Chapter 3 Cash Flow Statement

chapter 3
Cash flow statements
Contents
Introduction
Examination context
Topic List
1 Cash flow information
2 Presentation of a cash flow statement
3 Operating activities
4 Investing activities
5 Financing activities
6 Disclosures
7 Preparing a cash flow statement
Summary and Self-test
Technical reference
Answers to Self-test
Answers to Interactive questions
© The Institute of Chartered Accountants in England and Wales, March 2009 81

Financial accounting
Introduction
Learning objectives Tick off

 Prepare the cash flow statement of an individual entity in accordance with BAS 7
Specific syllabus references for this chapter are: 2a, b, c.
Practical significance
It has been argued that 'profit' does not always give a useful or meaningful picture of a company's
operations. Readers of a company's financial statements might even be misled by a reported profit
figure.
(a) Shareholders might believe that if a company makes a profit after tax of, say, CU100,000 then this is
the amount which it could afford to pay as a dividend. Unless the company has sufficient cash
available to stay in business and also to pay a dividend, the shareholders' expectations would be wrong.
(b) Employees might believe that if a company makes profits, it can afford to pay higher wages next
year. This opinion may not be correct: the ability to pay wages depends on the availability of cash.
(c) Survival of a business entity depends not so much on profits as on its ability to pay its debts when
they fall due. Such payments might include 'revenue' items such as material purchases, wages,
interest and taxation etc, but also capital payments for new non-current assets and the repayment of
loan capital when this falls due (for example on the redemption of debentures).
From these examples, it may be apparent that a company's performance and prospects depend not so much
on the 'profits' earned in a period, but more realistically on liquidity or cash flows.
Stop and think

Can you think of some possible disadvantages of cash flow accounting?
Working context
As we will see the preparation of the cash flow statement is very dependent on information contained in
the income statement and balance sheet. This is not just an accounting issue however, but will also have an
impact on the amount of audit work which will need to be carried out on these balances. Audit work on
the cash flow statement can be more limited than that carried out on the income statement and balance
sheet as the cash flows are derived from balance sheet and income statement balances which have already
been subjected to detailed audit procedures.
82 © The Institute of Chartered Accountants in England and Wales, March 2009

CASH FLOW STATEMENTS 3
Syllabus links
This is the first time that you will have come across a cash flow statement in your studies. However, as you
will see in the rest of the chapter, most of the information needed to produce a cash flow statement is
contained in the income statement and balance sheet, both of which you will be familiar with from your
Accounting studies.
The topic also relates to the underlying assumptions of accounting which were discussed in Chapter 1, in
particular the distinction between accrual accounting and cash accounting.
In this chapter we introduce the preparation of the cash flow statement of the individual company. Chapter
16 covers the preparation of group cash flow statements. Both of these aspects are also highly relevant in
the Financial & Corporate Reporting paper and at the Advanced Stage, where the emphasis will change from
preparation to analysis and interpretation.

Examination context
Exam requirements
As 55% of the syllabus deals with the preparation of single company financial statements, and this includes
the cash flow statement, it is likely that this topic will be examined regularly.
In an examination you would either be asked to prepare a full cash flow statement or to prepare cash flow
statement extracts and/or to answer a number short-form questions.
In the examination, candidates may be required to:
 Prepare and present a cash flow statement for an individual entity in accordance with BAS 7 Cash Flow
Statements
 Prepare extracts from the cash flow statement of an individual entity.

1 Cash flow information
Section overview
 The cash flow statement shows movements in cash and cash equivalents.
 All entities are required to produce a cash flow statement.
1.1 Objective of BAS 7

The objective of BAS 7 Cash Flow Statements is to provide historical information about changes in cash and
cash equivalents, classifying cash flows between operating, investing and financing activities. This will
provide information to users of financial statements about the entity's ability to generate cash and cash
equivalents, as well as indicating the cash needs of the entity.
Definition
Cash flows: These are inflows and outflows of cash and cash equivalents.
1.2 Scope
A cash flow statement should be presented as an integral part of an entity's financial statements. All types
of entity can provide useful information about cash flows as the need for cash is universal, whatever the
nature of their revenue-producing activities. Therefore all entities are required by the standard to
produce a cash flow statement.
1.3 Benefits of cash flow information

Cash flow statements should be used in conjunction with the rest of the financial statements. Users can
gain further appreciation of:
 The change in net assets
 The entity's financial position (liquidity and solvency)
 The entity's ability to adapt to changing circumstances and opportunities by affecting the amount and
timing of cash flows
Cash flow statements enhance comparability as they are not affected by differing accounting policies
used for the same type of transactions or events.
Cash flow information of a historical nature can be used as an indicator of the amount, timing and certainty
of future cash flows. Past forecast cash flow information can be checked for accuracy as actual figures
emerge. The relationship between profit and net cash flow and the impact of changing prices can be
analysed over time.
1.4 Cash and cash equivalents

The cash flow statement shows movements in cash and cash equivalents.
Definitions
Cash: Comprises cash on hand and demand deposits.
Cash equivalents: Short-term, highly liquid investments that are readily convertible to known amounts of
cash and which are subject to an insignificant risk of change in value.

BAS 7 expands on the definition of cash equivalents: they are not held for investment or other long-term
purposes, but rather to meet short-term cash commitments. To fulfil the above definition, an investment's
maturity date should normally be within three months from its acquisition date. It would usually
be the case then that equity investments (i.e. shares in other companies) are not cash equivalents. An
exception would be where preference shares were acquired with a very close maturity date.
Points to note:
(1) Loans and other borrowings from banks are classified as financing activities. In some countries,
however, bank overdrafts are repayable on demand and are treated as part of an entity's total cash
management system. In these circumstances an overdrawn balance will be included in cash and cash
equivalents. Such banking arrangements are characterised by a balance which fluctuates between
overdrawn and credit.
In the absence of other information you should assume, in the exam, that bank overdrafts are
repayable on demand and should therefore be classed as cash and cash equivalents.
(2) Movements between different types of cash and cash equivalent are not included in cash flows. The
investment of surplus cash in cash equivalents is part of cash management, not part of operating,
investing or financing activities.
2 Presentation of a cash flow statement
Section overview
 Cash flows are classified as:
– Operating activities
– Investing activities, and
– Financing activities.
2.1 Presentation
BAS 7 requires cash flow statements to report cash flows during the period classified by:
 Operating activities: These are primarily derived from the principal revenue-producing activities of
the entity and other activities that are not investing or financing activities.
 Investing activities: These are the cash flows derived from acquisition and disposal of non-current
assets and other investments not included in cash equivalents.
 Financing activities: These are activities that result in changes in the size and composition of the
equity capital and borrowings of the entity.
2.2 Example of a cash flow statement

We will look at the procedure for preparing a cash flow statement later in this chapter, but first, we will
look at a proforma adapted from the example given in the standard.

