Objective of statements of cash flows
IAS 7 Statement of Cash Flows provides guidance on the preparation of a statement of cash flows. The objective of a statement of cash flows is to provide information on an entity’s changes in cash and cash equivalents during the period.
The statement of financial position and statement of profit or loss are prepared on an accruals basis and do not show how the business has generated and used cash in the reporting period. The statement of profit or loss may show profits even though the company is suffering severe cash flow problems. A statement of cash flows is therefore important because it enables users of the financial statements to assess the liquidity, solvency and financial adaptability of the business.
Definitions
- Cash consists of cash in hand and deposits repayable upon demand, less overdrafts. This includes cash held in a foreign currency.
- Cash equivalents are ‘short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value’ (IAS 7, para 6).
- Cash flows are ‘inflows and outflows of cash and cash equivalents’ (IAS 7, para 6).
2 Classification of cash flows
IAS 7 does not prescribe a specific format for the statement of cash flows, although it requires that cash flows are classified under one of three headings:
- cash flows from operating activities, defined as the entity’s principal revenue earning activities and other activities that do not fall under the next two headings
- cash flows from investing activities, defined as the acquisition and disposal of long-term assets and other investments (excluding cash equivalents)
- cash flows from financing activities, defined as activities that change the size and composition of the entity’s equity and borrowings.
| Proforma statement of cash flow per IAS 7 | |||
| Cash flows from operating activities | $ | $ | |
| X | |||
| Profit before tax | |||
| Add: finance costs | X | ||
| Less: investment income | (X) | ||
| Less: income from associate | (X) | ||
| Adjust for non-cash items dealt with in arriving at | |||
| operating profit: | |||
| Add: depreciation | X | ||
| Less: gain on disposal of subsidiary | (X) | ||
| Add: loss on disposal of subsidiary | X | ||
| Add: loss on impairment charged to P/L | X | ||
| Add: loss on disposal of non-current assets | X | ||
| Add: increase in provisions | X | ||
| –––– | |||
| Changes in working capital: | X/(X) | ||
| Increase in inventory | (X) | ||
| Increase in receivables | (X) | ||
| Decrease in payables | (X) | ||
| –––– | |||
| Cash generated/used from operations | X/(X) | ||
| Interest paid | (X) | ||
| Taxation paid | (X) | ||
| Net cash Inflow/(outflow) from operating | –––– | ||
| X/(X) | |||
| activities |
| Cash flows from investing activities | |
| Payments to purchase NCA | (X) |
| Receipts from NCA disposals | X |
| Net cash paid to acquire subsidiary | (X) |
| Net cash proceeds from subsidiary disposal | X |
| Cash paid to acquire associates | (X) |
| Dividend received from associate | X |
| Interest received | X |
| Net cash inflow/(outflow) from investing | –––– |
| activities | |
| X/(X) | |
| Cash flows from financing activities | |
| Proceeds from share issue | X |
| Proceeds from loan or debenture issue | X |
| Cash repayment of loans or debentures | (X) |
| Lease liability repayments | (X) |
| Equity dividend paid by parent | (X) |
| Dividend paid to NCI | (X) |
| Net cash inflow/(outflow) from financing | –––– |
| activities | |
| X/(X) | |
| –––– | |
| Increase/(decrease) in cash and equivalents | X/(X) |
| Cash and equivalents brought forward | X/(X) |
| –––– | |
| Cash and equivalents carried forward | X/(X) |
| –––– | |
| Classification of cash flows | |
| Cash flows from operating activities | |
The key figure within cash flows from operating activities is ‘cash generated from operations’. There are two methods of calculating cash generated from operations:
- The direct method shows operating cash receipts and payments, such as cash receipts from customers, cash payments to suppliers and cash payments to and on behalf of employees.
- The indirect method (used in the proforma statement of cash flows presented earlier in the chapter) starts with profit before tax and adjusts it for non-cash charges and credits, deferrals or accruals of past or future operating cash receipts and payments, as well as for items that relate to investing and financing activities. The most frequently occurring adjustments required are:
– finance costs and investment incomes
– depreciation or amortisation charges in the year
– impairment charged to profit or loss in the year
– profit or loss on disposal of non-current assets
– change in inventories
– change in trade receivables
– change in trade payables.
IAS 7 permits either method, although encourages the use of the direct method. The methods differ only in respect of how the item ‘cash generated from operating activities’ is derived. A comparison between the direct and indirect method to arrive at cash generated from operations is shown below:
| Direct method: | $m | Indirect method: | $m | |
| Cash receipts from customers | 15,424 | Profit before tax | 6,022 | |
| Cash payments to suppliers | (5,824) | Depreciation charges | 899 | |
| Cash payments to and on behalf (2,200) | Increase in inventories | (194) | ||
| of employees | ||||
| Other cash payments | (511) | Increase in receivables | (72) | |
| Increase in payables | 234 | |||
| –––– | –––– | |||
| Cash generated from operations | 6,889 | Cash generated from | 6,889 | |
| –––– | operations | –––– | ||
The principal advantage of the direct method is that it discloses operating cash receipts and payments. Knowledge of the specific sources of cash receipts and the purposes for which cash payments have been made in past periods may be useful in assessing and predicting future cash flows.
Cash flows from investing activities
Cash flows to appear under this heading include:
- cash paid for property, plant and equipment and other non-current assets
- cash received on the sale of property, plant and equipment and other non-current assets
- cash paid for investments in or loans to other entities (excluding movements on loans from financial institutions, which are shown under financing)
- cash received for the sale of investments or the repayment of loans to other entities (again excluding loans from financial institutions).
Cash flows from financing activities
Financing cash flows mainly comprise receipts or repayments of principal from or to external providers of finance.
Financing cash inflows include:
- receipts from issuing shares or other equity instruments
- receipts from issuing debentures, loans, notes and bonds and from other long-term and short-term borrowings (other than overdrafts, which are normally included in cash and cash equivalents).
IAS 7 says that financing cash outflows include:
- repayments of amounts borrowed (other than overdrafts)
- the capital element of lease payments
- payments to reacquire or redeem the entity’s shares.
Interest and dividends
IAS 7 allows interest and dividends, whether received or paid, to be classified under any of the three headings, provided the classification is consistent from period to period.
The practice adopted in this text is to classify:
- interest received as a cash flow from investing activities
- interest paid as a cash flow from operating activities
- dividends received as a cash flow from investing activities
- dividends paid as a cash flow from financing activities.
3 Cash and cash equivalents
The statement of cash flows reconciles cash and cash equivalents at the start of the reporting period to the end of the reporting period.
- Cash equivalents are ‘short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value’ (IAS 7, para 6).
- ‘Cash equivalents’ are held in order to meet short-term cash commitments. They are not held for investment purposes.
- IAS 7 does not define ‘readily convertible’ but notes that an investment would qualify as a cash equivalent if it had a short maturity of ‘three months or less from the date of acquisition’ (IAS 7, para 7).
- Equity investments are generally excluded from being included in cash equivalents because there is a significant risk of a change in value. IAS 7 makes an exception for preference shares with a short period to maturity and a specified redemption date.
Test your understanding 1 – Cash and cash equivalents
The accountant for Minted, a company, is preparing a statement of cash flows. She would like advice about whether the following items can be included within ‘cash and cash equivalents’.
- An overdraft of $100,000.
- A balance of $500,000 held in a high-interest account. Minted must give 28 days’ notice in order to access this money, which is held with the intention of meeting working capital shortages.
- An investment in the ordinary shares of Moolah. The shares are listed and therefore could be sold immediately. The shares have a fair value of $1m.
Required:
Advise the accountant of Minted whether the above items qualify as ‘cash and cash equivalents’.
Unusual items and non-cash transactions
Unusual cash flows
Where cash flows are unusual because of their size or incidence, sufficient disclosure should be given to explain their cause and nature.
For a cash flow to be unusual on the grounds of its size alone, it must be unusual in relation to cash flows of a similar nature.
Discontinued activities
Cash flows relating to discontinued activities are required by IFRS 5 to be shown separately, either on the face of the statement of cash flows or in a disclosure note.
