CFS DIRECT METHOD

truongthihanhdung@uel.edu.vn
(+84)93.406.7343
(+84)96.672.4386
 DIRECTMETHOD
DIRECT METHOD FOR
FOROCF
OCF
 DIRECT METHOD FOR OCF
1/ Sales - AR - Cash Aim? To find Cash receipts from sales/AR:
SALES AR CASH
opening b/l (SFP)

A (IS) A X1 X1

Ending b/l (SFP)

X1 = opening AR + A - Ending AR = A - (ending -opening)AR = A - changes of AR
 DIRECT METHOD FOR OCF
Dr Inv/Cr AP Dr AR/Sales Dr COGS/Cr MI
2/ Cash - AP - Merchadise Inventory - COGS To find cash payment for purchasing Inventory through AP and COGS

Cash AP MI COGS
opening b/l opening b/l

X2? X2 B B C C (IS)

ending b/l ending b/l

X2 = Opening bl AP + B - Ending bl AP
B= Ending b/l MI + C - Opening b.l MI
 DIRECT METHOD FOR OCF

3/ Cash - Prepaid Ex/ Other payables - Operating ex: To find cash payment for operating ex

Cash Prepaid ex/Other Payables Operating ex

X3

X3 (prepaid ex) =Ending bl Prepaid ex + Operating ex - Opening bl Prepaid ex

X3 (other payables) = Opening Payables + Operating ex - Ending bl payables
 DIRECT METHOD FOR OCF
4/ Cash - Interest payables - Interest expenses:

Cash Interest payables Interest expenses

X4

X4 = Opening Interest Payables + Interest ex - Ending bl Interest Payables

5/ Cash - Tax payables - Tax expenses: X5 = Opening Tax payables + Tax ex - Ending tax payables

Cash Tax payables Tax expenses

X5
 DIRECT METHOD FOR OCF
Cash Prepaid ex Operating ex
A

X X E E

Accrued payables
C

Y Y F F

X = E + CHANGES IN PREPAID
Y = F - CHANGES IN ACCRUED PAYABLES
 X+Y = OPERATING EX + CHANGES IN PREPAID – CHANGES IN ACCRUED
DIRECT METHOD - PRACTICE
DIRECT METHOD - PRACTICE
DIRECT METHOD - PRACTICE
 DIRECT METHOD - PRACTICE

• P14.6, P14.8, P14.10

• ADVANCED CASE 2 AND 3
Exercise 2:
As at May 31, 20X1 and May 31, 20X2 Tempo Plc had the following
summarised statements of financial position.
20X2 20X1
£ £
ASSETS
Non-current assets
PPE
Cost 3,284,000 3,091,000
Accumulated depreciation (2,198,000) (2,001,000)
1,086,000 1,090,000
Intangibles assets
Cost 9,360,000 8,645,000
Accumulated amortization (3,690,000) (2,715,000)
5,670,000 5,930,000
Investments 2,145,000 127,000
8,901,000 7,147,000
Current assets
Investments 60,000 40,000
Inventories 1,112,000 1,086,000
Trade receivables 948,000 840,000
Prepayments 95,000 108,000
Cash 479,000 282,000
2,694,000 2,356,000
Total assets 11,595,000 9,503,000
EQUITY AND LIABILITIES
Capital and reserves
Ordinary share capital 1,800,000 1,000,000
Share premium 1,543,000 1,421,000
Retained earnings 2,689,000 746,000
6,032,000 3,167,000
Non-current liabilities
15% debenture loan 3,000,000 4,500,000
Preference shares 100,000 0
3,100,000 4,500,000
Current liabilities
Trade payables 1,417,000 896,000
Accruals 225,000 337,000
Dividend payable 180,000 100,000
Taxation 641,000 503,000
2,463,000 1,836,000
Total equity and liabilities 11,595,000 9,503,000

Tempo’s statement of profit or loss for the year ended May 31, 20X2 was as
Tempo’s statement of profit or loss for the year ended May 31, 20X2 was as
follows:
£
Revenue 8,646,000
Cost of sales (3,705,000)
Gross profit 4,941,000
Distribution costs (465,000)
Administrative expenses (621,000)
Profit from operations 3,855,000
Finance costs (563,000)
Investment income 78,000
Profit before tax 3,370,000
Income tax expense (684,000)
Profit for the period 2,686,000
 • Additional information:

1. During the year plant and equipment with an original cost of £1,201,000 and carrying
amount at the date of disposal of £496,000 was sold at a loss of £189,000. As at May 31,
20X2 £165,000 of the sale proceeds had yet to be received and is included within trade
receivables. As at May 31, 20X1 the corresponding figure in respect of disposals made
during the year then ended was £79,000, which was received in full in June 20X1.