Cash flow statement

Year ended 31 December 20X7
CUm CUm
Cash flows from operating activities
Cash generated from operations 2,730
Interest paid (270)
Income taxes paid (900)
Net cash from operating activities 1,560
Cash flows from investing activities

Purchase of property, plant and equipment (900)
Proceeds from sale of property, plant and equipment 20
Interest received 200
Dividends received 200
Net cash used in investing activities (480)
Cash flows from financing activities

Proceeds from issue of share capital 250
Proceeds from issue of long-term borrowings 250
Dividends paid (1,290)
Net cash used in financing activities (790)

Net increase in cash and cash equivalents 290
Cash and cash equivalents at beginning of period 120
Cash and cash equivalents at end of period 410
Points to note
1 The headings in italics are necessary to comply with the standard.
2 The information to prepare a cash flow statement can be obtained from the figures in the
 Balance sheet at the start of the period
 Balance sheet at the end of the period
 Income statement for the period
 Supporting notes

3 Operating activities
Section overview
 Cash flows from operating activities are primarily derived from the principal revenue producing
activities of the entity.
 There are two methods for calculating and analysing cash generated from operations:
– The direct method
– The indirect method
 Cash generated from operations is adjusted for payments of interest and income tax to arrive at net
cash from operating activities.
3.1 Operating activities

This is perhaps the key part of the cash flow statement because it shows whether, and to what extent,
companies can generate cash from their operations as other cash inflows may be non-recurring. It is
these operating cash flows which must, in the end pay for all cash outflows relating to other activities, i.e.
paying loan interest, dividends and so on.
Most of the components of cash flows from operating activities will be those items which determine the
net profit or loss of the entity, i.e. they relate to the main revenue-producing activities of the entity.
The standard gives the following as examples of cash flows from operating activities.
 Cash receipts from the sale of goods and the rendering of services.
 Cash receipts from royalties, fees, commissions and other revenue.
 Cash payments to suppliers for goods and services.
 Cash payments to and on behalf of employees.
Cash flows from interest paid and income taxes paid are also dealt with here.
3.2 Cash generated from operations

BAS 7 allows two possible layouts for cash generated from operations
 The indirect method
 The direct method.
The direct method is preferred by BAS 7 but not required. In practical terms the indirect method is
likely to be easier and less time consuming to prepare and is more likely to be examined. In the exam you
should use the indirect method unless the question specifies otherwise.
3.3 Indirect method

Using the indirect method, cash generated from operations is calculated by performing a reconciliation
between:
 Profit before tax as reported in the income statement, and
 Cash generated from operations.
This reconciliation is produced as follows:

Reconciliation of profit/loss before tax to cash generated from operations for the year ended 31 December
20X7
CU
Profit/(loss) before tax X
Finance cost X
Investment income (X)
Depreciation charge X
Amortisation charge X
Loss/(profit) on disposal of non-current assets X/(X)
(Increase)/decrease in inventories (X)/X
(Increase)/decrease in trade and other receivables (X)/X
(Increase)/decrease in prepayments (X)/X
Increase/(decrease) in trade and other payables (X)/X
Increase/(decrease) in accruals (X)/X
Increase/(decrease) in provisions (X)/X
Cash generated from operations X
You should show this reconciliation as a note to the cash flow statement.
3.4 Explanation
It is important that you understand why certain items are added and others are subtracted. Note the
following points:
 Depreciation is not a cash expense, but is deducted in arriving at the profit figure in the income
statement. It makes sense, therefore, to eliminate it by adding it back.
 By the same logic a loss on disposal of a non-current asset (arising through underprovision of
depreciation) needs to be added back, and a profit deducted.
 An increase in inventories means less cash – the company has spent cash on buying inventory.
 An increase in receivables means the company's debtors have not paid as much, and therefore there is
less cash.
 If the entity pays off payables, causing the figure to decrease, again there is less cash.
Worked example: Indirect method

A business has the following balance sheet balances.
30 June 20X7 30 June 20X6
CU CU
Inventories 3,200 4,000
Trade and other receivables 2,900 2,500
Trade and other payables 800 1,000
For the year ended 30 June 20X7 you also have the following information:
CU
Profit before tax 6,100
Finance cost 200
Investment income 100

Solution
Cash generated from operations would be calculated and disclosed as follows.
Reconciliation of profit before tax to cash generated from operations for the year ended 30 June 20X7
CU
Profit before tax 6,100
Finance cost 200
Investment income (100)
Decrease in inventories 800
Increase in trade and other receivables (400)
Decrease in trade and other payables (200)
3.5 Direct method

Using the direct method, cash generated from operations would be analysed as follows and shown as a note
to the cash flow statement:
Gross operating cash flows for the year ended 31 December 20X7
CU
Cash receipts from customers X
Cash paid to suppliers and employees (X)
Cash generated from operations (X)
Worked example: Direct method

Hail Ltd commenced trading on 1 January 20X7 following a share issue which raised CU35,000. During the
year the company entered into the following transactions:
 Purchases from suppliers were CU19,500, of which CU2,550 was unpaid at the year end.
 Wages and salaries amounted to CU10,500, of which CU750 was unpaid at the year end.
 Sales revenue was CU29,400, including CU900 receivables at the year end.
Solution
Cash generated from operations would be calculated and disclosed as follows:
Gross operating cash flows for the year ended 31 December 20X7
CU
Cash received from customers (29,400 – 900) 28,500
Cash paid to suppliers and employees (26,700) (W)
WORKING
CU
Cash paid to suppliers (19,500 – 2,550) 16,950
Cash paid to and on behalf of employees (10,500 – 750) 9,750
Cash paid to suppliers and employees 26,700

3.6 Payments of interest and tax

The adjustments in the cash flow statement to 'cash generated from operations' to arrive at 'net
cash from operating activities' consist of payments of interest and income tax.
A similar method can be used to calculate the cash flows for interest paid and income tax paid. For each
item, the information available might be:
 Opening balance at the start of the period (opening balance sheet)
 Income statement (the amount of the item, as reported)
 Closing balance at the end of the period (closing balance sheet)
The cash flow is a balancing figure obtained from these three figures.
A T account can be used as a working.
Worked example: Interest paid

A company’s financial statements show the following information:
At 1 Jan At 31 Dec For the year
20X2 20X2 20X2
CU CU CU
Interest payable 54,000 63,000
Interest charge 240,000
Interest paid is calculated as follows.
INTEREST PAID
CU CU
Cash payment (balancing figure) 231,000 Balance b/d 54,000
Balance c/d 63,000 Income statement 240,000
294,000 294,000
Alternatively, this could be calculated as follows:
(54,000 + 240,000 – 63,000) = CU231,000
A similar technique can be used to calculate payments of income tax in the year. The taxation payment
refers to payments of income tax, not to payments of sales tax (VAT) or tax paid by employees.
The opening and closing balance sheets will show a liability for income tax. The income tax charge for the
year is shown on the face of the income statement. The figure for income taxes paid during the year is
derived as a balancing figure.
Interactive question 1: Income tax [Difficulty level: Easy]

A company had a liability for income tax at 31 December 20X6 of CU940,000 and a liability for income tax
at 31 December 20X7 of CU1,125,000. The income tax charge for the year to 31 December 20X7 was
CU1,270,000. What amount of income tax was paid during the year?
INCOME TAX PAID
CU CU
See Answer at the end of this chapter.

