising from investing activities is important because the cash
flows represent the extent to which expenditures have been made for resources intended to generate
future income and cash flows. Examples of cash flows arising from investing activities are:
(a) Cash payments to acquire property, plant and equipment, intangibles and other long-term as-
sets. These payments include those relating to capitalised development costs and self-con-
structed property, plant and equipment;
(b) Cash receipts from sales of property, plant and equipment, tangibles and other long-term as-
sets;
(c) Cash payments to acquire equity or debt instruments of other enterprises and interests in joint
ventures (other than payments for those instruments considered to be cash equivalents and
those held for dealing or trading purposes);
(d) Cash receipts from sales of equity or debt instruments of other enterprises and interests in joint
ventures (other than receipts for those instruments considered to be cash equivalents and
those held for dealing or trading purposes);
 (e) Cash advances and loans made to other parties (other than advance and loans made by a fin -
ancial institution);
(f) cash receipts from the repayment of advances and loans made to other parties (other than ad-
vances and loans of a financial institution);
(g) Cash payments for future contracts, forward contracts, option contracts and swap contracts ex-
cept when the contracts are held for dealing or trading purposes, or the payments are classified
as financing activities; and
(h) Cash receipts from future contracts, forward contracts, option contracts and swap contracts ex-
cept when the contracts are held for dealing or trading purposes, or the receipts are classified
as financing activities.
When a contract is accounted for as a hedge of an identifiable position , the cash flows of the
contracts are classified in the same manner as the cash flows of the position being hedged.

Financing Activities
The separate disclosure of cash flows arising from financing activities is important because it is
useful in predicting claims on future cash flows by providers of capital to the enterprise. Examples
of cash flows arising from financing activities are;
(a) Cash proceeds from issuing shares or other equity instruments;
(b) Cash payments to owners to acquire or redeem the enterprise’s shares
(c) Cash proceeds from issuing debentures, loans, notes, bonds mortgages and other short or
long-term borrowings;
(d) Cash repayments of amounts borrowed; and
(e) Cash payments by a lessee for the reduction of the outstanding liability relating to a finance
lease.

The first category (operating activity) cash flows may be arrived at by two methods;
(a) The direct method – whereby major classes of gross cash receipts and gross cash payments are
disclosed; or
(b) The indirect method – whereby the net profit or loss is adjusted for the effects of transactions of a
non-cash nature and accruals/prepayments
[The examiner prefers the indirect method as less raw data needs to be supplied to the candidate and a
more rigorous understanding of cash flow statements is expected from the candidate]
Even though both methods lead to the same end results, the direct method is more recommended as it
provides more information to the user of the financial statements.

Format for cash flow statement (using direct cash flow method
Operating activities Sh Sh
Cash receipts from customers X
Cash paid to suppliers and employees (X)
Cash generated from operations X
Interest paid/received (X)
Income taxes paid (X)
Net cash flow from operating activities X
Investing activities
Purchase of property plant and equipment (X)
Proceeds on disposal of equipment X_
Net cash flow from investing activities X
Financing activities
Proceeds from issuance of share capital X
Redemption and purchase of share capital (X)
Proceeds from long- term borrowings X
Repayments on long-term borrowings (X)
Payments on finance lease obligations (X)
Dividends paid (X)
Net cash flow from financing activities X_
Net change in cash and cash equivalents X
Cash and cash equivalents b/f X_
Cash and cash equivalents c/f XX

Format for cash flow statements (using indirect cash flow method)
Sh Sh
Net profit before tax X
Adjustment for items not involving movement of cash
Depreciation X
Profit and losses on fixed asset disposals X_
X
Adjustment for working capital items
(Increase)/Decrease in stocks X
(Increase)/Decrease in debtors X
(Decrease)/Increase in creditors X.
Cash generated from operations X
Tax paid (X)
Net cash inflow from operating activities X
Investing Activities
Purchase of property plant and equipment (X)
Proceeds on disposal of equipment X_
Net cash flow from investing activities X
Financing Activities
Proceeds from issuance of share capital X
Redemptions and purchase of share capital (X)
Proceeds from long-term borrowings X
Repayments on long-term borrowings (X)
Payments on finance lease obligations (X)
Dividends paid (X)
Net cash flow from financing activities X_
Net change in cash and cash equivalents X
Cash and cash equivalents b/f X_
Cash and cash equivalents c/f XX

