STATEMENT OF CASH FLOWS – LECTURE QUESTIONS AND ANSWERS

QUESTION – CCE Limited

The draft financial statements of CCE Limited for the year ended 31 st December 20X2 are as
follows:

Statement of Comprehensive Income for the Year Ended 31st December 20X2
£
Sales revenue 30,650
Cost of sales (26,000)
Gross profit 4,650
Depreciation (450)
Administrative and selling expenses (950)
Interest expense (400)
Investment income 500
Profit before tax 3,350
Income tax expense (120)
Profit for the year 3,230

Statement of Financial Position as at 31st December 20X2

20X2 20X1
£ £ £ £
ASSETS
Property, plant and equipment at cost 3,730 1,910
Accumulated depreciation (1,450) 2,280 (1,060) 850
Long-term investments 2,500 2,500
Inventory 1,000 1,950
Accounts receivable 1,900 1,200
Cash and cash equivalents (see note below) 410 160
Total assets 8,090 6,660

EQUITY AND LIABILITIES

Capital and Reserves
Share capital 1,500 1,250
Retained earnings 3,410 1,380
Total shareholders’ equity 4,910 2,630

Liabilities
Trade payables 250 1,890
Interest payable 230 100
Income taxes payable 400 1,000
Long-term debt (including finance leases) 2,300 1,040
Total liabilities 3,180 4,030

Total equity and liabilities 8,090 6,660

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Cash and cash equivalents are made up as follows:

31st December
20X2 20X1
£ £
Cash 40 25
Short-term investments 370 135
410 160

The following additional information is also available.

1. Interest expense was £400 of which £170 was paid during the period. £100 relating to
interest expense of the prior period was also paid during the period. £200 of interest was
received during the period.

2. Dividends paid were £1,200.

3. The liability for tax at the beginning and end of the period was £1,000 and £400
respectively.

4. During the period, a further £20 tax was provided for. Withholding tax on dividends
received amounted to £100, thus leading to the total tax expense of £20 + £100 = £120.

5. During the period, the group acquired property, plant and equipment with an aggregate
cost of £1,900 of which £900 was acquired by means of finance leases. Cash payments of
£1,000 were made to purchase property, plant and equipment.

6. £90 of capital repayment was paid under the finance leases.

7. Plant with an original cost of £80 and accumulated depreciation of £60 was sold for £20.

8. Accounts receivable as at the end of 20X2 include £100 of interest receivable.

9. £250 was raised from the issue of share capital and a further £450 was raised form long-
term borrowings.

Requirement

(a) Prepare a statement of cash flows for the year ended 31 st December 20X2 using the
indirect method in accordance with IAS 7 Statement of Cash Flows (i.e. starting the
statement of cash flows with the profit before tax); and

(b) Show the calculation of operating cash flow using the direct method.

(c) Discuss the decision usefulness of the required classifications of cash flows under IAS 7
Statement of Cash Flows.

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SUGGESTED ANSWER – CCE Limited

Suggested Approach:

Figures for the statement of cash flows are derived from the differences between the opening
and closing statement of financial position figures, using the information in the notes and in
the statement of comprehensive income to make necessary calculations. One approach to
developing the answer is to adopt a standard procedure. Here is a suggested procedure for the
indirect method (the more usual exam requirement).

Step 1
Set up the statement in outline (main headings only). Leave plenty of space to insert detail. A
whole page will be needed.

Step 2
Study the additional information and mark with a cross those items affecting statement of
financial position amounts.

Step 3
Begin the statement of cash flows by using the statement of comprehensive income to work
down to operating profit before working capital changes.

Step 4
Proceed line by line through the statement of financial position. If an item is not marked with
a cross, the difference may be entered direct to the statement; if it is marked, a working is
required. Use working ledger accounts to calculate missing figures. Insert the opening and
closing balances from the statement of financial position into the working accounts, and then
add information from the notes to complete the ledger account. Balancing figures on the
working accounts are then transferred to the statement of cash flows.

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Suggested Answer:

(a) Statement of Cash Flows for the Year Ended 31st December 20X2

Workings £ £
Cash flows from operating activities
Net profit before tax 3,350
Adjustments for:
Depreciation 450
Investment income (500)
Interest expense 400
Operating profit from working capital changes 3,700
Increase in trade receivables 1 (600)
Decrease in inventories 950
Decrease in trade payables (1,640)
Cash generated from operations 2,410
Interest paid 3 (270)
Income taxes paid 4 (720)
Net cash from operating activities 1,420

Cash flows from investing activities

Purchases of property, plant and equipment 5 (1,000)
Proceeds of sale of equipment 7 20
Interest received 2 200
Dividends received 2 200
Net cash used in investing activities (580)

Cash flows from financing activities

Proceeds from issue of shares 250
Proceeds from long-term borrowings 450
Payment of finance lease liabilities (90)
Dividends paid (1,200)
Net cash used in financing activities (590)
Net increase in cash and cash equivalents 250
Cash and cash equivalents at beginning of period 160
Cash and cash equivalents at end of period 410

Analysis of Cash and Cash Equivalents at 31st December

20X2 20X1
£ £
Cash on hand and balances with banks 40 25
Short term investments 370 135
Cash and cash equivalents 410 160

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Workings:

(W1) Trade Receivables

£ £
Opening balances 1,200 Closing balance 1,800
Movement (bal fig) 600 (1,900 – 100) _____
1,800 1,800

(W2) Interest and dividends receivable

£ £
SCI 500 Interest receivable c/f 100
Dividend received (bal fig) 200
___ Interest received 200
500 500