Major non-cash transactions
Material transactions not resulting in movements of cash should be disclosed in the notes to the statement of cash flows if disclosure is necessary for an understanding of the underlying transactions.
4 Individual statements of cash flows
For your F3 and F7 exams, you will have learned how to prepare statements of cash flows for individual companies. It may be worthwhile taking some time to revise this knowledge using the following exercises.
Test your understanding 2 – Extracts
Calculate the required cash flows in each of the following scenarios:
| (1) | 20X1 | 20X0 |
| $ | $ | |
| Property, plant and equipment (PPE) | 250 | 100 |
During the year depreciation charged was $20, a revaluation surplus of $60 was recorded, and PPE with a carrying amount of $15 was disposed of. The carrying amount of assets recognised through lease agreements and classified as PPE was $30.
Required:
How much cash was spent on property, plant and equipment in the period?
| (2) | 20X1 | 20X0 |
| $ | $ | |
| Deferred tax liability | 100 | 50 |
| Income tax liability | 120 | 100 |
The income tax charge in the statement of profit or loss was $180.
| Required: | ||
| How much tax was paid in the period? | ||
| (3) | 20X1 | 20X0 |
| $ | $ | |
| Retained earnings | 300 | 200 |
The statement of profit or loss showed a profit for the period of $150.
Required:
How much was the cash dividend paid during the period?
Illustration – Single entity statements of cash flows
Below are the financial statements of Single for the year ended 30
September 20X2:
Statement of financial position as at 30 September 20X2 (including comparatives)
| 20X2 | 20X1 | ||
| Non-current assets | $m | $m | |
| Property, plant and equipment | 90 | 60 | |
| Current assets | 32 | 20 | |
| Inventories | |||
| Trade receivables | 20 | 27 | |
| Cash and cash equivalents | 8 | 12 | |
| ––––– | ––––– | ||
| 150 | 119 | ||
| ––––– | ––––– |
| Equity and liabilities | |||
| Share capital ($1 shares) | 30 | 5 | |
| Retained earnings | 60 | 35 | |
| ––––– | ––––– | ||
| Non-current liabilities: | 90 | 40 | |
| Loans | 10 | 29 | |
| Deferred tax | 15 | 14 | |
| Current liabilities: | |||
| Trade payables | 23 | 25 | |
| Tax payable | 12 | 11 | |
| –––––– | –––––– | ||
| 150 | 119 | ||
| –––––– | –––––– |
Statement of profit or loss for the year ended 30 September 20X2
| $m | |
| Revenue | 450 |
| Operating expenses | (401) |
| –––––– | |
| Profit from operations | 49 |
| Finance cost | (3) |
| –––––– | |
| Profit before tax | 46 |
| Tax | (12) |
| –––––– | |
| Profit for the period | 34 |
| –––––– |
Notes
- Property, plant and equipment with a carrying amount of $9 million was disposed of for cash proceeds of $13 million. Depreciation for the year was $17 million.
- Trade payables as at 30 September 20X2 includes accruals for interest payable of $4 million (20X1: $5 million).
Required:
Prepare the statement of cash flows for Single for the year ended 30 September 20X2.
Solution
| Statement of cash flows | |||
| Cash flows from operating activities | $m | $m | |
| Profit before tax | 46 | ||
| Finance cost | 3 | ||
| Depreciation | 17 | ||
| Profit on disposal of PPE | (4) | ||
| ($13 – $9) | (12) | ||
| Increase in inventories | |||
| ($32 – $20) | 7 | ||
| Decrease in receivables | |||
| ($20 – $27) | (1) | ||
| Decrease in payables | |||
| (($23 – $4) – ($25 – $5)) | ––––– | ||
| 56 | |||
| Interest paid (W1) | (4) | ||
| Tax paid (W2) | (10) | ||
| ––––– | 42 | ||
| Cash flows from investing activities | |||
| Proceeds from sale of PPE | 13 | ||
| Purchases of PPE (W3) | (56) | ||
| ––––– | (43) | ||
| Cash flows from financing activities | |||
| Proceeds from shares ($30 – $5) | 25 | ||
| Repayment of loans ($10 – $29) | (19) | ||
| Dividends paid (W4) | (9) | ||
| ––––– | (3) | ||
| ––––– | |||
| Decrease in cash and cash equivalents | (4) | ||
| Opening cash and cash equivalents | 12 | ||
| ––––– | |||
| Closing cash and cash equivalents | 8 | ||
| ––––– |
| Workings | |||
| (W1) Interest | |||
| $m | |||
| Balance b/fwd | 5 | ||
| Profit or loss | 3 | ||
| Cash paid (bal. fig.) | (4) | ||
| ––––– | |||
| Balance c/fwd | 4 | ||
| ––––– | |||
| (W2) Tax | |||
| $m | |||
| Balance b/fwd ($14 + $11) | 25 | ||
| Profit or loss | 12 | ||
| Cash paid (bal. fig.) | (10) | ||
| ––––– | |||
| Balance c/fwd ($15 + $12) | 27 | ||
| ––––– | |||
| (W3) PPE | |||
| $m | |||
| Balance b/fwd | 60 | ||
| Depreciation | (17) | ||
| Disposal | (9) | ||
| Cash paid (bal. fig) | 56 | ||
| ––––– | |||
| Balance c/fwd | 90 | ||
| ––––– | |||
| (W4) Retained earnings | |||
| $m | |||
| Balance b/fwd | 35 | ||
| Profit or loss | 34 | ||
| Cash dividends paid (bal. fig.) | (9) | ||
| ––––– | |||
| Balance c/fwd | 60 | ||
| ––––– | |||
5 Preparation of a consolidated statement of cash flows
A consolidated statement of cash flows shows the cash flows between a group and third parties. It is prepared using the consolidated statement of financial position and the consolidated statement of profit or loss. This means that intra-group transactions have already been eliminated.
When producing a consolidated statement of cash flows, there are three extra elements that need to be considered:
- acquisitions and disposals of subsidiaries
- cash paid to non-controlling interests
Acquisitions and disposals of subsidiaries
Acquisitions
- In the statement of cash flows we must record the actual cash flow for the purchase of the subsidiary net of any cash held by the subsidiary that is now controlled by the group.
- The assets and liabilities of the acquired subsidiary must be included in any workings to calculate the cash movement for an item during the year.
Illustration – Acquisition of a subsidiary
Sparkling buys 70% of the equity shares of Still for $500,000 in cash. At the acquisition date, Still had cash and cash equivalents of $25,000.
Although Sparkling paid $500,000 for the shares, it also gained control of Still’s cash of $25,000. In the consolidated statement of cash flows, this would be presented as follows:
Cash flows from investing activities
$000
Acquisition of subsidiary, net of cash acquired (475)
($500,000 – $25,000)
Disposals
- The statement of cash flows will show the cash received from the sale of the subsidiary, net of any cash held by the subsidiary that the group has lost control over.
- The assets and liabilities of the disposed subsidiary must be included in any workings to calculate the cash movement for an item during the year.
Illustration – Disposal of a subsidiary
Sparkling owned 80% of the equity shares of Fizzy. During the period, these shares were sold for $800,000 in cash. At the disposal date, Fizzy had cash and cash equivalents of $70,000.
Although Sparkling received $800,000 for the shares, it lost control of Fizzy’s cash of $70,000. In the consolidated statement of cash flows, this would be presented as follows:
Cash flows from investing activities
$000
Disposal of subsidiary, net of cash disposed of 730 ($800,000 – $70,000)
Illustration 1 – Acquisitions and disposals
Extracts from a group statement of financial position are presented below:
| 20X8 | 20X7 | |
| $000 | $000 | |
| Inventories | 74,666 | 53,019 |
| Trade receivables | 58,246 | 62,043 |
| Trade payables | 93,678 | 86,247 |
During 20X8, Subsidiary A was acquired and all shares in Subsidiary B were disposed of.
Details of the working capital balances of these two subsidiaries are provided below:
| Working capital of | Working capital of | |
| Subsidiary A | Subsidiary B | |
| at acquisition | at disposal | |
| $000 | $000 | |
| Inventories | 4,500 | 6,800 |
| Trade receivables | 7,900 | 6,700 |
| Trade payables | 8,250 | 5,740 |
Required:
Calculate the movement in inventories, trade receivables and trade payables for inclusion in the .
