Group statement of cash flows p2

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
–––––
(Visited 512 times, 1 visits today)
Share this:

Written by 

Leave a Reply