Lesson 04: Cash Flow Statement

Learning Outcomes;
After completing this session, you should be able to:

• Prepare a cash flow statement in a form suitable for publication

Cash flow statement:

Cash flow statement provides users with information on how well the business is generating cash.
It shows what a business has paid during a financial year (cash outflows) and what it has received
(cash inflows) during the same period. Cash flow statement, therefore, will only include
transactions that involved a payment or a receipt of money.

Format of the Cash Flow statement

The format splits the cash flows of a business into three different activities;

• Operating activities- these are generated from the on-going trading activities of the
business. Operating cash flows are the principal financing source a business uses to
maintain and develop its operational capacity. Cash flows from operating activities can be
calculated in two ways, using the direct method or the indirect method.

Direct method: the direct method shows operating cash receipts and payments, for
example, cash paid to suppliers and employees and cash received from customers.
Indirect method: the indirect method starts with profit before taxation, adding back items
shown elsewhere on the statement of cash flows (Ex. Finance cost) and adjusting non-
cash items included in arriving at the operating profit figure. Non-cash items would
include the following:
Depreciation: this is a book adjustment to reflect the wearing out of an asset; the
cash impact of non-current asset is the buying of the asset.
Profit/loss on disposal of non-current assets: profit is not cash- the cash impact
of the disposal is the disposal proceeds.
Changes in inventory: as operating profit is calculating after charging cost of sales,
which has been adjusted for opening and closing inventory we need the figure for total
cash spent on materials in the year, not the cost of the goods used in the year.
Changes in receivables: the figure included in the profit or loss is the sales
revenue- we need the cash received from customers and so we must take account of
opening and closing receivables for the year.
Changes in payables: for the same reason as above- we need to get to the figure
for actual cash paid to suppliers.
 Indirect method statement of cash flows
Rs. Rs.
Cash flows from operating activities
Profit before taxation X
Adjustments for:
Depreciation X
Investment income X
Interest expense X
X
Increase/decrease in trade and other receivables X
Increase/decrease in inventories X
Increase/decrease in trade payables X
Cash generated from operations X
Interest paid X
Income taxes paid X
Net cash from operating activities X

• Investing activities- cash payments to purchase property, plant and equipment and
receipts from the sale of the items, along with cash payments to acquire equity of other
entities, will be included under this heading.

Cash flows from investing activities

Purchase of property, plant and equipment X
Proceeds from sale of equipment X
Interest received X
Dividends received X
Net cash used in investing activities X

• Financing activities- proceeds of issuance of shares or loan notes, or cash paid for their
redemption, appear here, along with dividends paid. The repayment of the principal
amount of a finance lease is included here.

Cash flows from financing activities

Proceeds from issue of share capital X
Proceeds from long-term borrowings X
Payment of finance lease liabilities X
Dividends paid* X
Net cash used in financing activities X

*This could also be shown as an operating cash flows

 Indirect method statement of cash flows
Rs. Rs.
Cash flows from operating activities
Profit before taxation X
Adjustments for:
Depreciation X
Investment income X
Interest expense X
X
Increase/decrease in trade and other receivables X
Increase/decrease in inventories X
Increase/decrease in trade payables X
Cash generated from operations X
Interest paid X
Income taxes paid X
Net cash from operating activities X

Cash flows from investing activities

Purchase of property, plant and equipment X
Proceeds from sale of equipment X
Interest received X
Dividends received X
Net cash used in investing activities X

Cash flows from financing activities

Proceeds from issue of share capital X
Proceeds from long-term borrowings X
Payment of finance lease liabilities X
Dividends paid* X
Net cash used in financing activities X
Net increase in cash and cash equivalents X
Cash and cash equivalents at beginning of period X
Cash and cash equivalents at end of period X
Exercise 01
The following financial information relates to Waves for the year ended 30 September 2001.

Income statement for the year ended 30 September 2001

Rs. 000
Revenue 222
Operating expenses (156)
Operating profit 66
Finance costs (9)
Profit before tax 57
Income tax expense (21)
Profit 36

The following operating expenses were included in the year:

Rs. 000
Wages (36)
Auditor’s remuneration (6)
Depreciation (42)
Cost of materials used (111)
Gain on sale of non-current assets 30
Rental income 9
(156)

The following information is also available

30.09.2001 30.09.2000
Rs. 000 Rs. 000
Inventories 21 12
Trade receivables 24 21
Trade payables (15) (9)

Exercise 02
Y’s income statement for the year ended 31 December 2003 and statement of financial position
at 31 December 2002 and 31 December 2003 were as follows:
 Y-Income statement for the year ended 31 December 2003
Rs. 000 Rs. 000
Sales revenue 360
Raw materials consumed (35)
Staff costs (47)
Depreciation (59)
Loss on disposal (9)
(150)
Operating profit 210
Interest payable (14)
Profit before tax 196
Income tax expense (62)
Profit after tax 134

Y- Statement of financial position as at 31 December

2003 2002
Rs. 000 Rs. 000 Rs. 000 Rs. 000
Non- Current Assets
Cost 798 780
Depreciation (159) (112)
639 668
Current Assets
Inventory 12 10
Trade receivables 33 25
Bank 24 69 28 63
708 731
Capital and reserves
Share capital 180 170
Share premium 18 12
Retained earnings 358 556 257 439

Non-current liabilities
Long-term loans 100 250

Current liabilities
Trade payables 6 3
Income tax 46 52 39 42
708 731
During the year, the entity paid Rs. 45,000 for a new piece of machinery. A dividend of Rs. 33,000
was paid during the year.
Requirement
Prepare a statement of cash flows for Y for the year ended 31 December 2003.