Solution
The net assets of Subsidiary A are being consolidated at the end of the year, but they were not consolidated at the start of the year. Conversely, the net assets of Subsidiary B are not consolidated at the end of the year, but they were consolidated at the start of the year. The working capital balances brought forward and carried forward are therefore not directly comparable.
Comparability can be achieved by calculating the movement between the closing and opening figures and then:
- Deducing the subsidiary’s balances at the acquisition date for a subsidiary acquired during the year.
- Adding the subsidiary’s balances at the disposal date for a subsidiary disposed of during the year.
| Inventories | Trade | Trade | |||
| receivables | payables | ||||
| $000 | $000 | $000 | |||
| Bal c/fwd | 74,666 | 58,246 | 93,678 | ||
| Bal b/fwd | (53,019) | (62,043) | (86,247) | ||
| ––––– | ––––– | ––––– | |||
| 21,647 | (3,797) | 7,431 | |||
| Less: Sub acquired in year | (4,500) | (7,900) | (8,250) | ||
| Add: Sub disposed in year | 6,800 | 6,700 | 5,740 | ||
| ––––– | ––––– | ––––– | |||
| Movement in the year | inc 23,947 | dec (4,997) | inc 4,921 | ||
| ––––– | ––––– | ––––– | |||
| Impact on cash flow | Outflow | Inflow | Inflow | ||
Cash paid to non-controlling interests
- When a subsidiary that is not wholly owned pays a dividend, some of that dividend is paid outside of the group to the non-controlling interest.
- Dividends paid to non-controlling interests should be disclosed separately in the statement of cash flows.
- To calculate the dividend paid, reconcile the non-controlling interest in the statement of financial position from the opening to the closing balance. You can use a T-account or a schedule to do this.
Illustration 2 – Cash paid to NCI
The following information has been extracted from the consolidated financial statements of WG, which has a year end of the 31 December:
| 20X7 | 20X6 | |
| $000 | $000 | |
| Statement of financial position | ||
| Equity: | ||
| Non-controlling interest | 780 | 690 |
| Statement of profit or loss | ||
| Profit for the period attributable to the non-controlling | 120 | 230 |
| interest |
During the year, WG bought a 70% shareholding in CC. WG uses the full goodwill method for all subsidiaries. The fair value of the non-controlling interest in CC at the acquisition date was $60,000.
During the year, WG disposed of its 60% holding in TT. At the acquisition date, the fair value of the NCI and the fair value of TT’s net assets were $35,000 and $70,000 respectively. The net assets of TT at the disposal date were $100,000.
Required:
What is the dividend paid to non-controlling interest in the year ended 31 December 20X7?
Solution
| $000 | |
| NCI b/fwd | 690 |
| NCI re sub acquired in year | 60 |
| NCI share of profit for the year | 120 |
| NCI derecognised due to subsidiary disposal (W1) | (47) |
| Cash dividend paid in year (bal. fig) | (43) |
| ––––– | |
| NCI c/fwd | 780 |
| ––––– | |
| (W1) NCI at date of TT disposal | |
| $000 | |
| FV of NCI at acquisition | 35 |
| NCI % of post-acquisition net assets | 12 |
| 40% × ($100,000 – $70,000) |
––––
47
––––
Alternatively, a T account can be used:
Non-controlling interests
| $000 | $000 | ||
| NCI derecognised re | 47 | NCI Balance b/fwd | 690 |
| sub disposal (W1) | |||
| Dividends paid (bal fig) | 43 | NCI recognised re acq’n | 60 |
| of sub | |||
| NCI Balance c/fwd | 780 | Share of profits in year | 120 |
| ––––– | ––––– | ||
| 870 | 870 | ||
| ––––– | ––––– |
Associates
An associate is a company over which an investor has significant influence. Associates are not part of the group and therefore cash flows between the group and the associate must be reported in the statement of cash flows.
Cash flows relating to associates that need to be separately reported within the statement of cash flows are as follows:
- dividends received from an associate
- loans made to associates
- cash payments to acquire associates
- cash receipts from the sale of associates.
These cash flows should be presented as cash flows from investing activities.
Remember, associates are accounted for using the equity method. This means that, in the consolidated statement of profit or loss, the group records its share of the associate’s profit for the year. This is a non-cash income and so must be deducted in the reconciliation between profit before tax and cash generated from operations.
Illustration 3 – Associates
The following information is from the consolidated financial statements of
H:
Extract from consolidated statement of profit or loss for year ended 31 December 20X1
| $000 | |
| Profit from operations | 734 |
| Share of profit of associate | 48 |
| ––––– | |
| Profit before tax | 782 |
| Tax | (304) |
| ––––– | |
| Profit for the year | 478 |
| ––––– |
Extracts from consolidated statement of financial position as at 31 December 20X1 (with comparatives)
| 20X1 | 20X0 | |
| $000 | $000 | |
| Non-current assets | ||
| Investment in associate | 466 | 456 |
| Loan to associate | 380 | 300 |
Required:
Calculate the relevant figures to be included in the for the year ended 31 December 20X1.
Solution
| Extracts from statement of cash flows | |
| $000 | |
| Cash flows from operating activities | |
| Profit before tax | 782 |
| Share of profit of associate | (48) |
| Investing activities | |
| Dividend received from associate (W1) | 38 |
| Loan to associate (380 – 300) | (80) |
(W1) Dividend received from associate
When dealing with the dividend from the associate, the process is the same as we have already seen with the non-controlling interest.
Set up a schedule or T account and include all the balances that relate to the associate. The balancing figure will be the cash dividend received from the associate.
| $000 | |
| Balance b/fwd | 456 |
| Share of profit of associate | 48 |
| Cash dividend received (bal fig) | (38) |
| ––––– | |
| Balance c/fwd | 466 |
| ––––– |
Instead of a schedule, a T-account could be used:
Associate
| $000 | $000 | |||||
| Balance b/fwd | 456 | Dividend received | 38 | |||
| (bal fig) | ||||||
| Share of profit of associate | 48 | Balance c/fwd | 466 | |||
| –––– | –––– | |||||
| 504 | 504 | |||||
| –––– | –––– | |||||
Test your understanding 3 – The Z group
The following information is from the consolidated financial statements of
Z:
Extract from consolidated statement of profit or loss for year ended 31 December 20X1
| $000 | |
| Profit from operations | 900 |
| Share of profit of associate | 15 |
| ––––– | |
| Profit before tax | 915 |
| Tax | (200) |
| ––––– | |
| Profit for the year | 715 |
| ––––– |
Extracts from consolidated statement of financial position as at 31 December 20X1 (with comparatives)
20X1 20X0
| $000 | $000 | |
| Non-current assets | ||
| Investment in associate | 600 | 580 |
During the year, Z received dividends from associates of $5,000.
Required:
Based on the above information, prepare extracts showing relevant figures to be included in the for the year ended 31 December 20X1.
6 Question practice
Test your understanding 4 – Consolidated extracts
Calculate the required cash flows in each of the following scenarios:
| (1) | 20X1 | 20X0 |
| $ | $ | |
| Non-controlling interest | 840 | 440 |
The group statement of profit or loss and other comprehensive income reported total comprehensive income attributable to the non-controlling interest of $500.
Required:
How much was the cash dividend paid to the non-controlling interest?
| (2) | 20X1 | 20X0 |
| $ | $ | |
| Non-controlling interest | 850 | 500 |
The group statement of profit or loss and other comprehensive income reported total comprehensive income attributable to the non-controlling interest of $600.
Required:
How much was the cash dividend paid to the non-controlling interest?
| (3) | 20X1 | 20X0 |
| $ | $ | |
| Investment in associate | 500 | 200 |
The group statement of profit or loss reported ‘share of profit of associates’ of $750.
Required:
How much was the cash dividend received by the group?
| (4) | 20X1 | 20X0 |
| $ | $ | |
| Investment in associate | 3,200 | 600 |
The group statement of profit or loss reported ‘share of profit of associates’ of $4,000.