(W3) Interest paid

£ £
Cash (bal fig) 270 Opening balance 100
Closing balance 230 SCI 400
500 500

(W4) Income taxes

£ £
Cash (bal fig) 720 Opening balance 1,000
Closing balance 400 SCI (20 + 100) 120
1,120 1,120

(W5) Property, plant and equipment - cost

£ £
Opening balance 1,910 Transfer disposal 80
Leases 900 Closing balance 3,730
Cash – additions (bal fig) 1,000 _____
3,810 3,810

(W6) Property, plant and equipment - depreciation

£ £
Transfer disposal 60 Opening balance 1,060
Closings balance 1,450 SCI 450
1,510 1,510

(W7) Property, plant and equipment – disposal

£ £
Cost 80 Depreciation 60
__ Cash 20
80 80

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 (W8) Long-term debt (to reconcile balances)
£ £
Payments under finance leases 90 Opening balance 1,040
Closing balance 2,300 Finance leases 900
____ Long-term borrowing 450
2,390 2,390

(W9) Retained earnings (to reconcile balances)

£ £
Dividend paid 1,200 Opening balance 1,380
Closing balance 3,410 SCI 3,230
4,610 4,610

(b) Operating cash flow – direct method

Workings
Cash receipts from customers 1 30,050
Cash paid to suppliers and employees 2 (27,640)
Cash generated from operations (as in (a)) 2,410
Interest paid (270)
Income taxes paid (720)
Net cash from operating activities (as in (a)) 1,420

Workings:

(W1) Cash receipts from customers

Opening trade receivables 1,200
Sales 30,650
31,850
Less: closing trade receivables (1,900 – 100) 1,800
30,050

(W2) Cash paid to suppliers and employees

Opening trade payables 1,890
Purchases (26,000 – 1,950 + 1,000) 25,050
26,940
Less: closing trade payables 250
26,690
Administrative and selling expenses 950
27,640

(c) Decision usefulness of the required classifications of cash flows

Cash flows must be classified into cash flows from operating, investing and financing
activities.

Operating cash flows are the principal revenue-producing activities of an entity and any other
activities that do not fall within investing and financing activities. Such cash flows include
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receipts from customers, payments to suppliers and employees and income taxes. Operating
cash flows may also include interest and dividends received (though these items may be
classified as investing) and interest paid (though this item may be classified as financing).

Investing cash flows are the acquisition and disposal of long-term assets (such as property,
plant and equipment, subsidiaries, businesses and intangibles) and other investments not
included in cash equivalents (such as shares in other entities).

Financing activities are activities that result in changes in the size and composition of the
equity capital and borrowing of an entity (such as the issue of new shares, buyback of shares,
new borrowings, repayment of borrowings and the payment of dividends, though payment of
dividends are sometimes classified as an operating activity).

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QUESTION – LEPRECHAUN LIMITED (Question 3, August 2009) (Single Company)

Leprechaun Limited, an Irish company that sells garden furniture and related products throughout
Britain and Ireland to retail companies, prepares its financial statements to 31 December each year.
Leprechaun Limited’s statements of comprehensive income for the years ended 31 st December 2007
and 2008, and its statements of financial position as at those dates, are presented below.

Statements of Comprehensive Income for the Years Ended 31 December

2008 2007
£’000 £’000
Revenue 580,500 484,800
Cost of sales (435,400) (362,000)
Gross profit 145,100 122,800
Operating expenses (99,800) (86,440)
Operating profit 45,300 36,360
Finance charges (15,600) (7,600)
Profit before tax 29,700 28,760
Income tax (14,000) (15,160)
Profit after tax 15,700 13,600

Statements of Financial Position as at 31 December

2008 2007
£’000 £’000
ASSETS
Non Current Assets
Property, plant and equipment 277,900 206,600

Current Assets
Inventory 119,000 114,000
Trade receivables 98,000 108,000
Investments 18,000 14,000
Bank and cash 32,000 24,500
267,000 260,500

544,900 467,100

EQUITY AND LIABILITIES

Capital and Reserves
£1 Ordinary shares 100,000 100,000
Retained earnings 115,300 109,600
215,300 209,600
Non Current Liabilities
Loan 130,100 57,600

Current Liabilities
Bank overdraft 11,200 8,100
Trade payables 179,700 185,600
Taxation 5,200 4,100
Accruals – interest payable 3,400 2,100
199,500 199,900

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 544,900 467,100

Additional Information:

1. All of LEPRECHAUN’s sales and purchases are on credit.

2. Plant and equipment, with an original cost of £400,000 and a net book value of £320,000,
was sold for £275,000 during 2008. The profit / loss on disposal is included in operating
expenses. There were no other disposals during 2008. All additions to property, plant and
equipment during 2008 were paid for in cash.

3. Depreciation on property, plant and equipment during 2008, which is included in

operating expenses, amounted to £22,000,000.

4. The current asset investments fall within the definition of cash equivalents under IAS 7
Statement of Cash Flows.

5. Dividends amounting to £10,000,000 were proposed, approved and paid in each of the
years 2007 and 2008.

Requirement

(a) Prepare a statement of cash flows in accordance with IAS 7 Statement of Cash Flows for
LEPRECHAUN in respect of the year ended 31st December 2008 using the indirect
method of presenting operating cash flows.
20 Marks

(b) Notwithstanding the fact that statements of cash flows are a valuable source of
information for users of financial statements, important non-cash transactions may occur
which are not reported in a statement of cash flows.

Outline examples of such transactions.

5 Marks
Total 25 Marks