Illustration 1
The Statement of Financial Position of Spendthrift Ltd for the years ended 31 December, 19X1 and 31
December 19X2 were summarised and shown below:
19X2 19X1
Fixed assets (at written down values) Kshs Kshs
Premises 10,000 10,000
Fixtures 17,000 11,000
Vehicles 12,500 8,000

Current assets
Stock 17,000 14,000
Debtors 8,000 6,000
Bank and cash 23,000 29,500
87,500 78,500
Ordinary shares ofKshs1 per share 60,000 50,000
Reserves
Profit and Loss 5,000 4,000
Creditors due in less than one year
Trade creditors 4,000 2,500
Taxation 1,500 1,000
Proposed dividends 2,000 1,000
Creditors due in more than one year
10% debentures 15,000 20,000
87,500 78,500

Note: The 10% debentures were redeemed and cancelled on 31 December 19X2

The profit and Loss account for the year ended 31 December 19X2 was summarised thus:

Kshs Kshs
Turnover 36,250
Cost of sales (21,750)
Gross profit 14,500
Profit on disposal of vehicles 700
15,200
Less:
Wages and salaries 1,600
Other (cash) expenses 3,600
Depreciation 3,500
Debenture interest 2,000
10,700
Profit before tax 4,500
Less: Tax 1,500
Profit after tax 3,000
Less: Proposed dividends (2,000)
Retained profit: for year 1,000
: Brought forward 4,000
: Carried forward 5,000

Separate bank and cash accounts for the year ended 31 December 19X2 were summarised as shown
below:
Ca Ca
Bank sh Bank sh
Kshs Ks Ksh Ks
hs s hs
Opening balance b/d 25,300 4,200 Payment to trade 23,250 -
Receipts from debtors 30,500 3,750 creditors 700 900
Receipts from fixed asset Wages, salaries 2,400 1,200
disposals – vehicles 1,200 500 Other expenses 2,000
Ordinary share issue 10,000 - Debenture interest
Transfer from cash 4,650 - Fixed assets 7,000 -
fixtures 8,000 -
vehicles 1,000
Tax paid 1,000
Dividends paid 5,000
10% debentures: 4,650
_ _ redeemed 21,300 1,700
Transfer to bank
Closing balances c/d
71,650 8,450 71,650 8,450
 Opening balances b/d 21,300 1700
Solution (refer only to cash book for 1st solution)

Spendthrift Ltd
Cash flow statement for the eyar ended 31 December 19X2 (Direct Method)
Operating activities Kshs Kshs
Cash receipts from customers (30500 + 3750) 34,250
Cash paid to suppliers and employees (23250 + 700 + 900) (24,850)
Other cash payments (2400 + 1200) (3,600)
Cash generated from operations 5,800
Tax paid (1,000)
Debenture interest paid (2,000)
Net cash inflow from operating activities 2,800
Investing activities
Payments to acquire fixtures (7,000)
Payments to acquire vehicles (8,000)
Proceeds on disposal of vehicles 1,700
Net cash outflow from investing activities (13,300)
Financing Activities
Ordinary share issue 10,000
Redemption of debentures (5,000)
Dividends paid (1,000)
4,000
Net change in cash and cash equivalents (6,500)
Cash and cash equivalents b/f (25,300 + 4,200) 29,500_
Cash and cash equivalents c/f (21,300 + 1,700) 23,000

Note:
1) When all cash movements have been brought in, the opening cash is added thereon to generate
the closing cash
2) Under the direct method, the cash flow statement has been drawn up from the cash book only.
3) The term “cash and cash equivalents” refers to:
 Cash in hand
 Cash at bank
 Short-term investments
For the solution using the indirect method, no reference to the cash book is made. Information
provided to enable preparation of the cash flow statement under this method consists:
1) Beginning of the year Statement of Financial Position
2) End of year Statement of Financial Position
3) A profit and loss account for the year
4) Additional information
Thus accounts need reconstruction to obtain required values for the cash flow statement to be
drawn up.