4 Investing activities
Section overview
 The cash flows in this section are those related to the acquisition or disposal of any non-current
assets, and returns received in cash from investments.
4.1 Investing activities

The cash flows classified under this heading show the extent of new investment in assets which will
generate future income and cash flows. The standard gives the following examples of cash flows
arising from investing activities.
 Cash payments to acquire property, plant and equipment, intangibles and other non-current assets,
including those relating to capitalised development costs and self-constructed property, plant and
equipment
 Cash receipts from sales of property, plant and equipment, intangibles and other non-current assets
 Cash payments to acquire equity or debt of other entities
 Cash receipts from sales of equity or debt of other entities
 Interest received
 Dividends received
4.2 Cash receipts from sales of property, plant and equipment

A T account can be used for calculating the cash receipts from sales of property, plant and equipment (PPE).
The company's accounts will include the amount of any profit or loss on disposal. A note to the accounts on
non-current assets will show the cost and the accumulated depreciation for property, plant and equipment
disposed of during the year. The cash received from the sale is the balancing figure in the T account.
PROPERTY, PLANT AND EQUIPMENT – DISPOSAL ACCOUNT
CU CU
Cost/valuation of asset disposed of X Accumulated depreciation X
Profit on disposal X Loss on disposal X
Cash received (balancing figure) X
X X
Worked example: Cash receipts from sale of PPE

A company's balance sheet as at the beginning and the end of the year showed the following.
Property, plant and equipment
Cost CU
At 1 January 20X7 760,000
Disposals (240,000)
At 31 December 20X7 520,000
Depreciation
At 1 January 20X7 270,000
Disposals (180,000)
Charge for year (50,000)
Carrying amount

The property, plant and equipment was disposed of at a loss of CU7,000. What was the cash flow from the
disposal?
Solution
The balancing figure can be obtained by constructing a disposal of property, plant and equipment account as
a working.
PROPERTY, PLANT AND EQUIPMENT – DISPOSAL ACCOUNT
CU CU
Cost 240,000 Accumulated depreciation 180,000
Loss on disposal 7,000
Cash received (balancing figure) 53,000
240,000 240,000
4.3 Cash payments for purchase of property, plant and equipment

Purchase of property, plant and equipment during a period can be calculated by means of a T account or a
working table.
PROPERTY, PLANT AND EQUIPMENT
CU CU
Balance b/d X Disposals X
Revaluation reserve X
Additions (balancing figure) X Balance c/d X
X X
Interactive question 2: Cash payments for PPE [Difficulty level: Intermediate]

A company's accounts show that at 31 December 20X7, it had property, plant and equipment at cost or
valuation of CU6,800,000. During the year, it disposed of assets that had a cost of CU850,000. It also
revalued a freehold property upwards by CU300,000. At 31 December 20X6, the company's property,
plant and equipment at cost or valuation had been CU5,100,000.
What were purchases of property, plant and equipment during the year?
CU CU

4.4 Interest and dividends received

Returns received in cash from investments will include interest and dividends received. The cash flows can
be calculated by using an interest received or dividends received T account. Both T accounts are very
similar and are prepared as follows:
INTEREST/DIVIDENDS RECEIVED
CU CU
Balance b/d (receivable) X Cash receipt (balancing figure) X
Income statement X Balance c/d (receivable) X
X X
Interactive question 3: Interest received [Difficulty level: Easy]

A company had interest receivable of CU35,000 at the start of the year and interest receivable of
CU42,000 at the end of the year. The income statement for the year shows interest income of CU90,000.
What were the cash receipts for interest received in the year?
INTEREST RECEIVED
CU CU
5 Financing activities
Section overview
 Financing cash flows comprise receipts from or repayments to external providers of finance.
5.1 Financing activities

This section of the cash flow statement shows the share of cash which the entity's capital providers have
claimed during the period. This is an indicator of likely future interest and dividend payments. The
standard gives the following examples of cash flows which might arise under this heading.
 Cash proceeds from issuing shares
 Cash payments to owners to acquire or redeem the entity's shares
 Cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short or long-term
borrowings
 Repayments of capital of amounts borrowed under finance leases (We will look at this issue in
Chapter 16.)
 Dividends paid

5.2 Cash received from issuing shares

The amount of cash received from new issues of shares can usually be calculated from the opening and
closing balance sheet figures for share capital and share premium.
As a general rule:
SHARE CAPITAL AND PREMIUM
CU CU
Balance b/d X
Balance c/d X Cash receipt (balancing figure) X
X X
This rule does not apply fully when the company makes a bonus issue of shares during the year, and some
of the new share capital is obtained by means of reducing a reserve account other than the share premium.
To calculate cash receipts from share issues in the year, the amount transferred to share capital from the
other reserve account should be subtracted.
Worked example: Cash received from share issue

Rustler Ltd's annual accounts for the year to 31 December 20X7 show the following figures.
At 31.12.X7 At 31.12.X6
CU CU
Share capital: Ordinary shares of 50p 6,750,000 5,400,000
Share premium 12,800,000 7,300,000
There were no bonus issues of shares during the year. What amount of cash was raised from shares issued
during the year?
Solution
CU CU
Balance b/d
(5,400,000 + 7,300,000) 12,700,000
Balance c/d 19,550,000
(6,750,000 + 12,800,000) Cash receipt (balancing figure) 6,850,000
19,550,000 19,550,000
Interactive question 4: Bonus issue [Difficulty level: Intermediate]

Groat Ltd's accounts for the year to 31 December 20X7 show the following figures.
At 31.12.X7 At 31.12.X6
CU CU
Share capital: Ordinary shares of 10p 22,500,000 10,000,000
Share premium 900,000 4,800,000
The company made a one for two bonus issue of shares during the year. It used the share premium account
and CU200,000 from retained earnings to do this.
What amount of cash was raised from share issues during the year?


