STATEMENT OF CASH FLOW MFRS10

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INTRODUCTION

 Statement of Financial Position (SOFP) and Statement of Profit or Loss (SOPL) did
not show the sources of cash received and how the cash was used.
 A business may have profits but may not be able to settle its debts or even pay
dividends as it may have cash flow problems.
 Therefore, SOCF is now an important financial statement and all companies are
expected to prepare a SOCF.

OBJECTIVE

 Information about the cash flow of a company is useful in providing users of financial
statements with a basis to assess the ability of the enterprise to generate cash &
cash equivalents and the needs of the company to utilize those cash flows.

DEFINITIONS

 Cash – comprises cash on hand, bank and in demand deposits

 Cash equivalents – are short term, highly liquid investment that are readily
convertible into cash and which are subject to an insignificant risk of changes in
value. Example: short-term investment

 Cash flows – are inflows and outflows of cash & cash equivalent

 Operating activities – are the principal revenue-producing activities of the

enterprise and other activities that are not investing or financing activities

 Investing activities – are the acquisition and disposal of long term assets and other
investments not included in cash equivalents. Example: Property Plant & Equipment,
Long Term investment

 Financing activities – are activities that result in changes in the size and the
composition of the equity capital and borrowings of the company. Example: Shares,
Debentures, Loans, Borrowings

CLASSIFICATION OF CASH AND CASH EQUIVALENT IN THE SCF:

 Operating activities
 Investing activities
 Financing activities

 Operating activities – may be presented using direct or indirect methods.

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 Direct methods shows receipt from customers and payments to
suppliers, employees, government (taxes), etc.

 Indirect Method begins with accrual basis of net profit or loss before tax
and adjusts for non cash items and non operating activities.

 Investing activities – disclosed separately cash receipts and payments arising

from acquisition or sale of PPE, acquisition or sale of long term investment and
advance and loans made to, or repayment from third parties.

 Financing activities – disclosed separately cash receipts and payments arising

from an issue of shares or other equity securities, payment made to redeem such
securities, proceeds arising from issuing debentures, loans, notes and
repayments of such securities.

***ITEMS IN SCF ARE ALL CASH BASIS!!!

HOW TO PREPARE SOCF???

1. Determine whether the question requires preparation using the direct or indirect
method or direct method with reconciliation. There are 3 activities within the SOCF
and the difference between direct and indirect method only exists in cash flow from
operating activities. For the other 2 activities (investing and financing) are the same
either for direct or indirect method.

 Prepare the Notes for Cash & Cash equivalents

CASH FLOW FROM OPERATING ACTIVITIES

DIRECT METHOD

2. Sources of cash inflow

a. Cash sales
b. Collection from trade receivables.
 It can be derived as follows:

SALES + OPENING TRADE RECEIVABLES – CLOSING TRADE RECEIVABLES

TRADE RECEIVABLES a/c

RM RM
Balance b/d xx Bank/Cash* xx

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Sales xx Balance c/d xx
xxx xxx
3. Cash outflow/ Cash payments from operations are:

c. Cash purchases
d. Payment to suppliers of goods
 It can be derived as follows:

PURCHASES* + OPENING TRADE PAYABLES – CLOSING TRADE PAYABLES

*Purchases = Cost of sales + closing stock – opening stock

TRADE PAYABLES a/c

RM RM
Bank/Cash* xx Balance b/d xx
Balance c/d xx Purchases* xx
xxx xxx
COST OF SALES a/c / INVENTORIES a/c
RM RM
Balance b/d xx Cost of sales xx
Purchases* xx Balance c/d xx
xxx xxx

e. Payment to employees
 It can be derived as follows:

OPENING WAGES &SALARIES – CLOSING WAGES & SALARIES

+ WAGES& SALARIES CHARGED IN P/LOSS

WAGES & SALARIES a/c

RM RM
Bank/Cash* xx Balance b/d xx
Balance c/d xx Profit and Loss xx
xxx xxx

f. Payment for other expenses

OTHER EXPENSES AS CHARGED IN P/LOSS – DEPRECIATION AND

AMORTISATION EXPENSES – LOSSES ON DISPOSAL OF FIXED ASSETS +
DECREASE IN ACCRUED EXPENSES + INCREASE IN PREPAID EXPENSES +
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GAIN ON DISPOSAL OF FIXED ASSET

4. Cash from investing and financing activities.

5. Go through all the items in the questions for other adjustments.

6. Prepare reconciliation statement. Reconciling the net profit before tax to the Cash
flow from Operating activities.

INDIRECT METHOD

1. Starts with PROFIT BEFORE TAX (PBT)

Statement of Profit or Loss for the year ended……………………….

RM
Revenue
- COGS
Gross profit
Dividend received
Administrative expenses
-Salary
-Electricity
-Depreciation
-Amortisation
+Gain on disposal
-Loss on disposal
Selling and Distribution expenses
-Petrol for delivery van
-Salesmen commissions
Finance expenses
-Interest

PROFIT BEFORE TAX* xx

Less: Taxation xx
Profit after tax xx

2. +/(-) Adjustment for:

 Non-cash item
 Non operating activities

Examples adjustments for expenses that do not affect cash flow:

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NON CASH ITEMS
a. Depreciation (example: depreciations need to be added back to the PBT)
b. Amortisation
c. Intangible asset write off
NON OPERATING ACTIVITIES
 Investment income (example: investment incomes need to be minus from
PBT)
 Interest expense
 Premium on redemption
 Gain/ Loss on disposal of assets (if losses need to be added back to the
PBT)

3. Adjustment for increase or decrease in working capital

ITEMS INCREASE DECREASE

STOCK Cash outflow ( – ) Cash inflow ( + )

 Payments for an additional  Receipts from sale of stock
purchase of stock
RECEIVABLES Cash outflow ( – ) Cash inflow ( + )
 Sales receipts not  Receipts from T.
converted into cash Receivables
PREPAYMENT Cash outflow ( - ) Cash inflow ( + )
(expenses)  More payments in advance  Less payments in advance
PREPAYMENT Cash outflow ( + ) Cash inflow ( - )
(income)  More receipts in advance  Less receipts in advance
PAYABLES Cash inflow ( + ) Cash outflow ( - )
 Less payment to T.  More payments to T.
payables payables
ACCRUALS Cash inflow ( + ) Cash outflow ( - )
(expenses)  More payment in arrears  Less payments in arrears
ACCRUALS Cash inflow ( - ) Cash outflow ( + )
(income)  More receipts in arrears  Less receipts in arrears

4. Cash from investing and financing activities.

5. Go through all the items in the questions for other adjustments

 Refer to the text book for the format.