2. As in the previous year, all acquisitions of PPE made during the year were paid for in
cash at the date of acquisition. However, included within trade payables at May 31,
20X2 is £376,000 (20X1 - £nil) relating to the acquisition of intangible assets.

3. There were no disposals of intangible assets or investments during the year. Trade
receivables at May 31, 20X2 include £10,000 (20X1 £8,000) in respect of interest
receivable on investments.

4. As at May 31, 20X1 the ordinary share capital of Tempo Plc consisted of 1 million
shares, each with a £1 nominal value. The following day the company made a 1 for 2
bonus issue of 500,000 shares (utilising available profits).
5. Dividends payable at both statement of financial position dates represents a
10p per share dividend on the company’s ordinary share. Dividends of
£243,000 were charged to retained earnings in the year ended 31 May 20X2.
6. The current asset investments are government bonds and management has
decided to class them as cash equivalents.
7. During the year Tempo Plc issued 100,000 £1 redeemable preference shares.
8. Included within accruals at May 31, 20X2 is £125,000 (20X1 £75,000) for
interest payable.
9. An impairment review at 31 May 20X2 identified a fall in the recoverable
amount of the intangible assets. As a result, an impairment loss of £18,000
was identified and written off to administrative expenses.
• Requirement: Prepare a statement of cash flows for the year ended May
31, 20X2 in accordance with IAS 7.
Exercise 3:
Arial Company
Comparative Statements of Financial Position
November 30
20X2 20X1
£ £
ASSETS
Non-current assets
Property, plant and equipment 2,543,000 2,401,000
Intangible assets 550,000 584,000
Investments 406,000 -
3,499,000 2,985,000
Current assets
Inventories 685,000 598,000
Trade receivables 480,000 465,000
Prepayments 96,000 126,000
Cash and cash equivalents 426,000 200,000
1,687,000 1,389,000
Total assets 5,186,000 4,374,000
EQUITY AND LIABILITIES
Capital and reserves
Ordinary share capital 1,100,000 1,000,000
Share premium account 342,000 200,000
Retained earnings 1,785,000 1,311,000
3,227,000 2,511,000
Non-current liabilities
Borrowings 500,000 1,000,000
Redeemable preference shares 200,000 0
700,000 1,000,000
Current liabilities
Trade payables 749,000 427,000
Accruals 108,000 131,000
Taxation 282,000 165,000
Provisions 120,000 140,000
1,259,000 863,000
Total equity and liabilities 5,186,000 4,374,000

Arial Company
 1,259,000 863,000
Total equity and liabilities 5,186,000 4,374,000

Arial Company
Statement of profit or loss
For the year ended November 30, 20X2
£
Revenue 5,762,000
Cost of sales (4,630,000)
Gross profit 1,132,000
Distribution costs (236,000)
Administrative expenses (127,000)
Profit from operations 769,000
The following additional information is relevant:
1. Included within trade payables at November 30, 20X2 is £351,000 (20X1
£106,000) relating to purchases of PPE.
2. Included within accruals at November 30, 20X2 is £25,000 (20X1 £50,000)
for interest payable.
3. Property, plant and equipment and intangible assets can be analysed as
follows:
20X2 20X1
£ £
Property, plant and equipment
Cost or valuation 7,464,000 6,375,000
Accumulated depreciation (4,921,000) (3,974,000)
2,543,000 2,401,000
Intangibles
Cost 883,000 938,000
Accumulated amortization (333,000) (354,000)
550,000 584,000
4. During the year, plant with an original cost of £479,000 and a carrying amount at the
date of disposal of £326,000 was sold for £424,000 which was received in cash.
5. Arial Company received £20,000 during the year from the sale of highly liquid
investments, which were classed as cash equivalents.
6. During the year, Arial Company made a 1 for 20 bonus issue of its ordinary shares. The
subsequent issue of shares was made as a premium.
7. Included in trade receivables at the year ended was £25,000 in relation to investment
income. The corresponding figure for 20X1 was £15,000.
8. Intangible assets with accumulated amortisation at the date of disposal of £40,000 were
sold for £12,000. There were no acquisitions of intangible assets during the year.
9. Redeemable preference shares in the amount of £200,000 were issued during the year.
Requirement: Prepare a statement of cash flows for Arial Company for the year
ended November 30, 20X2 in accordance with IAS 7.
Exercise 4:
The following are the draft financial statements for Terrell Plc for the year ended
December 31, 20X7.
Terrell Plc
Statement of profit or loss
For the year ended December 31, 20X7
£
Revenue 7,350,500
Cost of sales (4,560,600)
Gross profit 2,789,900
Administrative expenses (1,060,800)
Distribution costs (768,000)
Profit from operations 961,100
Finance charge (75,000)
Profit before tax 886,100
Income tax expense (350,000)
Profit for the period 536,100
 Terrell Plc
Comparative Statements of Financial Position
December 31
20X7 20X6
£ £
ASSETS
Non-current assets
Property, plant and equipment 6,985,400 6,713,500
Intangible assets 350,700 300,500
7,336,100 7,014,000
Current assets
Inventories 60,500 365,100
Trade receivables 169,000 144,500
Investments 25,000 12,400
Cash and cash equivalents 10,700 20,200
265,200 542,200
Total assets 7,601,300 7,556,200
EQUITY AND LIABILITIES
Capital and reserves
Ordinary share capital 4,000,000 3,500,000
Share premium account 1,200,000 950,000
Retained earnings 1,342,800 2,206,700
6,542,800 6,656,700
Non-current liabilities
Preference share capital (redeemable ) 500,000 400,000