CU CU
5.3 Cash from issuing loan stock or raising a loan

The cash derived from obtaining a new loan during the year or from issuing new loan stock or
debentures should be apparent from a comparison of the opening and closing balance sheet figures for
non-current interest-bearing borrowings. An increase during the year represents new financing, and
should be taken as the amount of cash received from financing.
It is important that all loans in the balance sheet should be taken into consideration in the
calculation. There may be a loan that is within 12 months of repayment. If so, it will be included within
current liabilities in the year-end balance sheet as ‘short-term borrowings’, when it would have been a non-
current liability in the balance sheet at the start of the year. The loan has not been repaid during the year,
merely re-classified from non-current liability to current liability.
5.4 Repayment of non-current interest-bearing borrowings

In the same way, a reduction in interest-bearing borrowings indicates that a loan has been repaid, or
that loan stock or debentures have been redeemed. It should be assumed that the loans are repaid or loan
stock is redeemed for cash.
5.5 Dividends paid

Cash flows from dividends paid should be disclosed separately.
Dividends paid by the entity can be classified in one of two ways.
(a) As a financing cash flow, showing the cost of obtaining financial resources (as in the example cash
flow statement in section 2 above). This is the presentation adopted in these Learning Materials.
(b) As a component of cash flows from operating activities so that users can assess the entity's ability
to pay dividends out of operating cash flows.
Cash flows for dividends paid can be calculated using a T account.
Worked example: Dividends paid

A company has declared preference dividends for the year of CU7,000 (based on its 7% CU100,000
preference shares in issue). At the start of the year the balance sheet included a liability of CU3,500 for
preference dividends payable. At the end of the year no amount was owing to preference shareholders in
respect of dividends.
The preference dividend paid for the year is not simply the CU7,000 declared and reflected in retained
earnings as this amount needs to be adjusted for any opening and closing liabilities.

DIVIDENDS PAID
CU CU
Cash payment (balancing figure) 10,500 Balance b/d 3,500
Balance c/d 0 Retained earnings 7,000
10,500 10,500
The cash paid during the year of CU10,500 is the second half year preference dividend due from last year
and the whole of this year’s preference dividend (all paid during the year).
Point to note: Any dividends for the year will be disclosed in the statement of changes in equity.
6 Disclosures
Section overview
 BAS 7 requires certain additional disclosures to accompany the cash flow statement.
6.1 Components of cash and cash equivalents

The following disclosures are required:
 The components of cash and cash equivalents.
 A reconciliation showing the amounts in the cash flow statement reconciled with the equivalent items
reported in the balance sheet.
 The accounting policy used in deciding the items included in cash and cash equivalents (BAS 1).
6.2 Other disclosures

All entities should disclose, together with a commentary by management, any other information likely
to be of importance, for example:
 Restrictions on the use of or access to any part of cash equivalents.
 The amount of undrawn borrowing facilities which are available.
 Cash flows which increased operating capacity compared to cash flows which merely maintained
operating capacity.
6.3 Significant non-cash transactions

Many investing and financing activities do not have a direct impact on current cash flows although they do
affect the capital and asset structure of an entity. Significant 'non-cash transactions' should be
disclosed.
Examples include:
 The acquisition of assets either by assuming directly related liabilities or by means of a finance lease
 The acquisition of an entity by means of an issue of equity shares

6.4 Example: Notes to the cash flow statement

The following shows how the required disclosures would be presented.
Note: Cash and cash equivalents
Cash and cash equivalents consist of cash on hand and balances with banks, and investments in money
market instruments. Cash and cash equivalents included in the cash flow statement comprise the following
balance sheet amounts.
20X7 20X6
CUm CUm
Cash on hand and balances with banks 40 25
Short-term investments 370 95
Cash and cash equivalents 410 120
The company has undrawn borrowing facilities of CU2,000m of which only CU700m may be used for future
expansion.
Note: Property, plant and equipment
During the period the company acquired property, plant and equipment with an aggregate cost of
CU1,250m of which CU900m was acquired by finance lease. Cash payments of CU350m were made to
purchase property, plant and equipment.
7 Preparing a cash flow statement
Section overview
 This section gives you a step by step approach for preparing a cash flow statement.
7.1 Technique
Worked example: Preparing a cash flow statement

Able Ltd’s income statement and statement of changes in equity for the year ended 31 December 20X7 and
balance sheets at 31 December 20X6 and 31 December 20X7 were as follows.
ABLE LTD
Income statement for the year ended 31 December 20X7
CU'000 CU'000
Revenue 720
Raw materials consumed 70
Staff costs 94
Depreciation 118
Loss on disposal of non-current asset 18
(300)
Profit from operations 420
Finance cost (28)
Profit before tax 392
Income tax (124)
Profit for the period 268

ABLE LTD
Balance sheets as at 31 December
20X7 20X6
CU'000 CU'000 CU'000 CU'000
ASSETS
Non-current assets
Cost 1,596 1,560
Depreciation 318 224
1,278 1,336
Current assets
Inventory 24 20
Trade receivables 76 58
Bank 48 56
148 134
Total assets 1,426 1,470
EQUITY AND LIABILITIES

Equity
Share capital 360 340
Share premium 36 24
Retained earnings 686 490
1,082 854
Non-current liabilities
Long-term loans 200 500
Current liabilities
Trade payables 12 6
Taxation 102 86
Proposed dividend 30 24
144 116
Total equity and liabilities 1,426 1,470
ABLE LTD
Statement of changes in equity (extract) for the year ended 31 December 20X7
Retained
earnings
CU'000
Dividends on ordinary shares (72)
Balance brought forward 490
Balance carried forward 686
During the year, the company paid CU90,000 for a new piece of machinery.
Prepare a cash flow statement for Able Ltd for the year ended 31 December 20X7 in accordance with the
requirements of BAS 7, using the indirect method. The reconciliation of profit before tax to cash generated
from operations should be shown as a note.
Solution
Step 1
Set out the proforma cash flow statement with the headings required by BAS 7 and the reconciliation
note. You should leave plenty of space. Ideally, use three or more sheets of paper, one for the main
statement, one for the notes and one for your workings. It is obviously essential to know the formats very
well.
Step 2
Begin with the cash flows from operating activities as far as possible. You will usually have to calculate
such items as depreciation, loss on sale of non-current assets, interest paid and tax paid.

Step 3
Calculate the cash flow figures for dividends paid, purchase or sale of non-current assets, issue of
shares and repayment of loans if these are not already given to you (as they may be).
Step 4
If you are not given the profit figure, open up a working for the income statement. Using the opening
and closing balances of retained earnings, the taxation charge and dividends paid and proposed, you will be
able to calculate profit for the year as the balancing figure to put in the cash flows from operating activities
section.
Step 5
You will now be able to complete the statement by slotting in the figures given or calculated.
ABLE LTD
Cash flow statement for the year ended 31 December 20X7
CU'000 CU'000
Cash generated from operations (see note) 540
Interest paid (28)
Tax paid (86 + 124 – 102) (108)
Net cash from operating activities 404
Purchase of property, plant and equipment (90)
Proceeds from sale of property, plant and equipment (W) 12
Proceeds from issue of share capital (360 + 36  340  24) 32
Long-term loans repaid (500  200) (300)
Dividends paid (72 – 30 + 24) (66)
Net cash used in financing activities (334)
Decrease in cash and cash equivalents (8)
Cash and cash equivalents at 1.1.X7 56
Cash and cash equivalents at 31.12.X7 48
Note to the cash flow statement