Spendthrift Ltd
Cash flow statement for the year ended 31 December 19X2 (Indirect method)
Operating activities Kshs Kshs
Net profit before tax 4,500
Adjustment for items not involving movement of funds
Depreciation 3,500
Profit on disposal of vehicles (700)
7,300
Adjustment for working capital items
Increase in stock (3,000)
Increase in debtors (2,000)
Increase in creditors (trade) 1,500
Cash generated from operations 3,800
Taxation paid (1,000)
Net cash inflow from operating activities 2,800
Investing activities
Payments to acquire fixtures (7,000)
Payments to acquire vehicles (8,000)
Proceeds on disposal of vehicles 1,700
Net cash outflow from investing activities (13,300)
Financing activities
Ordinary share issue 10,000
Redemption of debentures (5,000)
Dividends paid (1,000)
4,000
Net change in cash and cash equivalents (6,500)
Cash and cash equivalents b/f (25,300 + 4,200) 29,500 _
Cash and cash equivalents c/f (21,300 + 1,700) 23,000 _

Illustration 2
The following information was extracted from the books of Kibo Ltd. for the year ended 30 june 1994
and 1993.
30 June 1994 30 June 1993
Fixed Assets: Sh ‘000’ Sh ‘000’ Sh ‘000’ Sh ‘000’
Land at cost 2,450 1,450
Buildings at cost 1,350 1,350
Less: Provision for depreciation (75) 1,275 ( 50) 1,300
Plant and machinery 3,522 3,000
Less: Provision for depreciation (522) 3,000 ( 300) 2,700
Investment at cost 850 800
Total fixed assets 7,575 6,250
Current Assets:
Stocks 2,600 1,600
Debtors 1,150 1,450
Cash and bank balances 25 950
3,775 4,000
Current Liabilities:
Creditors 2,500 1,600
Dividends 530 400
Total current liabilities (3,030) (2,000)
Net Current Assets 745 2,000
Net Assets 8,320 8,250

Financed By:
Share capital: Ordinary shares of Sh.10 each 3,200 3,000
12.5% Preference shares Sh20 each 2,050 1,250
10% Redeemable preference shares (Sh.100 par) 500 1,000
Reserves: Share premium 470 300
Capital redemption reserve 300 -
General reserve 300 500
Profit and Loss account 530 320
Total shareholder funds 7,350 6,370
7% Debentures 970 1,880
8,320 8,250

The following additional information is available for the year:

(i) Land was purchased by issuing 40,000 12.5% preference shares of Sh20 at par fully paid at a
premium of 25%.
(ii) Half of the redeemable preference shares were redeemed at Sh.110. The premium was paid
out of share premium account. For this purpose, 20,000 ordinary shares were issued fully paid
for cash at a premium of 10%. The capital redemption reserve was created out of transfer from
general reserve.
(iii) A plant which had cost Sh.95,000 was sold for Sh.35,000. Depreciation on the plant at the time
of disposal was Sh.78,000.
(iv) 7% Sh1,000,000 debentures were redeemed for Sh.900,000.
Required:
A cash flow statement for the year ended 30 June 1994. (20 marks)

Solution
This has been accomplished using a step by step “account reconstruction” process.

Step 1: In order to deal with note 1 as per the question;

Reconstruct a) Land at cost A/C
b) 12.5% preference share capital account
c) Share premium account

Land at cost
Sh ‘000’ S
Balance b/d (93 Statement of Financial Position) h ‘000’
1,450 Balance c/d (94 Statement of Financial
12.5% Preference share capital (40,000 x 20) 800 Position) 2,450
Share premium (25% x 800) 200
2,450 2,450

12.5% Preference Share Capital

Sh ‘000’ Sh ‘000’
Balance c/d (94 Statement of Financial Position) Balance b/d (93 Statement of Financial Position)
2,050 1,250
Land at cost
800
2,050 2,050

Share Premium
Sh ‘000’ Sh ‘000’
Balance c/d (93 Statement of Financial Position)
? 300
Balance c/d Land at cost
470 200
? _ ? _

Notes:
1) The objective is to be able to trace any cash movements by identifying “cash book entries” in the
accounts.
2) By the time the opening balances in the accounts have been brought in as per opening Statement
of Financial Position and other transactions posted therein, the closing balances should be as per
closing Statement of Financial Position.
3) The share premium account is incomplete; it will be redrawn later after incorporating information in
note2 to the question.

