CHAPTER 19
STATEMENT OF CASH FLOWS
(SINGLE COMPANY)*
* See Chapter 33 for consolidated statement of cash flows
Connolly – International Financial Accounting and Reporting – 4th Edition
19.1 INTRODUCTION
•
•
•
•
Profit v Cash
ST v LT
SPLOCI v SFP
SCF
Connolly – International Financial Accounting and Reporting – 4th Edition
Key questions
• Did the company’s profits generate sufficient funds for its
continued operations?
• Is the company capable of generating funds, as opposed to
profit from its trading activities?
• Why has the bank overdraft increased, despite the company
having had a profitable year?
• How has the company financed its increased non-current
assets? Did it finance them from non-current sources or
from operating activities?
• What was done with the loan that was taken out during the
year?
• How did the company meet its dividend and interest
payments? Was it from operating activities, from increased
borrowing or from the sale of non-current assets?
Connolly – International Financial Accounting and Reporting – 4th Edition
19.2 IAS 7 STATEMENT OF CASH FLOWS
Objective
To provide users with a mechanism for assessing the ability of
the entity to generate cash and cash equivalents and the needs
of the enterprise to utilise those cash flows
Scope
An enterprise should prepare a statement of cash flows as an
integral part of their financial statements
1. Single company (See Chapter 19)
2. Group (See Chapter 33)
Connolly – International Financial Accounting and Reporting – 4th Edition
Key definitions
• Cash
Cash on hand and demand deposits
• Cash equivalents
Short-term, highly liquid investments, readily convertible to
known amounts of cash and subject to insignificant risk of
changes in value
• Cash flows
Cash + cash equivalents
Connolly – International Financial Accounting and Reporting – 4th Edition
Format of statement of cash flows
Cash flows should be classified under the following
headings:
• Operating Activities
The principal revenue-producing activities and other
activities that are not investing or financing activities
• Investing Activities
Acquisition and disposal of long-term assets and other
investments not included in cash equivalents
• Financing Activities
Those that result in changes in the size and composition of
the equity capital and borrowings
Connolly – International Financial Accounting and Reporting – 4th Edition
Figure 19.1: Summarised statement of cash flows
€’000
Cash flows from operating activities
X
Cash flows from investing activities
X
Cash flow from financing activities
X
Net increase/ (decrease) in cash and
cash equivalents during period
X
Cash and cash equivalents at the beginning of period
X
Cash and cash equivalents at end of period
X
Connolly – International Financial Accounting and Reporting – 4th Edition
Cash flows from operating activities
•
•
By direct method = encouraged, or
By indirect method = required
Connolly – International Financial Accounting and Reporting – 4th Edition
Cash flows from operating activities
DIRECT METHOD
INDIRECT METHOD
Cash received from customers
- Cash payments to suppliers
- Cash paid to employees
- Other cash payments
+ Interest received*
- Interest paid*
- Tax paid
- Dividends paid*
= Net cash inflow from operating
activities
Depreciation charges
- Profit on disposal of equipment
- Increase in inventories
- Increase in receivables
+ Increase in payables
= cash generated from operations
+ Interest received*
- Interest paid*
- Tax paid
- Dividends paid*
= Net cash inflow from operating
activities
Connolly – International Financial Accounting and Reporting – 4th Edition
Interest and dividends*
•
•
Cash flows from interest and dividends received and
paid should be disclosed separately
Each should be disclosed consistently from period to
period as operating, investing or financing
Connolly – International Financial Accounting and Reporting – 4th Edition
Figure 19.2: Direct method of presenting operating cash flows
€’000
Cash received from customers
Cash Payments to suppliers
Cash paid to and on behalf of employees
Other cash expenses
Cash generated from operations
Interest received
Interest Paid
Tax Paid
Dividend Paid
Net cash flow from operating activities
Connolly – International Financial Accounting and Reporting – 4th Edition
X
(X)
(X)
(X)
X / (X)
X
(X)
(X)
(X)
X / (X)
Figure 19.3: Indirect method of presenting operating cash flows
€’000
Profit before Tax
Depreciation charges
(Profit) / Loss on disposal
Interest expense
(Increase) / decrease in receivables
(Increase) / decrease in inventory
Increase / (decrease) in payables
Cash generated from operations
Interest received
Interest Paid
Tax Paid
Dividend Paid
Net cash flow from operating activities