Reconciliation of profit before tax to cash generated from operations for the year ended 31 December
20X7
CU'000
Depreciation charges 118
Loss on sale of tangible non-current assets 18
Interest expense 28
Increase in inventories (4)
Increase in receivables (18)
Increase in payables 6
Cash generated from operations 540
WORKING
Non-current asset disposals
COST
CU'000 CU'000
Balance b/d 1,560 Balance c/d 1,596
Purchases 90 Disposals (balancing figure) 54
1,650 1,650
ACCUMULATED DEPRECIATION
CU'000 CU'000
Balance c/d 318 Balance b/d 224
Depreciation on disposals Charge for year 118
(balancing figure) 24
342 342
NBV of disposals (54 – 24) 30

Net loss reported (18)
Proceeds of disposals 12
Summary and Self-test
Summary
Cash and Cash equivalents

- Cash comprises cash on hand and on
demand deposits
- Cash equivalents are short-term, highly
liquid investments that are readily
convertible to known amounts of cash
and which are subject to an insignificant
risk of change in value
BAS 7 requires cash flows to be classified

as follows
Self-test
Answer the following questions
1 Which one of the following options best describes the objective of BAS 7 Cash Flow Statements?
A To aid comparison of cash flows between entities
B To assist users to understand the cash management and treasury practices of an entity
C To assist users to confirm the going concern of an entity
D To enable entities to report cash inflows and outflows analysed under standard headings
2 Which one of the following statements gives the best definition of cash equivalents as set out in BAS 7
Cash Flow Statements?
A Cash equivalents are cash, overdrafts, short-term deposits, options and other financial
instruments and equities traded in an active market
B Cash equivalents are short-term highly liquid investments subject to insignificant risks of change
in value
C Cash equivalents are readily disposable investments
D Cash equivalents are investments which are traded in an active market
3 In a company's cash flow statement prepared in accordance with BAS 7 Cash Flow Statements, a
revaluation of non-current assets during the year will be:
A Entirely excluded
B Shown under cash flows from operating activities
C Disclosed under investing activities
D Shown as a cash inflow
4 Information concerning the non-current assets of Ealing Ltd is detailed in the table. During the year
non-current assets which had cost CU80,000 and which had a net book value of CU30,000 were sold
for CU20,000. Net cash from operating activities for the year was CU300,000.
Start of year End of year
CU CU
Cost 180,000 240,000
Aggregate depreciation (120,000) (140,000)
Carrying amount 60,000 100,000
There was no other cash activity. As a result of the above, cash increased over the year by
A CU240,000
B CU260,000
C CU320,000
D CU180,000
5 Waterloo Ltd acquired a freehold building for cash, financed in full by issuing for cash 166,000 CU1
ordinary shares at a premium of CU2 per share.
In its cash flow statement prepared in accordance with BAS 7 Cash Flow Statements this transaction
should be stated as:
A Inflow CU498,000, outflow nil
B Inflow nil, outflow nil
C Inflow CU498,000, outflow CU498,000
D Inflow nil, outflow CU498,000
6 Information from the cash flow statement and related notes of Gresham Ltd for the year ended 31
December 20X1 can be found in the table below.
CU
Depreciation 30,000
Profit on sale of property, plant and equipment 5,000
Proceeds from sale of property, plant and equipment 20,000
Purchase of property, plant and equipment 25,000
If the net book value of property, plant and equipment was CU110,000 on 31 December 20X0, what
was it on 31 December 20X1?
A CU85,000
B CU90,000
C CU70,000
D CU80,000
7 In a cash flow statement prepared under BFRS under which category of cash flow would interest paid
usually be classified?
A Cash flows from operating activities
B Cash flows from financing activities
C Returns on investments and servicing of finance
D Financing
8 ROXY LTD (Note: this question is included to provide practice of basic techniques)
The financial statements of Roxy Ltd at 30 June were as follows.
Balance sheet at 30 June 20Y8
20Y8 20Y7
CU CU CU CU
ASSETS
Non-current assets
Property, plant and equipment 20,750 14,000
Current assets
Cash and cash equivalents - 1,300
25,950 15,000

Capital and reserves
Ordinary share capital 3,000 3,000
Accumulated profits/losses 16,200 3,800
19,200 6,800
Interest-bearing borrowings 6,000 10,000
Current liabilities
Bank overdrafts 11,000 -
Trade and other payables 8,000 11,000
Accruals 700 200
Tax liabilities 1,800 1,000
21,500 12,200
46,700 29,000
Income statement (extracts)
20Y8 20Y7
CU CU
Profit from operations 15,400 5,900
Finance cost (1,000) (1,400)
Profit before tax 14,400 4,500
Tax (2,000) (1,500)
Net profit for the year 12,400 3,000
Additional Information
(1) An analysis of property, plant and equipment shows the following.
20Y8 20Y7
CU CU CU CU
Building
Cost 22,000 12,000
Depreciation (4,000) (1,000)
18,000 11,000
Plant and machinery
Cost 5,000 5,000
Depreciation (2,250) (2,000)
2,750 3,000
20,750 14,000
(2) Machinery with a net book value of CU250 was sold at the beginning of 20Y8 for CU350. This
machinery had originally cost CU1,000.
(3) No dividends have been declared or paid in recent years.
(4) The accruals are in respect of interest payable.

Requirement
Under the indirect method, prepare a clash flow statement, together with a note reconciling profit
before tax to cash generated from operations for the year ended 30 June 20Y8.
9 MIDDLESEX LTD (Note: this question is included to provide practice of basic techniques)
The balance sheet of Middlesex Ltd as at 30 June 20Y8, including comparative figures, is given below.
20Y8 20Y7
CU CU CU CU
ASSETS
Non-current assets
Less Depreciation (70,000) (69,000)
263,000 242,000
Investment 50,000 -
313,000 242,000
Current assets
Cash and cash equivalents 20,000 10,000
61,000 48,000
Total assets 374,000 290,000

Ordinary share capital (CU1 shares) 95,000 50,000
Share premium 15,000 10,000
Revaluation reserves 12,000 12,000
Accumulated profits 149,000 115,000
271,000 187,000
Interest-bearing borrowings (12% 50,000 60,000
debentures 20Z1)
Current liabilities
Provisions - 2,000
Tax liabilities 7,000 3,000
Accruals 19,000 19,000
53,000 43,000
You are also given the following information which is already reflected correctly in the accounts.
(1) During the year a bonus issue of 1 for 10 was made on the ordinary shares in issue at 30 June
20Y7, utilising available profits.
(2) New shares were issued on 1 July 20Y7. Part of the proceeds was used to redeem CU10,000
12% debentures 20Z1 at par.
(3) During the year certain tangible non-current assets were disposed of for CU20,000. The assets
had originally cost CU40,000 and had a net book value at the disposal date of CU18,000.
(4) Trade and other payables include CU5,000 for 20Y8 relating to the fixed asset purchases.
(5) The corporation tax charge for the year is CU7,000.
Requirement
Prepare a cash flow statement for the year ended 30 June 20Y8 and the note reconciling profit before
tax with cash generated from operations.
10 Set out below are the financial statements of Emily Ltd. You are the financial controller, faced with the
task of implementing BAS 7 Cash Flow Statements.
EMILY LTD
Income statement for the year ended 31 December 20X7
CU'000
Revenue 2,553
Cost of sales (1,814)
Gross profit 739
Distribution costs (125)
Administrative expenses (264)
Profit from operations 350
Investment income 25
Finance cost (75)
Income tax expense (140)
Balance sheets as at 31 December

