Professional Documents
Culture Documents
Chapter 7
• The main idea of a formal SCF is to show the cash inflows and
outflows from a business in respect of three different aspects of a
business: its operating activities, its investing activities and its
financing activities. Operating activities are the principal revenue-
generating activities of the entity, such as buying and selling
inventory or the expenses incurred while generating revenues. The
cash flows that relate to items that feature in the profit or loss
calculation are included here. Investing activities relate to what a
business does to invest for the future, such as buying a new
property. Financing activities are activities that relate to how a
business is funded, such as the issue of new shares or taking out a
loan.
IV-FRS 102 (Section 7) presentation
• Layout
• Figure 7.3 shows what a simple SCF could looks like under FRS 102 (Section
7) using the direct method.
• There are a few other items that may be shown in a real company SCF but
they are more advanced or relate specifically to banks so we will ignore them
here for simplicity.
• There is also some choice about the presentation of interest and dividends
which we will also omit. If you would like to find out all the details of the
standard you will find FRS 102 on the FRC website.
• When you prepare a SCF, headings may be omitted if no cash transaction has
taken place either in the current period or in the previous period. They must
be in the order listed. A subtotal should be included for each heading. The
reconciliation at the bottom of the SCF is not always required but it is
certainly helpful to users.
• We will use Durton Ltd’s accounts as our example once again because by
now you should be familiar with the details.
• The SCF looks very similar if the indirect method is used to prepare it, except
for the operating cash flows section at the top. Under this method the
statement starts with operating profit as reported in the SPL which is
reconciled to operating cash flows by adjusting operating profit for:
1. anything that went into the profit calculation as result of non-cash
transactions (e.g. credit sales and purchases of inventory) and
2. the effect of accounting adjustments to profit done at the year end (such as
depreciation, accruals and prepayments).
Figure 7.3 The statement of cash flow in accordance with FRS 102 (section 7)
Example 7.3 Preparation of a statement of cash flows in
accordance with FRS 102 (Section 7) using the direct method
Figure 7.4 The operating cash flow section of scf in accordance with FRS 102
(section 7)
• This is what the operating cash flow section would look like:
Example 7.4 Preparation of a statement of cash flows in
accordance with FRS 102 (Section 7) using the indirect method
Tutorial Example 7.4
Table 7.1
Activity 7.3
State whether each of the following statements is true or false.
(a) operating activities reflect total cash inflows. True/false
(b) Depreciation decreases the cash position. True/false
(c) tax paid decreases the cash position. True/false
(d) a dividend declared increases the cash position. True/false
(e) a decrease in trade receivables increases the cash position. True/false
(f) an increase in trade payables decreases the cash position. True/false
IV-IAS 7 format
• The process and principles are very similar to those explained for FRS 102
(Section 7).
• This is because the new FRS 102 was updated in September 2015 to bring it
much closer to International Financial Reporting Standards than was
previously the case.
• Layout
• A SCF prepared under IAS 7 has three main headings: operating activities,
investing activities and financing activities. The operating activities include
those incomes and expenses that you would normally find in the statement of
profit or loss.
• If the indirect method is used, the adjustments that you need to make are
identical to the ones we outlined for you in the previous section (see Table 7.1 ).
• Investing activities may include the purchases and sales of long-term assets and
investments while financing activities include cash from the sale and purchase
of the company’s own shares, debentures and loans.
• Real-life example
• Here is what a SCF looks like for a real business: De La Rue (remember the
business you read about at the start of the chapter, the company which prints
out money?). The De La Rue group prepares its accounts under IFRS as
adopted by the European Union and this is what its statement of cash flows
looks like for the latest available accounting period (Figure 7.5).
Figure 7.5 La Rue Statement of cash flow
Activity 7.4
Have a look at the De La Rue statement of cash flows above and answer
the following questions:
(a) What constitutes cash for De La Rue?
(b) What method has the company used to prepare its SCF – the direct
or indirect method?
(c) Where has De La Rue chosen to show the cash flows related to
interest and dividends – in operating, investing or financing activities?
(d) Is De La Rue reporting a cash inflow or a cash outflow for 2015?
(e) What are the main reasons for that cash movement?
Notes
• The differences between a SCF prepared under FRS 102 (Section 7)
and one prepared under IAS 7 requirements are not particularly
significant and its precise format does not really matter. What does
matter is that as a manager:
• (a) you receive some sort of SCF;
• (b) that you know what it is and (c) and you know what action to
take when you receive it. It could help to save your job and your
company!
• Spare a thought for governments as they also have to manage the
cash receipts from taxes and the cash payments on government-
funded services, such as roads maintenance, education, healthcare
and many other competing priorities. The principles are exactly the
same (although the detailed formats of government accounts differ
from those of companies) and the repercussions of running out of
cash are just as serious but on a far grander scale.
Conclusion: key points
• A statement of cash flows contains some extremely useful information for
management because it gives a lot more detail about the movement in the
cash position. This is vital as it is possible for an entity to be profitable
without necessarily having the cash resources to keep it going. Strict control
over cash resources is absolutely essential, and a statement of cash flows can
help in this respect.
• KEY POINTS
1. Entities may have a long-term profitable future but in the short term they
may be short of cash. This may curb their activities and in extreme cases they
may be forced out of business.
2. To avoid this happening, owners and managers should be supplied with
information about the cash movement and resources of the entity, i.e. about
its liquidity. This can be done by preparing a statement of cash flows.
3. Listed companies in the European Union must use IAS 7 in preparing their
group financial statements as they are required to adopt IASB requirements.
Non-listed companies in the United Kingdom may use either IAS 7 or the
FRS 102 (Section 7). Non-listed companies in other EU countries may have a
similar arrangement.
4. Both IAS 7 and FRS 102 permit the use of either the direct method or the
indirect method. The direct method is basically a list of the receipts and
payments extracted from the cash book. The indirect method takes the
respective balances from the statement of profit or loss and with the help of
the information in the statement of financial position converts them back
from an accruals basis to a cash basis. The direct method of presentation is
encouraged, but the indirect method is acceptable.
Application and assignment
• See the e-campus
End