In addition, the associate revalued its non-current assets during the period. The group share of this gain is $500.
Required:
How much was the cash dividend received by the group?
| (5) | 20X1 | 20X0 |
| $ | $ | |
| Property, plant and equipment | 500 | 150 |
| (PPE) |
During the year depreciation charged was $50, and the group acquired a subsidiary which held PPE of $200 at the acquisition date.
Required:
How much cash was spent on property, plant and equipment in the period?
Test your understanding 5 – AH Group
Extracts from the consolidated financial statements of the AH Group for the year ended 30 June 20X5 are given below:
Consolidated statement of profit or loss for the year ended 30 June 20X5
| $000 | |
| Revenue | 85,000 |
| Cost of sales | (60,750) |
| ––––––– | |
| Gross profit | 24,250 |
| Operating expenses | (5,650) |
| ––––––– | |
| Profit from operations | 18,600 |
| Finance cost | (1,400) |
| ––––––– | |
| Profit before disposal of property | 17,200 |
| Disposal of property (note 2) | 1,250 |
| ––––––– | |
| Profit before tax | 18,450 |
| Tax | (6,250) |
| ––––––– | |
| Profit for the period | 12,200 |
| ––––––– | |
| Attributable to: | |
| Non-controlling interest | 405 |
| Owners of the parent | 11,795 |
| ––––––– | |
| 12,200 | |
| ––––––– |
Note: There were no items of other comprehensive income.
Statement of financial position, with comparatives, at 30 June 20X5
| 20X5 | 20X4 | ||||
| Non-current assets | $000 | $000 | $000 | $000 | |
| Property, plant and | |||||
| equipment | 50,600 | 44,050 | |||
| Goodwill (note 3) | 5,910 | 4,160 | |||
| –––––– | 56,510 | –––––– | 48,210 | ||
| Current assets | |||||
| Inventories | 33,500 | 28,750 | |||
| Trade receivables | 27,130 | 26,300 | |||
| Cash and cash equivalents | 1,870 | 3,900 | |||
| –––––– | 62,500 | –––––– | 58,950 | ||
| ––––––– | ––––––– | ||||
| 119,010 | 107,160 | ||||
| ––––––– | ––––––– | ||||
| Equity and liabilities | $000 | $000 | $000 | $000 | |
| Equity shares | 20,000 | 18,000 | |||
| Share premium | 12,000 | 10,000 | |||
| Retained earnings | 24,135 | 18,340 | |||
| –––––– | 56,135 | –––––– | 46,340 | ||
| Non-controlling interest | 3,875 | 1,920 | |||
| ––––––– | ––––––– | ||||
| Total equity | 60,010 | 48,260 | |||
| Non-current liabilities | |||||
| Interest-bearing borrowings | 18,200 | 19,200 | |||
| Current liabilities | |||||
| Trade payables | 33,340 | 32,810 | |||
| Interest payables | 1,360 | 1,440 | |||
| Tax | 6,100 | 5,450 | |||
| –––––– | –––––– | ||||
| 40,800 | 39,700 |
| ––––––– | ––––––– |
| 119,010 | 107,160 |
| ––––––– | ––––––– |
Notes:
- Several years ago, AH acquired 80% of the issued equity shares of its subsidiary, BI. The NCI at the acquisition date was valued using the proportion of net assets method.
On 1 January 20X5, AH acquired 75% of the issued equity shares of CJ in exchange for a fresh issue of 2 million of its own $1 equity shares (issued at a premium of $1 each) and $2 million in cash. The net assets of CJ at the date of acquisition were assessed as having the following fair values:
| $000 | |
| Property, plant and equipment | 4,200 |
| Inventories | 1,650 |
| Trade receivables | 1,300 |
| Cash and cash equivalents | 50 |
| Trade payables | (1,950) |
| Tax | (250) |
| ––––––– | |
| 5,000 | |
| ––––––– |
Goodwill relating to the acquisition of entity CJ during the year was calculated on the full goodwill basis. On 1 January 20X5 when CJ was acquired, the fair value of the non-controlling interest was $1,750,000.
Any impairments of goodwill during the year have been accounted for within operating expenses.
- During the year, AH disposed of property, plant and equipment for proceeds of $2,250,000. The carrying value of the asset at the date of disposal was $1,000,000. There were no other disposals of property, plant and equipment. Depreciation of $7,950,000 was charged to the consolidated statement of profit or loss in the year.
Required:
Prepare the consolidated statement of cash flows of the AH Group for the year ended 30 June 20X5 using the indirect method.
Test your understanding 6 – Pearl
Below are the consolidated financial statements of the Pearl Group for the year ended 30 September 20X2:
| Consolidated statements of financial position | |||
| 20X2 | 20X1 | ||
| $000 | $000 | ||
| Non-current assets | |||
| Goodwill | 1,930 | 1,850 | |
| Property, plant and equipment | 2,545 | 1,625 | |
| Investment in associate | 620 | 540 | |
| –––––– | ––––– | ||
| 5,095 | 4,015 | ||
| Current assets | |||
| Inventories | 470 | 435 | |
| Trade receivables | 390 | 330 | |
| Cash and cash equivalents | 210 | 140 | |
| –––––– | ––––– | ||
| 6,165 | 4,920 | ||
| –––––– | ––––– | ||
| Equity and liabilities | |||
| Share capital ($1 shares) | 1,500 | 1,500 | |
| Retained earnings | 1,755 | 1,085 | |
| Other reserves | 750 | 525 | |
| –––––– | –––––– | ||
| 4,005 | 3,110 | ||
| Non-controlling interest | 310 | 320 | |
| –––––– | –––––– | ||
| Non-current liabilities: | 4,315 | 3,430 | |
| Loans | 500 | 300 | |
| Deferred tax | 150 | 105 | |
| Current liabilities: | |||
| Trade payables | 800 | 725 | |
| Tax payable | 400 | 360 | |
| –––––– | –––––– | ||
| 6,165 | 4,920 | ||
| –––––– | –––––– | ||
Consolidated statement of profit or loss and other comprehensive income for the year ended 30 September 20X2
| $000 | |
| Revenue | 2,090 |
| Operating expenses | (1,155) |
| –––––– | |
| Profit from operations | 935 |
| Gain on disposal of subsidiary | 100 |
| Finance cost | (35) |
| Share of profit of associate | 115 |
| –––––– | |
| Profit before tax | 1,115 |
| Tax | (225) |
| –––––– | |
| Profit for the period | 890 |
| Other comprehensive income | 200 |
| Other comprehensive income from associate | 50 |
| –––––– | |
| Total comprehensive income | 1,140 |
| –––––– | |
| Profit for the year attributable to: | |
| Owners of the parent | 795 |
| Non-controlling interests | 95 |
| –––––– | |
| 890 | |
| –––––– | |
| Total comprehensive income for the year attributable to: | |
| Owners of the parent | 1,020 |
| Non-controlling interests | 120 |
| –––––– | |
| 1,140 | |
| –––––– | |
| Consolidated statement of changes in equity | ||
| Attributable | Attributable to | |
| to owners | the NCI | |
| of the | ||
| parent | ||
| $000 | $000 | |
| Equity brought forward | 3,110 | 320 |
| Total comprehensive income | 1,020 | 120 |
| Acquisition of subsidiary | – | 340 |
| Disposal of subsidiary | – | (420) |
| Dividends | (125) | (50) |
| ––––– | ––––– | |
| Equity carried forward | 4,005 | 310 |
| ––––– | ––––– | |
- Depreciation of $385,000 was charged during the year. Plant with a carrying amount of $250,000 was sold for $275,000. The gain on disposal was recognised in operating costs. Certain properties were revalued during the year resulting in a revaluation gain of $200,000 being recognised.