20X7 20X6
ASSETS CU'000 CU'000
Non-current assets
Property, plant and equipment 380 305
Intangibles 250 200
Investments – 25
Current assets
Inventories 150 102
Receivables 390 315
Short-term investments 50 –
Cash in hand 2 1
Total assets 1,222 948

Equity
Share capital (CU1 ordinary shares) 200 150
Share premium 160 150
Revaluation reserve 100 91
Retained earnings 160 100
Long-term loan 170 50
Current liabilities
Trade payables 127 119
Bank overdraft 85 98
Taxation 120 110
Dividends proposed 100 80
Total equity and liabilities 1,222 948
Statement of changes in equity for the year ended 31 December 20X7 (extract)
Retained
earnings
CU'000
Dividends on ordinary shares (100)
Balance brought forward 100
Balance carried forward 160
The following information is available.

(a) The proceeds of the sale of non-current asset investments amounted to CU30,000.
(b) Fixtures and fittings, with an original cost of CU85,000 and a net book value of CU45,000, were
sold for CU32,000 during the year.
(c) The following information relates to property, plant and equipment.
31.12.20X7 31.12.20X6
CU'000 CU'000
Cost 720 595
Accumulated depreciation 340 290
Net book value 380 305
(d) 50,000 CU1 ordinary shares were issued during the year at a premium of 20p per share.
(e) The short-term investments are highly liquid and are close to maturity.
Requirement
Prepare a cash flow statement for the year to 31 December 20X7 using the indirect method laid out
in BAS 7 Cash Flow Statements. The reconciliation of profit before tax to cash generated from
operations should be shown as a note. Your answer should also include an analysis of cash and cash
equivalent balances.
11 HATCHBACK MOTOR COMPONENTS LTD
Hatchback Motor Components Ltd has prepared the summarised accounts as set out below.
Income statements for the years ended 30 April
20X7 20X6
CU'000 CU'000
Revenue 74,680 69,937
Cost of sales (51,595) (47,468)
Gross profit 23,085 22,469
Distribution and administrative costs (17,681) (16,920)
Profit before tax 5,404 5,549
Tax (2,634) (1,093)
Net profit for the period 2,770 4,456
Balance sheets at 30 April
20X7 20X6
CU'000 CU'000 CU'000 CU'000
ASSETS
Non-current assets
Investments 7,100 –
38,046 25,141
Current assets
Cash and cash equivalents 863 724
29,697 24,720
20X7 20X6
EQUITY AND LIABILITIES CU'000 CU'000
Ordinary share capital (CU1 ordinary shares) 13,000 10,000
Share premium 12,500 5,000
Revaluation reserve 7,450 2,650
Retained earnings 24,776 22,856
57,726 40,506
Non-current liabilities 3,250 4,250
Current liabilities 6,767 5,105

Notes relating to the accounts
(1) Analysis of property, plant and equipment
20X7 20X6
CU'000 CU'000
Freehold buildings 25,100 19,780
Fixtures and fittings 5,846 5,361
30,946 25,141
(2) Depreciation has not been provided on freehold buildings. During the year a professional
revaluation – taking account of additions during the year – has been incorporated into the books
of account. There were no disposals during the year.
(3) Additions to fixtures and fittings during the year totalled CU1,365,000 at cost. There were no
disposals.
(4) Current liabilities
20X7 20X6
CU'000 CU'000
Accruals 1,200 1,235
Tax liability 2,796 1,238
6,767 5,105
Taxation provided at 30 April 20X6 was settled at a figure lower than the amount provided.
(5) During the year the company made a rights issue of shares on the basis of three new shares for
every ten shares held at a price of CU3.50 per share. Pending the purchase of new plant part of
the proceeds of the issue has been invested in shares in other UK companies.
Requirement
Prepare a cash flow statement in accordance with BAS 7 Cash Flow Statements under the indirect
method, for the year ended 30 April 20X7.
Now go back to the Learning Objectives in the Introduction. If you are satisfied you have achieved these
objectives, please tick them off.
Technical reference
Point to note: All of BAS 7 is examinable with the exception of paragraphs 24-28, 38 and Appendix B. The
paragraphs listed below are the key references you should be familiar with. (Paragraph references relating
to the treatment of leased assets in the cash flow statement and consolidated cash flow statements are
dealt with in Chapter 16).
1 Objective of the cash flow statement

 The cash flow statement should show the historical changes in cash and cash
equivalents.
 Cash comprises cash on hand and demand deposits. BAS 7(6)
 Cash equivalents are short-term, highly liquid investments that are readily BAS 7(6)
convertible to known amounts of cash and which are subject to an insignificant
risk of change in value.
2 Presentation of a cash flow statement Appendix A
 Cash flows should be classified by operating, investing and financing activities. BAS 7(10)
 Cash flows from operating activities are primarily derived from the principal BAS 7(13–14)
revenue-producing activities of the entity.
 There are two methods of presentation for cash flows from operating activities
– Direct method BAS 7(19)
– Indirect method BAS 7(20)

 Cash flows from investing activities are those related to the acquisition or disposal
of any non-current assets, or trade investments together with returns received in
cash from investments (i.e. dividends and interest received).
 Financing activities include: BAS 7(16)
– Cash proceeds from issuing shares

– Cash proceeds from issuing debentures, loans, notes, bonds, mortgages and
other short or long-term borrowings
– Cash repayments of amounts borrowed
– Repayment of capital of amounts borrowed under finance leases
– Dividends paid to shareholders
3 Disclosures BAS 7(50)
 Components of cash and cash equivalents. Appendix A