Step 2:
Note 2 on the question paper has 3 distinct areas
a) Redemption of shares (preference)
b) Issue of shares (ordinary)
c) Transfer to CRR

In order to account for the redemption, the following accounts are necessary:
a) Redeemable preference share capital account
b) Share redemption account
c) Share premium account (continued from step 1).

10% Redeemable Preference Share Capital

Sh ‘000’ Sh ‘000’
Redemption account (1/2 x 1,000) Balance b/d
500 1,000
Balance c/d
500 _
1,000 1,000

Share Premium
Sh ‘000’ Sh ‘000’
Redemption account (10% x 500) Balance b/d
50 300
Balance c/d Land at cost
470 200
? _ ?_

Redemption A/C
Sh ‘000’ Sh ‘000’
Preference share capital
Cash book* 500
550 Share premium
50
550 550
* Missing entry – This is a cash flow – it will appear in the cash flow statement under “financing
activities”.

Note: The share premium account is still not complete

It is now necessary to construct the following accounts in order to record the second transaction in note
(2) of the question:
a) Ordinary share capital
b) Share premium account
 Ordinary Share Capital
Sh ‘000’ Sh ‘000’
Balance b/d (93 Statement of Financial Position)
Balance c/d (94 Statement of Financial Position) 3,000
3,200 Cash book (20,000 x 10)
200
3,200 3,200

Share Premium
Sh ‘000’ Sh ‘000’
Redemption account 50 Balance b/d 300
Balance c/d 470 Land at cost 200
Cash book 20
520 520

Notes:
- The share premium account is now complete
- In the cash flow statement, the amount shown as “proceeds from sale of shares” will be
Sh.220,000. This can be found in:
- Share capital account – Sh.200,000
- Share premium account – Sh.20,000

The final part of note (2) on the question paper requires the following accounts:
a) Capital redemption reserve
b) General Reserve

Capital Redemption Reserve

Sh ‘000’ Sh ‘000’
Balance c/d (94 Statement of Financial Position) General Reserve 300
300
Balance b/d 300

General Reserve
Sh ‘000’ Sh ‘000’
Capital redemption reserve 300 Balance b/d (93 Statement of Financial Position)
Balance c/d (94 Statement of Financial Position) 500
300 Profit and Loss* 100
600 600

* Missing entry – It is deduced from here that the directors must have approved a transfer of
Sh.100,000 from Profit and Loss to general reserve, even though such information is not given.
This can be confirmed upon reconstruction of the Profit and Loss.

Sh ‘000’ Sh ‘000’
Net profit before tax (8) 840
Tax (assumed) 0_
Profit after tax (7) 840
Transfer to general reserve (5) 100
Dividends (4) 530 (6)(630)
Retained profit: Year (3) 210
 b/f (2) 320
c/f (1) 530

Note the numbering this is the order in which entries are made to reconstruct the Profit and Loss.

In order to comply with note (3), the following accounts need to be reconstructed:
a) Plant and machinery
b) Provision for depreciation on plant and machinery account.
c) Plant disposal account.
Plant A/C
Sh ‘000’ Sh ‘000’
Balance b/d 3,000 Disposal 95
Cash book* 617 Balance c/d 3,522
3,617 3,617

Provision for depreciation

Sh ‘000’ Sh ‘000’
Disposal 78 Balance b/d 300
Balance c/d 522 Profit and Loss 300
600 600

Plant Disposal
Sh ‘000’ Sh ‘000’
Plant account: Cost 95 Provision for depreciation 78
Profit and Loss: Profit* 18 Cash book 35
113 113

* Missing entry in the accounts

Note (4) on the question paper indicates that there was a redemption of debentures. The following
accounts will thus be drawn up:
a) 7% Debentures Account
b) Debenture Redemption Account.

7% Debentures
Sh ‘000’ Sh ‘000’
Debenture redemption 1,000 Balance b/d 1,880
Balance c/d 970 Cash book* 90
1,970 1,970

Debenture Redemption
Sh ‘000’ Sh ‘000’
Cash book 900 7% Debentures 1,000
Profit on redemption* 100
1,000 1,000

* Missing entries
Note: It may be assumed that there has been a fresh issue of debentures of which Sh.90 (thousand)
has already been received.
Finally, the provision for depreciation on buildings is reconstructed as follows:

Provision for depreciation

 Sh ‘000’ Sh ‘000’
Balance c/d 75 Balance b/d 50
Profit and Loss* 25
75 75

KIBO LTD.
Cash flow statements for the year ended 30 June ’94
Operating Activities Sh ‘000’ Sh ‘000’
Profit before tax 840
Adjustment for:
Depreciation (buildings) 25
Depreciation (plant) 300
Profit on redemption of debentures (100)
Profit on plant disposal (18)
1,047
Increase in stocks (1,000)
Decrease in debtors 300
Increase in creditors 900
Net cash inflow from operating activities 1,247
Investing Activities
Purchase of plant and machinery (617)
Purchase of investments (50)
Proceeds on plant disposal 35
Net cash outflow from investing activities (632)

Financing Activities
Issue of ordinary shares 220
Redemption of preference shares (550)
Issue of debentures 90
Redemption of debentures (900)
Dividends paid (400)
Net cash outflow from financing activities (1,540)
Net decrease in cash and cash equivalents (925)
Cash and cash equivalents b/f 950
Cash and cash equivalents c/f 25

Tutorial note:
The profit and loss A/C should normally have been given.
When this is not the case, it should be reconstructed.
If not information is provided, it is deemed that the dividend in the final Statement of Financial Position
is the one appearing in the Profit and Loss; whereas the one appearing in the beginning of year
Statement of Financial Position was paid in the course of the year.
Dividends
Sh ‘000’ Sh ‘000’
Cash book 400 Balance b/d 400
Balance c/d 530 Profit and Loss 530
930 930

Illustration 3
The financial statements listed below were prepared from the books of WVF Ltd. In respect of the year
ended 31 March 1997
Statement of Financial Position as at 31 March
1996 1997
 Sh ‘000’ Sh ‘000’ Sh ‘000’ Sh ‘000’
Ordinary share capital of Sh.10 33,600 49,000
Share premium account 8,400 9,800
Profit and Loss account 24,080 39,424
Shareholders’ funds 66,080 98,224
Debenture stock, 12% (1996 – 2001) 15,400 15,400
Owings on finance lease 10,080 16,800
91,560 130,424

Represented by:
Fixed assets: at cost 84,000 120,372
Accumulated depreciation (16,800) (27,972)
67,200 92,400
Current assets: Stock 19,040 27,160
Debtors 15,680 21,560
Cash 5,040 6,440
39,760 55,160
Current Liabilities:
Creditors 7,560 6,048
Finance lease obligations 1,008 1,680
Taxation 784 336
Proposed dividends 3,360 6,720
Bank overdraft 2,688 2,352
15,400 17,136
Net current assets 24,360 38,024
Net assets 91,560 130,424

Profit and Loss account for the year ended 31 March 1997
Sh ‘000’ Sh ‘000’
Turnover 112,560

Profit for the year 31,248

After charging:
Depreciation 12,432
Interest 4,368
Directors’ remuneration 3,136
Auditor’s fees 560
Investment income: interest receivable 1,008
32,256
Taxation (7,392)
Profit after tax 28,864
Dividends: Interim paid (2,800)
: Final proposed (6,720) 9,520
Retained profit for the year 15,344

The following additional information is provided:

1. On 1 October 1996, a bonus issue of one share for every four held was made. Two months later,
shareholders were offered the right to purchase one share for every six shares held at a price of
Sh.12 per share. The market price was Sh.18 per share.
2. The debenture holders have the option of converting their stock into ordinary shares at par value.
3. Fixed assets which had cost Sh7,644,000 and in which accumulated depreciation on 1 April 1996
was Sh.1,260,000 were sold during the year at a profit of Sh.336,000; this profit is included in the
profit for the year. The company acquired some fixed assets from ART (Ltd). on a finance lease for
Sh.10,416,000. The assets were capitalised.
4. The composition of the interest charge shown in the profit and loss account is as follows:

Sh ‘000’
Interest on bank overdraft 504
Finance charges on finance leases 2,016
Interest on 12% debentures 1,848
4,368

Required:
(a) A cash flow statement for WVF Ltd. for the year ended 31 March 1997 in accordance with IAS 7
(17
marks)
(b) Comment on the position revealed by the cash flow statement. (3 marks)
(Total: 20 marks)