- During the year, Pearl acquired 80% of the equity share capital of Gem paying cash consideration of $1.5 million. The NCI holding was measured at its fair value of $340,000 at the date of acquisition. The fair value of Gem’s net assets at acquisition was made up as follows:
| $000 | |
| Property, plant and equipment | 1,280 |
| Inventories | 150 |
| Trade receivables | 240 |
| Cash and cash equivalents | 80 |
| Trade payables | (220) |
| Tax payable | (40) |
| –––––– | |
| 1,490 | |
| –––––– | |
- During the year, Pearl disposed of its 60% equity shareholding in Stone for cash proceeds of $850,000. The subsidiary has been acquired several years ago for cash consideration of $600,000. The NCI holding was measured at its fair value of $320,000 at acquisition and the fair value of Stone’s net assets were $730,000. Goodwill had not suffered any impairment. At the date of disposal, the net assets of Stone had carrying values in the consolidated statement of financial position as follows:
| $000 | |
| Property, plant and equipment | 725 |
| Inventories | 165 |
| Trade receivables | 120 |
| Cash and cash equivalents | 50 |
| Trade payables | (80) |
| –––––– | |
| 980 | |
| –––––– |
Required:
Prepare the consolidated statement of cash flows for the Pearl group for the year ended 30 September 20X2.
7 Foreign exchange and cash flow statements
Exchange gains and losses
The values of assets and liabilities denominated in an overseas currency will increase or decrease partly due to movements in exchange rates. These movements must be factored into your workings in order to determine the actual cash payments and receipts during the year.
Dealing with foreign exchange issues
The loan balances of the Grey group as at 31 December 20X1 and 31
December 20X0 are presented below:
| 20X1 | 20X0 | |
| $m | $m | |
| Loans | 60 | 20 |
One of the subsidiaries of the Grey group prepares its financial statements in sterling (£). The exchange loss on the translation of the loans of this subsidiary was $10 million.
Remember that an exchange loss increases the value of a liability. This is not a cash flow. Therefore, the exchange loss must be factored into the cash flow workings as follows:
| $m | |
| Bal b/fwd | 20 |
| Exchange loss | 10 |
| Cash received (bal. fig.) | 30 |
| ––––– | |
| Bal c/fwd | 60 |
| ––––– |
The cash received from new loans in the year is $30 million. This will be shown as an inflow within cash flows from financing activities.
Illustration – Cash flows and foreign exchange
A group had the following working capital as at 31 December 20X1 and 20X0:
| 20X1 | 20X0 | |
| $ | $ | |
| Inventories | 100 | 200 |
| Trade receivables | 300 | 200 |
| Trade payables | 500 | 200 |
| During the period ended 31 December 20X1, the group acquired a | ||
| subsidiary with the following working capital. | ||
| Inventories | 50 | |
| Trade receivables | 200 | |
| Trade payables | 40 | |
During this period the group disposed of a subsidiary with the following working capital.
| Inventories | 25 |
| Trade receivables | 45 |
| Trade payables | 20 |
During this period the group experienced the following exchange rate differences.
| Inventories | 11 | Gain |
| Trade receivables | 21 | Gain |
| Trade payables | 31 | Loss |
Required:
Calculate the movements in inventories, trade receivables and trade payables as they would appear in the indirect reconciliation between profit before tax and cash generated from operations for the period ended 31 December 20X1.
Solution
| Inventories | Trade | Trade | |
| receivables | payables | ||
| $000 | $000 | $000 | |
| Bal c/fwd | 100 | 300 | 500 |
| Bal b/fwd | (200) | (200) | (200) |
| ––––– | ––––– | ––––– | |
| (100) | 100 | 300 | |
| Less: Sub acquired in year | (50) | (200) | (40) |
| Add: Sub disposed in year | 25 | 45 | 20 |
| Adjustment for forex | (11) | (21) | (31) |
| ––––– | ––––– | ––––– | |
| Movement in the year | dec (136) | dec (76) | inc 249 |
| ––––– | ––––– | ––––– | |
| Impact on cash flow | Inflow | Inflow | Inflow |
Be careful with foreign exchange gains and losses:
- Assets are increased by a foreign exchange gain
- Liabilities are increased by a foreign exchange loss.
Overseas cash balances
If cash balances are partly denominated in a foreign currency, the effect of exchange rate movements must be reported in the statement of cash flows in order to reconcile the cash balances at the beginning and end of the period.
According to IAS 7, this reconciling item is presented separately from cash flows from operating, investing and financing activities.
Illustration – Overseas subsidiary
B Group recognised a gain of $160,000 on the translation of the financial statements of a 75% owned foreign subsidiary for the year ended 31 December 20X7. This gain is found to be made up as follows
| $ | |
| Gain on opening net assets: | |
| Non-current assets | 90,000 |
| Inventories | 30,000 |
| Receivables | 50,000 |
| Payables | (40,000) |
| Cash | 30,000 |
| ––––––– | |
| 160,000 | |
| ––––––– |
The overseas subsidiary made no profit or loss in the year. No goodwill arose on acquisition.
B Group recognised a loss of $70,000 on retranslating the parent entity’s foreign currency loan. This loss has been recorded in the statement of profit or loss.
Consolidated statements of financial position as at 31 December
| 20X7 | 20X6 | |
| $000 | $000 | |
| Non-current assets | 2,100 | 1,700 |
| Inventories | 650 | 480 |
| Receivables | 990 | 800 |
| Cash | 500 | 160 |
| –––––– | –––––– | |
| 4,240 | 3,140 | |
| –––––– | –––––– | |
| Share capital | 1,000 | 1,000 |
| Group reserves | 1,600 | 770 |
| –––––– | –––––– | |
| 2,600 | 1,770 | |
| Non-controlling interest | 520 | 370 |
| –––––– | –––––– | |
| Equity | 3,120 | 2,140 |
| Long-term loan | 250 | 180 |
| Payables | 870 | 820 |
| –––––– | –––––– | |
| 4,240 | 3,140 | |
| –––––– | –––––– |
There were no non-current asset disposals during the year.
Consolidated statement of profit or loss for the year ended 31 December 20X7
| $000 | |
| Profit before tax (after depreciation of $220,000) | 2,100 |
| Tax | (650) |
| –––––– | |
| Group profit for the year | 1,450 |
| –––––– | |
| Profit attributable to: | |
| Owners of the parent | 1,190 |
| Non-controlling interest | 260 |
| –––––– | |
| Net profit for the period | 1,450 |
| –––––– |
Note: The dividend paid by the parent company of the B group during the year was $480,000.
Prepare a statement of cash flows for the year ended 31 December 20X7.
Solution
Statement of cash flows for the year ended 31 December 20X7
| Cash flows from operating activities | $000 | |
| Profit before tax | 2,100 | |
| Forex loss on loan | 70 | |
| Depreciation charges | 220 | |
| Increase in inventory (650 – 480 – 30) | (140) | |
| Increase in receivables (990 – 800 – 50) | (140) | |
| Increase in payables (870 – 820 – 40) | 10 | |
| ––––– | ||
| Cash generated from operations | 2,120 | |
| Income taxes paid | (650) | |
| ––––– | ||
| Net cash from operating activities | 1,470 | |
| ––––– | ||
| Cash flows from investing activities | ||
| Purchase of non-current assets (W1) | (530) | |
| ––––– ––––– | ||
| (530) | ||
| Cash flows from financing activities | ||
| Dividends paid to non-controlling interests (W2) | (150) | |
| Dividends paid | (480) | |
| ––––– | ||
| (630) | ||
| Exchange gain on cash | 30 | |
| ––––– | ||
| Increase in cash and cash equivalents | 340 | |
| Cash and cash equivalents at 1 Jan 20X7 | 160 | |
| ––––– | ||
| Cash and cash equivalents at 31 Dec 20X7 | 500 | |
| ––––– |
Note: There have been no proceeds from loans during the year. The loan balance has increased by $70,000 ($250,000 – $180,000) as a result of the foreign exchange loss.
| Workings | |
| (W1) Non-current assets | |
| $000 | |
| Bal b/fwd | 1,700 |
| Exchange gain | 90 |
| Depreciation | (220) |
| Additions (bal. fig.) | 530 |
| –––––– | |
| Bal c/fwd | 2,100 |
| –––––– | |
| (W2) Non-controlling interest | |
| $000 | |
| Bal b/fwd | 370 |
| Total comprehensive income* | 300 |
| Dividend paid (bal. fig.) | (150) |
| –––––– | |
| Bal c/fwd | 520 |
| –––––– |
- This is the NCI share of the subsidiary’s profit after tax ($260,000) as well as the NCI share of the foreign exchange gain (25% × $160,000)
Test your understanding 7 – Boardres
Set out below is a summary of the accounts of Boardres, a public limited company, for the year ended 31 December 20X7.