 Reconciliation of the amounts in the cash flow statement with the equivalent
balance in the balance sheet.
 Information (together with a commentary) which may be relevant to the users.
 The cash flow statement does not record non-cash transactions. Significant non- BAS 7(43)
cash transactions should be disclosed.
Answers to Self-test
1 D To enable entities to report cash inflows and outflows analysed under standard headings. (BAS 7).
2 B Cash equivalents are short-term highly liquid investments subject to insignificant risks of changes
in value.
3 A A revaluation of non-current assets during the year will be entirely excluded.
Revaluations have no cash flow implications.
4 D The correct answer is CU180,000.
NON-CURRENT ASSETS – COST
CU CU
Balance b/d 180,000 Disposals 80,000
Therefore purchases 140,000 Balance c/d 240,000
320,000 320,000
DEPRECIATION
CU CU
Balance b/d 120,000
Disposals 50,000 Therefore charge 70,000
Balance c/d 140,000
190,000 190,000
DISPOSALS
CU CU
Cost 80,000 Accumulated depreciation 50,000
Proceeds 20,000
Therefore loss 10,000
80,000 80,000
CU
Cash from operations 300,000
Cash inflow:
Disposal proceeds 20,000
320,000
Cash outflow: purchases of non-current assets (140,000)
Therefore net cash increase 180,000
Note that adjustments for depreciation and loss on disposal will already be included in net cash
from operating activities.
5 C Inflow CU498,000, outflow CU498,000.
The outflow is classified under 'Purchase of property, plant and equipment'.
The inflow is classified under 'Proceeds from issuance of share capital'.
6 B CU90,000
PROPERTY (NBV)
CU CU
Balance b/d 110,000 Depreciation 30,000
Additions 25,000 Disposals (NBV) 15,000
Balance c/d 90,000
135,000 135,000
7 A (BAS 7)
8 ROXY LTD
Cash flow statement for year ended 30 June 20Y8
CU CU
Interest paid (W5) (500)
Tax paid (W4) (1,200)
Purchase of property, plant and equipment (W1) (11,000)
Proceeds from sale of property, plant and equipment (W3) 350
Net cash used in investing activities (10,650)

Redemption of non-current interest-bearing borrowings (4,000)
Net cash used in financing activities (4,000)
Net change in cash and cash equivalents (12,300)
Cash and cash equivalents brought forward 1,300
Cash and cash equivalents carried forward (11,000)
Reconciliation of profit/loss before tax to cash generated from operations fro the
year ended 30 June 20Y8
CU
Profit/loss before tax 14,400
Finance cost 1,000
Property, plant and equipment – depreciation charge (W2) 4,000
Profit/loss on disposal of property, plant and equipment (W3) (100)
Change in inventories (W6) (5,000)
Change in trade and other receivables (W6) (7,250)
Change in trade and other payables (3,000)
WORKINGS
(1) PROPERTY, PLANT AND EQUIPMENT – COST OR VALUATION
CU CU
B/f (5,000 + 12,000) 17,000 Disposal 1,000
Additions (β) 11,000 C/f (5,000 + 22000) 27,000
28,000 28,000
(2) PROPERTY, PLANT AND EQUIPMENT – ACCUMULATED DEPRECIATION

CU CU
Disposal (1,000 – 250) 750 B/f (1,000 + 2000 3,000
C/f (4,000 + 2,250 6,250 Depreciation charge for the year (β) 4,000
7,000 7,000
(3) PROPERTY, PLANT AND EQUIPMENT – DISPOSAL ACCOUNT

CU CU
Cos 1,000 Accumulated depreciation 750
Profit on sale 100 Proceeds 350
1,100 1,100

CU CU
Cash paid (β) 1,200 B/f 1,000
C/f 1,800 Income statement 2,000
3,000 3,000

CU CU
Cash paid (β) 500 B/f 200
C/f 700 Income statement 1,000
1,200 1,200
(6) Changes in current items

CU
Inventories (16,000 – 11,000) (5,000)
Receivables (9,950 – 2700) (7,250)
Payables (11,000 – 8,000) (3,000)
9 MIDDLESEX LTD
Cash flow statement for the year ended 30 June 20Y8
CU CU
Interest paid (6,000)
Tax paid (W2) (3,000)

Purchase of property, plant and equipment (W3) (57,000)
Proceeds from sale of property, plant and equipment (W3) 20,000
Purchase of investments (50,000)
Net cash used in investing activities (87,000)

Issues of ordinary shares (W4) 45,000
Redemption of non-current interest-bearing borrowings (10,000)
Net cash used in financing activities 35,000
Net change in cash and cash equivalents 10,000
Cash and cash equivalents carried forward 20,000
Reconciliation's of profit/loss before tax to net cash generated from operations for the
year ended 30 June 20Y8
CU
Profit/loss before tax (W7) 46,000
Finance cost (W6) 6,000
Profit/loss on disposal of property, plant and equipment (2,000)
Change in inventories (W5) (1,000)
Change in trade and other receivables (W5) (3,000)
Change in trade and other payables (W5) (2,000)
Change in provision (2000)
WORKINGS
(1) PROPERTY, PLANT AND EQUIPMENT – ACCUMULATED DEPRECIATION
CU CU
Disposal (40,000 – 18,000) 22,000 B/f 69,000
C/f 70,000 Charge for year (β) 23,000
92,000 92,000
(2) TAX PAID

CU CU
Cash (β) 3,000 B/f 3,000
C/f 7,000 Charge for year 7,000
10,000 10,000

CU CU
B/f 311,000 Disposal 40,000
Additions (β) 57,000 C/f 333,000
C/f 5,000
373,000 373,000
(4) SHARE CAPITAL AND PREMIUM

CU CU
B/f (50,000 + 10,000) 60,000
Accumulated profit/losses
(bonus issue) (50,000 ÷ 10) 5,000
C/f (95,000 + 15,000) 110,000 Cash (β) 45,000
373,000 110,000

CU
Inventories (12,000 – 11,000) (1,000)
Receivables (29,000 – 27,000) (2,000)
Payables (27,000 – 5,000 – 19,000) 3,000
(6) Finance cost

CU50,000 x 12% = CU6,000
(7) ACCUMULATED PROFIT/LOSS

CU CU
Bonus issue 5,000 B/f 115,000
Corporation tax 7,000 Net profit for the period (β) 46,000
C/f 149,000
161,000 161,000
10 EMILY LTD
Cash flow statement for the year ended 31 December 20X7
CU'000 CU'000
Interest paid (75)
Tax paid (110 + 140 – 120) (130)
Net cash from operating activities 128
Purchase of property, plant and equipment (W2) (201)
Purchase of intangible non-current assets (50)
Proceeds from sale of property, plant and equipment 32
Proceeds from sale of non-current asset investments 30
Interest received 25
Proceeds from issue of share capital 60
Long-term loan 120
Dividends paid (100 + 80 – 100) (80)
Net cash from financing activities 100
Increase in cash and cash equivalents (Note) 64
Cash and cash equivalents at 1.1.X7 (Note) (97)
Cash and cash equivalents at 31.12.X7 (Note) (33)
Notes to the cash flow statement