Current liabilities
Trade payables 148,500 139,500
Taxation 410,000 360,000
558,500 449,500
Total equity and liabilities 7,601,300 7,556,200

Additional information:
1. During the year, Terrell Plc issued redeemable preference shares at par.
2. The current asset investments are government bonds and management has
decided to class them as cash equivalents.
3. During the year Terrell Plc sold plant and equipment with a carrying amount
of £560,500 for £600,000. Total depreciation charges for the year were
£750,600.
4. Trade payables include accrued interest of £5,000 ( 20X6 £7,000)
5. Terrell Plc acquired new intangible assets at a cost of £77,500 during the year.
6. Included in trade receivables is investment income of £14,500 (20X6 £2,000)
7. An impairment review at December 31, 20X7 identified a fall in the
recoverable amount of intangible assets. As a result, an impairment loss of
£15,000 was identified and written off to administrative expenses.
8. Included in trade payables is £10,000 which relates to the purchase of
machinery.
9. During the year Terrell Plc made a 1 for 100 bonus issue of its ordinary shares.
Requirement: Prepare a statement of cash flows for the year ended
December 31, 20X7 in accordance with IAS 7.
Exercise 5:
The following are the draft financial statement for Vernet Company for the year
ended March 31, 20X5.
Vernet Company
Statement of profit or loss
For the year ended March 31, 20X5
£
Revenue 5,650,500
Cost of sales (3,460,600)
Gross profit 2,189,900
Administrative expenses (978,800)
Distribution costs (256,000)
Profit from operations 955,100
Finance charge (89,000)
Profit before tax 866,100
Income tax expense (297,600)
Profit for the period 568,500
 Vernet Company
Comparative Statements of Financial Position
March 31
20X7 20X6
£ £
ASSETS
Non-current assets
Property, plant and equipment 4,360,400 2,950,300
Investments 172,000 156,000
4,532,400 3,106,300
Current assets
Inventories 460,600 365,100
Trade receivables 269,000 244,500
Government bonds 105,000 100,000
Cash 180,000 20,200
1,014,600 729,800
Total assets 5,547,000 3,836,100

EQUITY AND LIABILITIES

Capital and reserves
Ordinary share capital 3,000,000 1,800,000
Share premium account 1,050,000 850,000
Retained earnings 142,500 74,500
4,192,500 2,724,500
 Loan 556,000 472,000
Preference shares (redeemable ) 150,000 0
706,000 472,000
Current liabilities
Trade payables 348,500 289,600
Taxation 300,000 350,000
648,500 639,600
Total equity and liabilities 5,547,000 3,836,100

Additional information:
1. During the year Vernet Company made a 1 for 10 bonus issue of its ordinary
shares. It subsequently issued further shares at the market price.
2. An impairment review at March 31, 20X5 identified a fall in the recoverable
amount of certain non current investments. As a result, an impairment loss of
£12,000 was identified and written off to administrative expenses.
3. During the year Vernet Company acquired plant and equipment for cash of
£2,057,000. In addition, plant and equipment with a fair value of £600,000
was acquired through a long term loan. The depreciation charge for the year,
charged to cost of sales, was £750,600. A loss on sale of plant of £55,000
was made during the year.
4. Interest payable of £10,000 has been included in trade payables at year end.
The corresponding figure in 20X4 was £5,000.
5. The government bonds are highly liquid and management has decided to
class them as cash equivalents.
6. Vernet Company issued £150,000 redeemable preference share during the
year.
7. Included in trade payables is £10,000 in relation to the acquisition of long
term investments.