Connolly – International Financial Accounting and Reporting – 4th Edition
X
X
(X) / X
X
(X) / X
(X) / X
X / (X)
X / (X)
X
(X)
(X)
(X)
X / (X)
Example 19.1: Net cash flow from operating activities (indirect method)
The following financial information relates to ABC Ltd for the
year ended 31 December 2012:
Statement of Profit or Loss and Other Comprehensive Income
for the Year Ended 31 December 2012
€’000
Revenue
Operating expenses
Profit from operations
Finance cost
Profit before tax
Income tax expense
Profit for year
Connolly – International Financial Accounting and Reporting – 4th Edition
222
(156)
66
( 9)
57
(21)
36
Example 19.1: Net cash flow from operating activities (indirect method)
The following operating expenses were incurred in the year:
€’000
Wages
Auditors remuneration
Depreciation
Cost of material used
Gain on sale of non-current
assets
Rental Income
(36)
(6)
(42)
(111)
30
9
(156)
The following information is also available:
31-12-12
€’000
31-2-11
€’000
Inventories
21
12
Trade receivables
24
21
(15)
(9)
Trade payables
Connolly – International Financial Accounting and Reporting – 4th Edition
Example 19.1: Net cash flow from operating activities (indirect method)
Requirement: Calculate the net cash flow from operating
activities using indirect method
Solution
€’000
Profit before Tax
Adjustments for:
Depreciation
Finance cost
Gain on sale of non-current asset
Increase in inventories
Increase in receivables
Increase in payable
Connolly – International Financial Accounting and Reporting – 4th Edition
€’000
57
42
9
(30)
21
(9)
(3)
6
72
Cash flows from investing activities
•
Represent the extent to which expenditures have been
made for resources intended to generate future income and
cash flows
Examples of investing cash flows are:


Proceeds from sale of property, plant and equipment
Cash paid to purchase property, plant and equipment
Connolly – International Financial Accounting and Reporting – 4th Edition
Figure 19.4: Cash flows from investing activities
Cash paid to acquire PPE
+ Cash receipts from the sales of PPE
-/+ Cash paid/received for shares and debentures in other
entities
+/- Loans received/repaid
-/+ Dividends paid/received*
-/+ Interest paid/received*
Connolly – International Financial Accounting and Reporting – 4th Edition
Cash flows from financing activities
•
Represent cash flows to and from external providers of
capital to the entity
Examples of financing cash flows are:
 Proceeds from issue of shares
 Repayment of loan facilities
 Capital repayment of leases
 Loan proceeds
Connolly – International Financial Accounting and Reporting – 4th Edition
Figure 19.5: Cash flows from financing activities
Proceeds from share issue
- Cash paid to acquire/redeem own shares
+ Cash proceeds from issuing debentures and loans
- Capital repayments of finance leases
-/+ Dividends paid/received*
-/+ Interest paid/received*
Connolly – International Financial Accounting and Reporting – 4th Edition
Taxes on income
•
•
Disclosed separately
Operating unless can be specifically
identified as arising from financing and
investing activities
Connolly – International Financial Accounting and Reporting – 4th Edition
IAS 7 STATEMENT OF CASH FLOWS
Notes to the Statement of Cash Flows
1. Property, Plant and Equipment
2. Cash and Cash Equivalents
3. Segment Information
Other Issues
•
•
•
•
Exceptional items in the SPLOCI
Exceptional cash flows
Discontinued activities
Major non-cash transactions
Connolly – International Financial Accounting and Reporting – 4th Edition
IAS 7 STATEMENT OF CASH FLOWS
SELF TEST QUESTIONS
1. What are the standard headings under which IAS 7
requires cash flows to be classified?
2. How does IAS 7 define cash and cash equivalents?
3. What does the direct method of reporting net cash flows
from operating activities show?
4. What are the advantages of a statement of cash flows?
Connolly – International Financial Accounting and Reporting – 4th Edition
Suggested approach to statement of cash flow questions
Step 1:
Set up SCF headings. Leave plenty of space to insert detail.
Step 2:
Study additional information and mark with a cross those items
affecting SFP amounts.
Step 3:
Begin SCF by using SPLOCI to work down to operating profit before
working capital changes.
Step 4:
Proceed line by line through SFP. If an item is not marked with a
cross, the difference may be entered direct to SCF; if it is marked, a
working is required. Use working ledger accounts to calculate
missing figures. Insert the opening and closing balances from SFP
into the working accounts, and then add information from the notes
to complete the ledger account. Balancing figures on the working
accounts are then transferred to SCF.