Solution
Ordinary Share Capital
Sh ‘000’ Sh ‘000’
Balance c/d (97 Statement of Financial Position) Balance b/d (96 Statement of Financial Position)
49,000 33,600
Reserves: bonus issue (1/4 x 33,600) 8,400
Cash book: rights issue 7,000
49,000 49,000

Notes:
1. Ordinary shares b/f: 3,360,000 shares @ 10/= 33,600,000
Bonus issue (1/4) 840,000 shares @ 10/= 8,400,000
4,200,000 shares @ 10/= 42,000,000
Rights issue (1/6 700,000 shares @ 10/= 7,000,000
4,900,000 49,000,000

2. Bonus issues entail the following entries:

DR Reserves (any reserve)
CR Share capital
There are two reserves on the Statement of Financial Positions; share premium and profit and loss.
The reserve that has been used in the profit and loss because the share premium account is
reconstructed without a “Bonus issue” entry therein:

Share Premium
Sh ‘000’ Sh ‘000’
Balance c/d 9,800 Balance b/d 8,400
Cash book: rights issue 1,400
9,800 9,800

Notes:
The number of shares issued on right was 700,000.
The selling price per share was Sh.12 though the par value is sh.10. Therefore, the premium per share
is Sh.2.
Total premium collected = 700,000 x 2 = 1,400,000.

Lessor A/C
Sh ‘000’ Sh ‘000’
 Cash book* 5,040 Balance b/d (long-term) 10,080
Balance b/d (current) 1,008
Balance c/d (long-term) 16,800 Finance charges 2,016
Balance c/d current 1,680 Fixed assets (capitalised) 10,416
23,520 23,520

The ‘cash book’ entry is the missing entry – and will appear in the cash flow statement at two different
points:
Sh ‘000’
1) Under operating activities (Finance Charges) 2,016
2) Under financing activities (principal) 3,024
5,040

Fixed Assets
Sh ‘000’ Sh ‘000’
Balance b/d 84,000 Disposal 7,644
Lessor 10,416 Balance c/d 120,372
Cash book* 33,600
128,016 128,016

Provision for Depreciation

Sh ‘000’ Sh ‘000’
Disposal 1,260 Balance b/d 16,800
Balance c/d 27,972 Profit and Loss* 12,432
29,232 29,232

Disposal
Sh ‘000’ Sh ‘000’
Fixed Assets 7,644 Provision for depreciation 1,260
Profit and Loss: Profit 336 Cash book* 6,720
7,980 7,980

Notes:
* Missing entries to complete the accounts.

Tax A/C
Sh ‘000’ Sh ‘000’
Cash book* 7,840 Balance b/d 784
Balance c/d 336 Profit and Loss 7,392
8,176 8,176
Dividends
Sh ‘000’ Sh ‘000’
Cash book* 6,160 Balance b/d 3,360
Balance c/d 6,720 Profit and Loss 9,520
12,880 12,880

Notes:
* Missing entries.
The actual cash flow statement may now be drawn up as follows:

WVF
Cash flow statement for the year ended 31 December 1997
Operating Activities Sh ‘000’ Sh ‘000’
Net profit before tax 32,256
Adjustments from non-cash items:
Depreciation 12,432
Profit on disposal (336)
Bonus issue 8,400
52,752
Adjustment for working capital items:
Increase in stock (8,120)
Increase in debtors (5,880)
Decrease in creditors (1,512)
Cash generated from operations 37,240
Tax paid (7,840)
Net cash inflow from operating activities 29,400
Investing Activities
Purchase of fixed assets (33,600)
Proceeds on asset disposal 6,720
Net cash inflow from investing activities (26,880)
Financing Activities
Rights issue of ordinary shares 8,400
Capital repayments on leases (3,024)
Dividends paid (6,160)
Net cash outflow from financing activities (784)
Net increase in cash and cash equivalents 1,736
Cash and cash equivalents b/f (5,040 – 2,688) 2,352
Cash and cash equivalents c/f (6,440 – 2,352) 4,088
Illustration 4
Gatitu Farm
1994 1993
Sh. Sh. Sh. Sh.
Cost NBV Cost NBV
Fixed Asets:
Freehold land and buildings 1,200,000 1,200,000 1,200,000
Plant and machinery 8,580,000 8,500,000
Less Accumulated depreciation (5,340,000) 3,240,000 (4,000,000) 4,500,000
Motor vehicles 600,000 400,000
Less Accumulated depreciation (240,000 360,000 100,000 300,000
) 4,800,000 10,000,000 6,000,000
10,380,000
Goodwill at cost 1,400,000 1,400,000
Current Assets
Debtors 1,946,520
Stock and work in progress 2,208,000 1,334,200
Cash and bank balances 2,406,000 69,900
24,980 3,350,620
Current Liabilities 4,640,000
Creditors 336,840
Bank loans and overdrafts 499,120 914,860
Taxation 652,820 1,520,000
Proposed ordinary dividends 640,000 400,000
400,000 (2,191,940) (3,171,700)
Working capital 2,448,440 178,920
8,648,440 7,578,920
Represented by:
Authorised share capital:
100,000 Redeemable preference
shares of Sh.20 each 2,000,000 2,000,000
250,000 ordinary shares of Sh.20 5,000,000 5,000,000
each 7,000,000 7,000,000