Reconciliation of profit before tax to net cash generated from operations for the year ended 31
December 20X7
CU'000
Depreciation charge (W1) 90
Loss on sale of property, plant and equipment (45 – 32) 13
Profit on sale of non-current asset investments (5)
Investment income (25)
Finance cost 75
Increase in inventories (48)
Increase in receivables (75)
Increase in payables 8
Analysis of the balances of cash and cash equivalents as shown in the balance sheet
Change
20X7 20X6 in year
CU'000 CU'000 CU'000
Cash in hand 2 1 1
Short term investments 50 – 50
Bank overdraft (85) (98) 13
(33) (97) 64
WORKINGS
(1) Depreciation charge
ACCUMULATED DEPRECIATION
CU’000 CU’000
Depreciation on assets sold Balance b/d 290
(85 – 45) 40 Charge for year
Balance c/d 340 (balancing figure) 90
380 380
(2) Purchase of property, plant and equipment

PROPERTY, PLANT AND EQUIPMENT (COST)
CU'000 CU'000
1.1.X7 Balance b/d 595 Disposals 85
Revaluation (100  91) 9
Purchases (balancing figure) 201 31.12.X7 Balance c/d 720
805 805
11 HATCHBACK MOTOR COMPONENTS LTD

Cash flow statement for the year ended 30 April 20X7
Cash flows from operating activities CU CU
Cash generated from operations 1,550,000
Tax paid (W4) (1,076,000)
Cash ﬂows from investing activities
Purchase of property, plant and equipment (W3) (1,885,000)
Purchase of investments (7,100,000)
Net cash used in investing activities (8,985,000)
Cash ﬂows from financing activities
Proceeds from issue of ordinary shares (W2) 10,500,000
Redemption of non-current interest-bearing borrowings (1,000,000)
Dividends paid (W5) (850,000)
Net cash from financing activities 8,650,000
Net change in cash and cash equivalents 139,000
Cash and cash equivalents carried forward
863,000
Note to the cash flow statement
Reconciliation of profit before tax to cash generated from operations for the year ended 30 April 20X7
CU
Profit before tax 5,404,000
Increase in inventories (W6) (595,000)
Increase in trade and other receivables (W6) (4,243,000)
Increase in trade and other payables (W6) 139,000
Decrease in accruals (35,000)
Cash generated from operations 1,550,000
WORKINGS
(1) FIXTURES AND FITTINGS (AT NBV)
CU CU
Balance b/d 5,361,000 Balance c/d 5,846,000
Additions 1,365,000 Depreciation charge () 880,000
6,726,000 6,726,000
(2) SHARE CAPITAL AND PREMIUM

CU CU
Balance b/d
Balance c/d (10,000,000 + 5,000,000) 15,000,000
(13,000,000 + 12,500,000) 25,500,000 Cash received () 10,500,000
25,500,000 25,500,000
(3) FREEHOLD BUILDINGS

CU CU
Balance b/d 19,780,000 Balance c/d 25,100,000
Revaluation surplus
(7,450 – 2,650) 4,800,000
Additions () 520,000
25,100,000 25,100,000
Total additions = 520,000 + 1,365,000 = CU 1,885,000
(4) TAX PAID

CU CU
Cash paid () 1,076,000 Balance b/d 1,238,000
Balance c/d 2,796,000 Income statement 2,634,000
3,872,000 3,872,000
(5) RETAINED EARNINGS
CU CU
Dividends paid () 850,000 Balance b/d 22,856,000
Balance c/d 24,776,000 Net profit for the period 2,770,000
25,626,000 25,626,000
CU
Inventories (16,487 – 15,892) (595,000)
Receivables (12,347 – 8,104) (4,243,000)
Payables (2,771 – 2,632) 139,000
Accruals (1,235 – 1,200) (35,000)
Answers to Interactive questions
Answer to Interactive question 1

INCOME TAX PAID
CU CU
Cash payment (balancing figure) 1,085,000 Balance b/d 940,000
Balance c/d 1,125,000 Income statement 1,270,000
2,210,000 2,210,000
Alternatively this could be calculated as follows:
(CU940,000 + CU1,270,000 – CU1,125,000) = CU1,085,000

CU CU
Balance b/d 5,100,000 Disposals 850,000
Revaluation reserve 300,000
Additions (balance) 2,250,000 Balance c/d 6,800,000
7,650,000 7,650,000
The company started the year with PPE at cost or valuation of CU5,100,000 and revalued an asset upward
by CU300,000. It bought a further CU2,250,000 of PPE, giving a total of CU7,650,000 at cost or valuation.
However, there was disposals of PPE with a cost of CU850,000, bringing the year-end figure down to
CU6,800,000.

INTEREST RECEIVED
CU CU
Balance b/d 35,000 Cash received (balancing figure) 83,000
Income statement 90,000 Balance c/d 42,000
125,000 125,000

CU CU
Balance b/d 14,800,000
Balance b/d 23,400,000 Accumulated profits/losses 200,000
Cash received (balance) 8,400,000
23,400,000 23,400,000

Chapter 3 Cash Flow Statement

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Chapter 3 Cash Flow Statement

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chapter 3

Cash flow statements

© The Institute of Chartered Accountants in England and Wales, March 2009 81

Learning objectives Tick off

Stop and think

82 © The Institute of Chartered Accountants in England and Wales, March 2009

© The Institute of Chartered Accountants in England and Wales, March 2009 83

84 © The Institute of Chartered Accountants in England and Wales, March 2009

1 Cash flow information

1.1 Objective of BAS 7

1.3 Benefits of cash flow information

1.4 Cash and cash equivalents

© The Institute of Chartered Accountants in England and Wales, March 2009 85

2 Presentation of a cash flow statement

2.2 Example of a cash flow statement

86 © The Institute of Chartered Accountants in England and Wales, March 2009

Cash flow statement

Net cash from operating activities 1,560

Cash flows from investing activities

Net cash used in investing activities (480)

Cash flows from financing activities

Net cash used in financing activities (790)

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3.1 Operating activities

3.2 Cash generated from operations

3.3 Indirect method

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Worked example: Indirect method

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3.5 Direct method

Worked example: Direct method

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3.6 Payments of interest and tax

Worked example: Interest paid

Interactive question 1: Income tax [Difficulty level: Easy]

See Answer at the end of this chapter.

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4.1 Investing activities

4.2 Cash receipts from sales of property, plant and equipment

Worked example: Cash receipts from sale of PPE

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4.3 Cash payments for purchase of property, plant and equipment

Interactive question 2: Cash payments for PPE [Difficulty level: Intermediate]

See Answer at the end of this chapter.

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4.4 Interest and dividends received

Interactive question 3: Interest received [Difficulty level: Easy]

See Answer at the end of this chapter.

5.1 Financing activities

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5.2 Cash received from issuing shares

Worked example: Cash received from share issue

Interactive question 4: Bonus issue [Difficulty level: Intermediate]

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SHARE CAPITAL AND PREMIUM

See Answer at the end of this chapter.

5.3 Cash from issuing loan stock or raising a loan

5.4 Repayment of non-current interest-bearing borrowings

5.5 Dividends paid

Worked example: Dividends paid

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6.1 Components of cash and cash equivalents

6.2 Other disclosures

6.3 Significant non-cash transactions