Connolly – International Financial Accounting and Reporting – 4th Edition
Example 19.2: Statement of cash flows
CCE Limited
Connolly – International Financial Accounting and Reporting – 4th Edition
(W1) Trade Receivables
€
Opening balances
1,200 Closing balance*
Movement (bal)
600 *(1,900 – 100)
1,800
(W2) Interest and Dividends Receivable
€
500 Int. receivable c/f
SPLOCI
Div. Rec’d (bal fig)
___ Interest received
500
Connolly – International Financial Accounting and Reporting – 4th Edition
€
1,800
____
1,800
€
100
200
200
500
Cash (bal fig)
Closing balance
Cash (bal fig)
Closing balance
(W3) Interest Paid
€
270 Opening balance
230 SPLOCI
500
(W4) Income Taxes
€
720 Opening balance
400 SPLOCI (20+100)
1,120
Connolly – International Financial Accounting and Reporting – 4th Edition
€
100
400
500
€
1,000
120
1,120
(W5) Property, Plant and Equipment - Cost
€
Opening balance
1,910 Transfer disposal
Leases
900 Closing balance
Cash additions (bal)
1,000
3,810
(W6) Property, Plant and Equipment – Depreciation
€
Transfer disposal
60 Opening balance
Closings balance
1,450 SPLOCI
1,510
(W7) Property, Plant and Equipment – Disposal
€
Cost
80 Depreciation
__ Cash
80
Connolly – International Financial Accounting and Reporting – 4th Edition
€
80
3,730
_____
3,810
€
1,060
450
1,510
€
60
20
80
(W8) Long-term Debt (to reconcile balances)
€
€
Payments under FL
90 Opening balance
1,040
Closing balances
2,300 Finance leases
900
____ LT borrowing
450
2,390
2,390
(W9) Retained Earnings (to reconcile balances)
€
€
Dividend paid
1,200 Opening balance
1,380
Closing balance
3,410 SPLOCI
3,230
4,610
4,610
Connolly – International Financial Accounting and Reporting – 4th Edition
CCE LIMITED
Statement of Cash Flows Year Ended 31 December 2012
W
€
€
Cash flows from operating activities
Net profit before tax
3,350
Adjustments for:
Depreciation
450
Investment income
(500)
Interest expense
400
Op. profit from working capital changes
3,700
Increase in trade receivables
1
(600)
Decrease in inventories
950
Decrease in trade payables
(1,640)
Cash generated from operations
2,410
Interest paid
3
(270)
Income taxes paid
4
(720)
Net cash from operating activities
1,420
Connolly – International Financial Accounting and Reporting – 4th Edition
Net cash from operating activities
Cash flows from investing activities
Purchases of PPE
Proceeds of sale of equipment
Interest received
Dividends received
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issue of shares
Proceeds from long-term borrowings
Payment of finance lease liabilities
Dividends paid
Net cash used in financing activities
Net increase in C&CEs
C&CEs at beginning of period
C&CEs at end of period
W
€
5
7
2
2
(1,000)
20
200
200
Connolly – International Financial Accounting and Reporting – 4th Edition
€
1,420
(580)
250
450
(90)
(1,200)
(590)
250
160
410
(W1) Cash receipts from customers
Opening trade receivables
Sales
Less: closing trade receivables (1,900 – 100)
1,200
30,650
31,850
1,800
30,050
(W2) Cash paid to suppliers and employees
Opening trade payables
1,890
Purchases (26,000 – 1,950 + 1,000)
25,050
26,940
Less: closing trade payables
250
26,690
Administrative and selling expenses
950
27,640
Connolly – International Financial Accounting and Reporting – 4th Edition
Cash receipts from customers
Cash paid to suppliers and employees
Cash generated from ops (as in (a))
Interest paid
Income taxes paid
Net cash from op. activities (as in (a))
Connolly – International Financial Accounting and Reporting – 4th Edition
W
1
2
30,050
(27,640)
2,410
(270)
(720)
1,420
Analysis of Cash and Cash Equivalents at 31 December
2012 2011
€
€
Cash on hand and balances with banks
40
25
Short term investments
370 135
Cash and cash equivalents
410 160
Connolly – International Financial Accounting and Reporting – 4th Edition