Issued Share Capital:

13% Redeemable preference shares 5,000,000 2,000,000
of 1,648,440 4,000,000
Sh.20 each 6,648,440 6,000,000
Ordinary shares of Sh.20 each fully 2,000,000 1,578,920
paid 7,578,920
Capital redemption Reserve 1,000,000 - - _
Funds 400,000 200,000
Share premium 248,000 1,378,920
Unappropriated profit
15% unsecured loan stock
8,648,440 7,578,920

Required:
(a) A statement of source and application of funds for the year ended 31 December 1994. (14 marks)

(b) Comment on the significant changes which have taken place during the year under the follow-
ing headings:
(i) Solvency (3 marks)
 (ii) Capital gearing (3
marks)
(Total: 20
marks)

In this question, it was necessary to reconstruct the P & L.

Sh. Sh.
Net profit before tax 909,520 (9)
Tax (640,000) (8)
Profit after tax 269,520 (7)
Add: Profit and Loss b/f 1,378,920 (6)
1,648,440 (5)
Transfer to reserves 1,000,000 (2)
Dividends 400,000 (3) (1,400,000) (4)
Profit and Loss c/f 248,440 (1)

Notes: -
The numbers indicate the order in which the P&L is reconstructed. The tax, dividends and P&L c/f are
obtained from the closing Statement of Financial Position.

There was a transfer to capital redemption reserve from revenue reserves. The only revenue reserve is
Profit and Loss.

Other notes
There is no information on disposals or revaluation of fixed assets;
The only change must be due to purchases. The bank loans and overdrafts fall under cash and cash
equivalents.

Gatitu Farm
Cash flow statement for the year ended 31 December 1994
Operating activities Sh. Sh.
Net profit before tax 909,520

Adjustment for items not involving movement of cash

Depreciation plant and machinery 1,340,000
Depreciation on motor vehicles 140,000
2,389,520

Adjustment for working capital items

Increase in debtors (262,400)
Increase in stock and work-in-progress (1,072,280)
Increase in creditors 162,280
Cash generated from operations 1,217,120
Tax paid (1,520,000)
Net cash outflow from operating activities (302,880)

Investing activities
Purchase of plant and machinery 80,000
Purchase of motor vehicle (200,000)
Net cash outflow from investing activities (280,000)

Financing activities
Redemption of preference shares (2,000,000)
Issue of ordinary shares 1,200,000
Loan stock 2,000,000
Dividend paid (400,000)
Net cash inflow from financing activities 800,000
Change in cash and cash equivalents 217,120
Cash and cash equivalents b/f (844,960)
Cash and cash equivalents c/d 627,840
Notes: -
(1) The ordinary shares must have been issued at a premium due to the change in share premium.
(2) Analysis of cash and cash equivalents

Cash at bank Bank loans and overdrafts Total

At 31 Dec 93 69,900 914,860
844,960
31 Dec 94 24,980 652,820
627,840
Net cash flow as per cash flow statement
217,120

Illustration 5
The following trial balances were extracted from the books of TR Co. Ltd.
31 March 1995 31 March
1996
Sh. ‘000’ Sh. ‘000’
6% Debentures (2030 A.D) 30,000
20,000
Ordinary Shares of Sh.5 each 20,000 45,000
Share premium account - 15,000
Sales - 107,006