Consolidated statement of profit or loss and other comprehensive income for the year ended 31 December 20X7
| $000 | |
| Revenue | 44,754 |
| Cost of sales and other expenses | (39,613) |
| –––––– | |
| Profit from operations | 5,141 |
| Income from associates | 30 |
| Finance cost | (305) |
| –––––– | |
| Profit before tax | 4,866 |
| Tax: | (2,038) |
| ––––– | |
| Profit for the period | 2,828 |
| Other comprehensive income: Items that may be reclassified to | |
| profit or loss in future periods | |
| Total exchange difference on retranslation of foreign operations | 302 |
| (note 5) | |
| ––––– | |
| Total comprehensive income | 3,130 |
| ––––– | |
| Profit for the year attributable to: | |
| Owners of the parent | 2,805 |
| Non-controlling interests | 23 |
| ––––– | |
| 2,828 | |
| ––––– | |
| Total comprehensive income for the year attributable to: | |
| Owners of the parent (2,805 + 302) | 3,107 |
| Non-controlling interests | 23 |
| –––––– |
3,130
––––––
Summary of changes in equity attributable to the owners of the parent for the year
| $000 | ||||
| Equity b/f | 14,164 | |||
| Profit for year | 2,805 | |||
| Dividends paid | (445) | |||
| Exchange differences | 302 | |||
| ––––– | ||||
| Equity c/f | 16,826 | |||
| ––––– | ||||
| Consolidated statements of financial position at 31 December | ||||
| 20X7 | 20X6 | |||
| Non-current assets | Note | $000 | $000 | |
| Goodwill | 500 | – | ||
| Property, plant and equipment | (1) | 11,157 | 8,985 | |
| Investment in associate | 300 | 280 | ||
| –––––– | ––––– | |||
| Current assets | 11,957 | 9,265 | ||
| 9,749 | 7,624 | |||
| Inventories | ||||
| Receivables | 5,354 | 4,420 | ||
| Short-term investments | (2) | 1,543 | 741 | |
| Cash | 1,013 | 394 | ||
| –––––– | ––––– | |||
| 29,616 | 22,444 | |||
| –––––– | ––––– | |||
| Equity share capital | 1,997 | 1,997 | ||
| Share premium | 5,808 | 5,808 | ||
| Retained earnings | 9,021 | 6,359 | ||
| –––––– | –––––– | |||
| 16,826 | 14,164 | |||
| Non-controlling interest | 170 | 17 | ||
| –––––– | –––––– | |||
| Total equity | 16,996 | 14,181 | ||
| Non-current liabilities | ||||
| Loans | 2,102 | 1,682 | ||
| Provisions | (4) | 1,290 | 935 | |
| Current liabilities | (3) | 9,228 | 5,646 | |
| –––––– | –––––– | |||
| 29,616 | 22,444 | |||
| –––––– | –––––– | |||
Notes to the accounts
- Property, plant and equipment
Property, plant and equipment movements include the following:
| $000 | |
| Carrying amount of disposals | 305 |
| Proceeds from disposals | 854 |
| Depreciation charge for the year | 907 |
- Short-term investments
The short-term investments are readily convertible into cash and there is an insignificant risk that their value will change.
- Current liabilities
| 20X7 | 20X6 | ||
| $000 | $000 | ||
| Bank overdrafts | 1,228 | 91 | |
| Trade payables | 4,278 | 2,989 | |
| Tax | 3,722 | 2,566 | |
| –––––– | –––––– | ||
| 9,228 | 5,646 | ||
| –––––– | –––––– | ||
| (4) Provisions | |||
| Legal | Deferred | Total | |
| provision | taxation | ||
| $000 | $000 | $000 | |
| At 31 December 20X6 | 246 | 689 | 935 |
| Exchange rate adjustment | 29 | – | 29 |
| Increase in provision | 460 | – | 460 |
| Decrease in provision | – | (134) | (134) |
| –––––– | –––––– | –––––– | |
| At 31 December 20X7 | 735 | 555 | 1,290 |
| –––––– | –––––– | –––––– | |
- Liberated
During the year, the company acquired 82% of the issued equity capital of Liberated for a cash consideration of $1,268,000. The fair values of the assets of Liberated were as follows:
| $000 | |
| Property, plant and equipment | 208 |
| Inventories | 612 |
| Trade receivables | 500 |
| Cash in hand | 232 |
| Trade payables | (407) |
| Debenture loans | (312) |
| ––––– | |
| 833 | |
| ––––– |
- Exchange gains
The net exchange gain on translating the financial statements of a wholly-owned subsidiary has been recorded in other comprehensive income and is held within retained earnings. The gain comprises differences on the retranslation of the following:
| $000 | |
| Property, plant and equipment | 138 |
| Legal provision | (29) |
| Inventories | 116 |
| Trade receivables | 286 |
| Trade payables | (209) |
| –––– | |
| Net exchange gain | 302 |
| –––– |
(7) Non-controlling interest
The non-controlling interest is valued using the proportion of net assets method.
Required:
Prepare a statement of cash flows for the year ended 31 December 20X7.
8 Evaluation of statements of cash flows
Usefulness and limitations
Usefulness of the statement of cash flows
A statement of cash flows can provide information that is not available from the statement of financial position or statement of profit or loss and other comprehensive income.
- It may assist users of financial statements in making judgements on the amount, timing and degree of certainty of future cash flows.
- It gives an indication of the relationship between profitability and cash generating ability, and thus of the quality of the profit earned.
- Analysts and other users of financial information often, formally or informally, develop models to assess and compare the present value of the future cash flow of entities. Historical cash flow information could be useful to check the accuracy of past assessments.
- A statement of cash flow in conjunction with a statement of financial position provides information on liquidity, solvency and adaptability. The statement of financial position is often used to obtain information on liquidity, but the information is incomplete for this purpose as the statement of financial position is drawn up at a particular point in time.
- Cash flows cannot easily be manipulated and are not affected by judgement or by accounting policies.
Limitations of the statement of cash flows
Statements of cash flows should normally be used in conjunction with statements of profit and loss and other comprehensive income and statements of financial position when making an assessment of future cash flows.
- Statements of cash flows are based on historical information and therefore do not provide complete information for assessing future cash flows.
- There is some scope to ‘window dress’ cash flows. For example, a business may delay paying suppliers until after the period-end, or it may sell assets before the period-end and then immediately repurchase them at the start of the next period.
- Cash flow is necessary for survival in the short term, but in order to survive in the long term a business must be profitable. It is often necessary to sacrifice cash flow in the short term in order to generate profits in the long term (e.g. by investment in non-current assets). A substantial cash balance is not a sign of good management if the cash could be invested elsewhere to generate profit.
Neither cash flow nor profit provides a complete picture of an entity’s performance when looked at in isolation.
9 Other issues
Criticisms of IAS 7
The following criticisms have been made of IAS 7 Statement of Cash Flows
Direct and indirect method
Allowing entities to choose between using the direct or indirect method limits comparability.
Many users of the financial statements will not understand the adjustments made to profit when cash generated from operations is presented under the indirect method.
Lack of guidance and disagreements
There is insufficient guidance in IAS 7 as to how to classify cash flows.
This can create the following problems:
- IAS 7 allows dividends and interest paid to be presented as cash flows from either operating or financing activities. This limits comparability between companies.
- Entities may classify cash flows related to the same transaction in different ways (a loan repayment might be split between interest paid within operating activities and the repayment of the principal in financing activities). This could hinder user understanding.
- There are disagreements about the presentation of payments related to leases. Some argue that they should be classified as a financing activity, whereas others argue that they are a form of investment activity.
- Expenditure on research is classified as an operating activity. Some argue that they should be included within investing activities, because it relates to items that are intended to generate future income and cash flows.
Disclosures
Current cash flow disclosures are deemed to be inadequate. In particular, there is a lack of disclosure about restrictions on an entity’s ability to use their cash and cash equivalents (particularly if located overseas) and whether other sources of finance would be more economical.
