1. Financial Accounting

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3. 3 Section F: Preparing Basic Financial Statements Designed to give you knowledge and application of: F1. Statement of financial position F3. Events after the reporting period F4. Accounting for partnerships F5. Statements of cash flows (excluding partnerships) F6. Incomplete records

4. 4 Learning outcomes F5 : Cash Flow Statement  Differentiate between profit and cash flow. [1]  Understand the need for management to control cash flow. [1]  Classify the effect of transactions on cash flows. [1]  Calculate the figures needed for the statement of cash flows including: [1]  Cash flows from operating activities  Cash flows from investing activities  Cash flows from financing activities  Calculate the cash flows from operating activities using the indirect and direct method. [1]  Prepare extracts from a statement of cash flows from given information. [1]

5. 5 Important Definitions Example  Preference shares acquired within a short period (3 months) from their maturity may be treated as cash equivalents.  Bank overdrafts repayable on demand are treated as part of cash equivalents Cash – “Cash comprises cash in hand and demand deposits” 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”

6. 6 Users can judge whether the purpose of entity’s existence is fulfilled Operating activities Principal revenue-producing activity of entity Cash receipts or payments for all items in SOCI will be included Examples  Cash flows from operating activities  Cash receipts from the sale of goods and the rendering of services  Cash receipts from royalties, fees, commission and other revenue Operating Activities

7. 7 Investing activities Acquisition and disposal of long-term assets and other investments Bring future profits Financing activities Changes in the size and composition of the contributed equity Borrowings of the entity Examples of cash flows from financing activities  Issue or redemption of shares  Borrowing and repayment of debentures, loans, notes, bonds, mortgages and other short or long-term borrowings Examples of cash flows from investing activities  Property, plant and equipment, intangibles and other long-term assets e.g. acquisition or disposal of equipment  If money is invested in new machinery, it will help the entity to produce and sell more goods, which in turn will generate more income in the future. Investing and Financing Activities

8. 8 ItemClassification Interest paid  Either under operating activity since paid out of revenues from operations or  Financing activity since it represents the cost of obtaining a financial resource Interest received  Investment activity if it represents return on investments or  Operating activity Dividend received  Investment activity if it represents return on investments or  Operating activity Dividend paid  Financing activity if it represents the cost of obtaining a financial resource or  Operating activity if paid out of revenues from operations Income taxes  Operating activities unless they can be specifically identified with financing & investing activity Sale of non – current asset  Should not be classified as an operating activity but as an investing activity Classification of Certain Specific Items

9. 9 Identify the classification of the following activities in order to prepare a statement of cash flows. A.Issue of share capital for cash B.Issue of share capital other than cash, for acquisition of business C.Payment to suppliers D.Depreciation E.Purchase of a plant F.Dividend paid G.Taxes on income Answer A.Financing activities B.Not a cash flow item, although needs a separate disclosure C.Operating activities D.It is a non-cash item. Not included in the cash flow. In the indirect method, it is added back since the starting net profit is after depreciation. E.Investing activities F.Either as a finance activity or as an operating activity. (The IAS allows flexibility to the entities to decide how to classify interest and dividends, depending upon circumstances and the judgement of management). G.Operating activities, unless they can be specifically identified with financing and investing activities. Question

10. 10 Cash flow from operating activities – direct method Prepare extracts from a Statement of Cash Flows Refer to Example on page 564 Cash flow from operating activities –indirect method Refer to Example on page 565

11. 11 Entity Outflow of cash Inflow of cash Outflow of cash I N C R E A S E D E C R E A S E Trade receivables Or Inventory Trade receivables Or Inventory Trade payables Changes in Working Capital

12. 12 The following information relates to Poly Plc. Calculate the cash flow from financing and investing activities of Poly Plc for the year to 31 August 20X9. $ Purchase of a plot of land150,000 (out of the purchase price, $50,000 is outstanding and advance paid in the last accounting year is $20,000) Sale of vehicle (book value of $92,000) 85,000 Depreciation charged during the year on non-current assets 53,000 Dividend received 156,000 Interest on the deposit in bank received 45,000 Dividend paid 50,000 Obtained loan from bank200,000 Long-term investment in bank250,000 Additional information A.Sale of long-term investments with a carrying amount of $120,000 at a loss of $25,000 B.The loan $20,000 is repaid (out of this, $12,000 is paid for interest) C.Issued 100,000 ordinary shares for cash of $5 each at premium $1 Test Yourself

13. 13 Cash flow from Investing Activities Inflow $ Sale of vehicle 85,000 Dividend received 156,000 Interest received 45,000 Sale of investment (120,000 - 25000)95,000 Purchase of plot of land(150,000 - 20,000 - 50,000) (80,000) Purchase of long term investment (250,000) Net cash flow from investing activities 51,000 Cash flow from financing activities Issue of shares 600,000 Loan from bank 200,000 Repayment of loan* (20,000) Dividend paid (50,000) Net cash flow from investing activities 730,000 *Interest payment is treated as a financing activity. Alternatively, it may be presented under operating activities Answer

14. 14 Revise  Profit earned and cash generated are different because of the following: Accounting on accrual basis Non-cash expenses such as depreciation  Cash is crucial to the business and therefore cash management is important to strike a balance between liquidity and profitability  Movement between cash and cash equivalents is not considered in the statement of cash flows  In the statement of cash flows, cash flows are classified as follows Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities  Cash flows from operating activities: arising from ordinary business activities  Cash flows from investing activities: acquisition or disposal of non-current assets, investments etc.

15. 15 RECAP  Differentiate between profit and cash flow?  Understand the need for management to control cash flow?  Classify the effect of transactions on cash flows?  Calculate the figures needed for the statement of cash flows including: Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities?  Calculate the cash flows from operating activities using the indirect and direct method?  Prepare extracts from a statement of cash flows from given information?

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