Creditors 7,520 9,050

Reserves and retained profit 35,963 18,963
Corporation tax (due 1 Jan 1996) 4,200 -
Provision for bad and doubtful debts 9 11
Provision for depreciation – Freehold buildings 4,023
5,164
- Machinery and motor vehicles 9,671
10,732
Profit on redemption of debentures -
1,700
Profit on sale of machinery -
95
Proposed final dividend 1,567 -
Provision for maintenance of properties 325
268
Bank overdraft 85 -
.
113,363
232,989

Opening stock 8,853

10,625
Cost of sales -
95,042
Debtors 9,577 12,024
Trade loans to customers 3,750
4,950
Freehold land at cost 13,200
16,200
Freehold buildings at cost 56,075
58,760
Machinery and motor vehicles 18,422
20,652
Investment at cost 3,486
4,024
Interim dividend paid -
1,383
Balance at bank _ -
9,329
113,363
232,989

The following transactions took place during the year:

(1) there was a bonus issue of shares of one for one to the ordinary share holders, followed by a rights
issue of one share for every eight shares held at a price of Sh.20 per share.
(2) The freehold land was re-valued from Sh.13,200,000 to Sh.16,200,000, the increase in valuation
being transferred to reserves.
(3) Machinery costing Sh.2,700,000 and with a book value of Sh.600,000 was sold at a profit of
sh.95,000.
(4) Part of the debentures were redeemed at a profit of Sh1,700,000.

Required:
(a) A statement of source and application of funds for the year ended 31 march, 1996 complying
with the Kenya Accounting Standards No.7 (15 marks)
(b) Comment on the position revealed by the statement of source and application of funds
(5 marks)

(N.B. The candidate has the option to apply either the revised or the previous standard).

(Total: 20 marks)

TR Co. Ltd.
Trading Profit and Loss A/C for the year ended 31st March 1996
Sh ‘000’ Sh
‘000’
Sales
107,006
Cost of sales
(95,042)
Gross Profit
11,964
Profit on machinery disposal 95
Profit on debenture redemption 1,700
Tax 0 _
1,795
Profit after tax
13,759
Profit and Loss b/f
35,963
49,722
Transfer to share capital/bonus shares 20,000
Dividend (interim) 1,383 (21,383)
Profit and Loss c/f
28,339

TR Co. Ltd
Statement of Financial Position as at 31st March 1996
Sh ‘000’ Sh ‘000’
Sh ‘000
Fixed Assets: Cost Depr.
NBV
Tangibles
Freehold land 16,200 NIL
16,200
Freehold building 58,760 5,164
53,596
Machinery 20,652 10,732
9,920
95,612 15,896
79,716
Investments
Sundry investments
4,024

83,740
Current Assets:
Stock
10,625
Debtors 12,024
Less: provisions (11) 12,013
Trade loans
4,950
Bank
9,329

36,917
Current Liabilities:
Creditors 9,050
Provision for maintenance 268 (9,318) 27,599
111,339
Financed by:
Ordinary share capital 45,000
Capital reserves:
Share premium 15,000
Revaluation reserve 3,000 18,000
Revenue reserves
Profit and Loss c/f 28,339
Shareholders funds 91,339
6% Debentures 20,000
111,339
TR Co. Ltd
Cash flow statement for the year ended 31st March 1996
Operating activities Sh ‘000’ Sh
‘000’
Net profit before taxation 13,759
Adjustment for items not involving movement of cash
Profit on debenture redemption (1,700)
Provision of depreciation on: Buildings 1,141
: Machinery and motor vehicles 3,161
Profit on machinery disposal (95)
Reduction in provision for maintenance (57)
16,209
Adjustment of working capital items
Increase in stock (1,772)
Increase in debtors (2,445)
Increase in trade loans (1,200)
Increase in creditors 1,530
Cash generated from operations 12,322
Tax paid (4,200)
Net cash inflow from operating activities
8,122

Investing activities
Purchases of building (2,685)
Machinery and motor vehicles (4,930)
Purchase of investments (538)
Purchase on sale of fixed asset (machinery) 695
Net cash outflow from investing activities (7,458)
Financing activities
Debentures redemption (8,300)
Issue of ordinary shares 20,000
Dividends paid (2,950)
Net cash flow financing activities
8,750
Change in cash and cash equivalents
9,414
Change in cash and cash equivalents b/f
(85)
Change in cash and cash equivalents c/d
9,329