Test your understanding 1 – Cash and cash equivalents
To qualify as a cash equivalent, an item must be readily convertible to cash and have an insignificant risk of a change in value. Furthermore, it should be held for the purpose of meeting short-term cash commitments.
Bank overdrafts are an integral part of most company’s cash management. They are therefore generally treated as a component of cash.
The balance of $500,000 in a high interest account is readily available (only 28 days’ notice is required to access it). This money is also held to meet short-term needs. Assuming that there is not a significant penalty for accessing this money, it should be included within cash equivalents.
The shares are not a cash equivalent. Shares are investments rather than a way of meeting short-term cash requirements. Moreover, there is a significant risk that the value of the shares will change. Any cash spent on shares in the period should be shown within cash flows from investing activities.
Test your understanding 2 – Extracts
| (1) Property, plant and equipment | ||
| $ | ||
| Bal b/fwd | 100 | |
| Revaluation | 60 | |
| Leases | 30 | |
| Depreciation | (20) | |
| Disposals | (15) | |
| Additions (bal. fig.) | 95 | |
| –––––– | ||
| Bal c/fwd | 250 | |
| –––––– |
| (2) Tax | |||
| $ | |||
| Bal b/fwd (50 + 100) | 150 | ||
| Profit or loss charge | 180 | ||
| Tax paid (bal. fig.) | (110) | ||
| –––––– | |||
| Bal c/fwd (100 + 120) | 220 | ||
| –––––– | |||
| (3) Retained earnings | |||
| $ | |||
| Bal b/fwd | 200 | ||
| Profit or loss | 150 | ||
| Dividend paid (bal. fig.) | (50) | ||
| –––––– | |||
| Bal c/fwd | 300 | ||
| –––––– | |||
Test your understanding 3 – The Z group
| Extracts from statement of cash flows | ||
| $000 | ||
| Cash flows from operating activities | ||
| Profit before tax | 915 | |
| Share of profit of associate | (15) | |
| Cash flows from investing activities | ||
| Dividend received from associate | 5 | |
| Cash paid to acquire associates (W1) | (10) | |
| (W1) Associate | ||
| $000 | ||
| Balance b/fwd | 580 | |
| Share of profit of associate | 15 | |
| Cash dividend received | (5) | |
| Cash spent on investments in associates (bal. fig) | 10 | |
| ––––– | ||
| Balance c/fwd | 600 | |
| ––––– | ||
Test your understanding 4 – Consolidated extracts
| (1) Non-controlling interest | ||
| $ | ||
| Bal b/fwd | 440 | |
| Total comprehensive income | 500 | |
| Dividend paid (bal. fig.) | (100) | |
| –––––– | ||
| Bal c/fwd | 840 | |
| –––––– | ||
| (2) Non-controlling interest | ||
| $ | ||
| Bal b/fwd | 500 | |
| Total comprehensive income | 600 | |
| Dividend paid (bal. fig.) | (250) | |
| –––––– | ||
| Bal c/fwd | 850 | |
| –––––– | ||
| (3) Associate | ||
| $ | ||
| Bal b/fwd | 200 | |
| Profit or loss | 750 | |
| Dividend received (bal. fig.) | (450) | |
| –––––– | ||
| Bal c/fwd | 500 | |
| –––––– | ||
| (4) Associate | ||
| $ | ||
| Bal b/fwd | 600 | |
| Profit or loss | 4,000 | |
| Revaluation | 500 | |
| Dividend received (bal. fig.) | (1,900) | |
| –––––– | ||
| Bal c/fwd | 3,200 | |
| –––––– |
- Property, plant and equipment
| $ | |
| Bal b/fwd | 150 |
| New subsidiary | 200 |
| Depreciation | (50) |
| Additions (bal. fig.) | 200 |
| –––––– | |
| Bal c/fwd | 500 |
| –––––– | |
Test your understanding 5 – AH Group
Consolidated statement of cash flows for the year ended 30 June 20X5
| $000 | $000 | ||
| Cash flows from operating activities | |||
| Profit before tax | 18,450 | ||
| Less: profit on disposal of property | (1,250) | ||
| (2,250 – 1,000) | |||
| Add: finance cost | 1,400 | ||
| Adjustment for non-cash items dealt with in | |||
| arriving at operating profit: | |||
| Depreciation | 7,950 | ||
| Decrease in trade receivables | 470 | ||
| (27,130 – 26,300 – 1,300) | |||
| Increase in inventories | (3,100) | ||
| (33,500 – 28,750 – 1,650) | |||
| Decrease in trade payables | (1,420) | ||
| (33,340 – 32,810 – 1,950) | |||
| Goodwill impaired (W5) | 1,000 | ||
| –––––– | |||
| Cash generated from operations | 23,500 | ||
| Interest paid (W1) | (1,480) | ||
| Income taxes paid (W2) | (5,850) | ||
| Net cash from operating activities | –––––– | 16,170 | |
| Cash flows from investing activities | |
| Acquisition of subsidiary net | (1,950) |
| of cash acquired (2,000 – 50) | |
| Purchase of property, plant, and | (11,300) |
| equipment (W3) | |
| Proceeds from sale of property | 2,250 |
| –––––– | |
| Net cash used in investing activities | (11,000) |
| Cash flows from financing activities | |
| Repayment of long-term | (1,000) |
| borrowings | |
| (18,200 – 19,200) | |
| Dividend paid by parent (W7) | (6,000) |
| Dividends paid to NCI (W6) | (200) |
| ––––– | |
| Net cash used in financing activities | (7,200) |
| –––––– | |
| Net decrease in cash and cash equivalents | (2,030) |
| Cash and cash equivalents at 1 July 20X4 | 3,900 |
| –––––– | |
| Cash and cash equivalents at 30 June 20X5 | 1,870 |
| –––––– | |
| (W1) Interest paid | |
| $000 | |
| Bal b/fwd | 1,440 |
| Profit or loss | 1,400 |
| Interest paid (bal. fig.) | (1,480) |
| –––––– | |
| Bal c/fwd | 1,360 |
| –––––– | |
| (W2) Income taxes paid | |
| $000 | |
| Bal b/fwd | 5,450 |
| Profit or loss | 6,250 |
| New subsidiary | 250 |
| Tax paid (bal. fig.) | (5,850) |
| –––––– | |
| Bal c/fwd | 6,100 |
| –––––– |
| (W3) Property, plant and equipment | ||||
| $000 | ||||
| Bal b/fwd | 44,050 | |||
| New subsidiary | 4,200 | |||
| Depreciation | (7,950) | |||
| Disposals | (1,000) | |||
| Additions (bal. fig.) | 11,300 | |||
| –––––– | ||||
| Bal c/fwd | 50,600 | |||
| –––––– | ||||
| (W4) Goodwill arising on acquisition of subsidiary | ||||
| $000 | ||||
| Fair value of shares issued (2m × $2) | 4,000 | |||
| Cash consideration | 2,000 | |||
| ––––– | ||||
| 6,000 | ||||
| Fair value of NCI at acquisition | 1,750 | |||
| ––––– | ||||
| 7,750 | ||||
| Fair value of net assets at acquisition | (5,000) | |||
| ––––– | ||||
| Goodwill at acquisition | 2,750 | |||
| (W5) Goodwill | ––––– | |||
| $000 | ||||
| Bal b/fwd | 4,160 | |||
| Goodwill on sub acquired (W4) | 2,750 | |||
| Impairment in year (bal. fig.) | (1,000) | |||
| –––––– | ||||
| Bal c/fwd | 5,910 | |||
| –––––– | ||||
| (W6) Non-controlling interest | ||||
| $000 | ||||
| Bal b/fwd | 1,920 | |||
| NCI arising on subsidiary acquired | 1,750 | |||
| Profit or loss | 405 | |||
| Dividend paid (bal. fig.) | (200) | |||
| –––––– | ||||
| Bal c/fwd | 3,875 | |||
| –––––– | ||||
| (W7) Retained earnings | |||
| $000 | |||
| Bal b/fwd | 18,340 | ||
| Profit or loss | 11,795 | ||
| Dividend paid (bal. fig.) | (6,000) | ||
| –––––– | |||
| Bal c/fwd | 24,135 | ||
| –––––– | |||
Test your understanding 6 – Pearl
| Consolidated statement of cash flows | ||
| $000 | $000 | |
| Cash flows from operating activities | ||
| Profit before tax | 1,115 | |
| Finance cost | 35 | |
| Profit on sale of subsidiary | (100) | |
| Income from associates | (115) | |
| Depreciation | 385 | |
| Impairment (W1) | 80 | |
| Gain on disposal of PPE ($275 – $250) | (25) | |
| Increase in inventories | (50) | |
| ($470 – $435 – $150 + $165) | ||
| Decrease in receivables | 60 | |
| ($390 – $330 – $240 + $120) | ||
| Decrease in payables | (65) | |
| ($800 – $725 – $220 + $80) | ||
| ––––– | ||
| 1,320 | ||
| Interest paid | (35) | |
| Tax paid (W4) | (180) | |
| ––––– |
1,105
| Cash flows from investing activities | |
| Proceeds from sale of PPE | 275 |
| Purchases of PPE (W5) | (800) |
| Dividends received from associate (W6) | 85 |
| Acquisition of subsidiary ($1,500 – $80) | (1,420) |
| Disposal of subsidiary ($850 – $50) | 800 |
| ––––– |
(1,060)
Cash flows from financing activities
| Proceeds from loans ($500 – $300) | 200 |
| Dividends paid to shareholders of the | (125) |
| parent (per CSOCIE) | |
| Dividends paid to NCI (per CSOCIE) | (50) |
| ––––– |
Increase in cash and cash equivalents Opening cash and cash equivalents
Closing cash and cash equivalents
25
–––––
70
140
–––––
210
–––––
| Workings | |
| (W1) Goodwill | |
| $000 | |
| Balance b/f | 1,850 |
| Acquisition of subsidiary (W2) | 350 |
| Disposal of subsidiary (W3) | (190) |
| Impairment (bal fig) | (80) |
| –––––– | |
| Balance c/f | 1,930 |
| –––––– | |
| (W2) Goodwill on acquisition of subsidiary | |
| $000 | |
| Cost of investment | 1,500 |
| Fair value of NCI at acquisition | 340 |
| Fair value of net assets at acquisition | (1,490) |
| –––––– |
350
––––––
| (W3) Goodwill at disposal date | |||
| $000 | |||
| Cost of investment | 600 | ||
| Fair value of NCI at acquisition | 320 | ||
| Fair value of net assets at acquisition | (730) | ||
| –––––– | |||
| 190 | |||
| –––––– | |||
| (W4) Tax | |||
| $000 | |||
| Balance b/f ($360 + $105) | 465 | ||
| Acquisition of subsidiary | 40 | ||
| Disposal of subsidiary | – | ||
| Profit or loss | 225 | ||
| Cash paid (bal. fig.) | (180) | ||
| –––––– | |||
| Balance c/f ($400 + $150) | 550 | ||
| –––––– | |||
| (W5) PPE | |||
| $000 | |||
| Balance b/f | 1,625 | ||
| Depreciation | (385) | ||
| Revaluation gain | 200 | ||
| Disposal of plant | (250) | ||
| Acquisition of subsidiary | 1,280 | ||
| Disposal of subsidiary | (725) | ||
| Cash paid (bal. fig) | 800 | ||
| –––––– | |||
| Balance c/f | 2,545 | ||
| –––––– | |||
| (W6) Dividend from associate | |||
| $000 | |||
| Balance b/f | 540 | ||
| Share of profit of associate | 115 | ||
| OCI from associate | 50 | ||
| Dividend received (bal. fig) | (85) | ||
| –––––– | |||
| Balance c/f | 620 | ||
| –––––– | |||
Test your understanding 7 – Boardres
Statement of cash flows for the year ended 31 December 20X7
| $000 | $000 | |
| Cash flows from operating activities | ||
| Profit before tax | 4,866 | |
| Finance cost | 305 | |
| Income from associates | (30) | |
| Depreciation | 907 | |
| Goodwill (W7) | 85 | |
| Profit on disposal of PPE (W1) | (549) | |
| Increase in legal provision | 460 | |
| ––––– | ||
| 6,044 | ||
| Change in working capital | ||
| Increase in inventory | ||
| (9,749 – 7,624 – 612 acq – 116 ex diff) | (1,397) | |
| Increase in receivables | ||
| (5,354 – 4,420 – 500 acq – 286 ex diff) | (148) | |
| Increase in payables | ||
| (4,278 – 2,989 – 407 acq – 209 ex diff) | 673 | |
| ––––– | ||
| 5,172 | ||
| Interest paid | (305) | |
| Tax paid (W2) | (1,016) | |
| ––––– | ||
| Cash flows from investing activities | ||
| Purchase of non-current assets (W3) | (3,038) | |
| Proceeds on disposal | 854 | |
| Cash consideration paid on acquisition | ||
| of subsidiary, net of cash acquired | ||
| (1,268 – 232) | (1,036) | |
| Dividend received from associate (W4) | 10 | |
| ––––– |
(3,210)
| Cash flows from financing activities | |
| Dividends paid | (445) |
| Dividends paid to NCI (W6) | (20) |
| Proceeds from debt issue (W5) | 108 |
| ––––– | |
| (357) | |
| ––––– | |
| Change in cash and cash equivalents | 284 |
| Opening cash and cash equivalents | |
| (394 + 741 – 91) | 1,044 |
| ––––– | |
| Closing cash and cash equivalents | |
| (1,013 + 1,543 – 1,228) | 1,328 |
| ––––– |
| Workings | |
| (W1) Profit on disposal of property, plant and equipment | |
| $000 | |
| Sales proceeds | 854 |
| Carrying amount | (305) |
| ––––– | |
| Profit on disposal | 549 |
| ––––– | |
| (W2) Tax paid | |
| $000 | |
| Bal b/fwd (2,566 + 689) | 3,255 |
| Profit or loss | 2,038 |
| Tax paid (bal. fig.) | (1,016) |
| –––––– | |
| Bal c/fwd (3,722 + 555) | 4,277 |
| –––––– |
| (W3) Property, plant and equipment | |||
| $000 | |||
| Bal b/fwd | 8,985 | ||
| Exchange gain | 138 | ||
| Acquisition of subsidiary | 208 | ||
| Depreciation | (907) | ||
| Disposal | (305) | ||
| Additions (bal. fig.) | 3,038 | ||
| –––––– | |||
| Bal c/fwd | 11,157 | ||
| –––––– | |||
| (W4) Dividends from associates | |||
| $000 | |||
| Bal b/fwd | 280 | ||
| Profit or loss | 30 | ||
| Dividend received (bal. fig.) | (10) | ||
| –––––– | |||
| Bal c/fwd | 300 | ||
| –––––– | |||
| (W5) Debentures | |||
| $000 | |||
| Bal b/fwd | 1,682 | ||
| Acquisition of subsidiary | 312 | ||
| Cash received (bal. fig.) | 108 | ||
| –––––– | |||
| Bal c/fwd | 2,102 | ||
| –––––– | |||
| (W6) Non-controlling interest | |||
| $000 | |||
| Bal b/fwd | 17 | ||
| Total comprehensive income | 23 | ||
| Acquisition of subsidiary (18% × 833) | 150 | ||
| Dividend paid (bal. fig.) | (20) | ||
| –––––– | |||
| Bal c/fwd | 170 | ||
| –––––– |
| (W7) Goodwill | |||
| $000 | |||
| Cost of investment | 1,268 | ||
| NCI at acquisition (18% × 833) | 150 | ||
| ––––– | |||
| 1,418 | |||
| FV of net assets at acquisition | (833) | ||
| ––––– | |||
| Goodwill at acquisition | 585 | ||
| ––––– | |||
| $000 | |||
| Goodwill b/fwd | nil | ||
| Goodwill acquired (above) | 585 | ||
| Goodwill impairment (bal. fig) | (85) | ||
| ––––– | |||
| Goodwill c/fwd | 500 | ||
| ––––– | |||
