STATEMENT OF CASH FLOWS (IAS 7) – CHANGES IN WORKING

CAPITAL
- VERY IMPORTANT NB!!! Changes in working capital needs to be calculated whether
you are preparing your Statement of cash flow according to the direct method or according
to the indirect method. Easily said, for BOTH methods you need to calculate changes in
working capital – Please see the templates of the two methods. You will see for both you need
to calculate the changes in working capital.

- VERY IMPORTANT NB!!! Work through the EXAMPLES at point 5.

1. (Increase) / Decrease in inventory:

- An INCREASE in inventory indicates that you have bought inventory during the year, but
which have not yet been sold.

An INCREASE in inventory is an OUTFLOW of funds. Because you have bought inventory,

which means there was an outflow of money from out of the business.

- A DECREASE in inventory indicates that you have sold inventory during the year, that’s why
your inventory has decreased.

A DECREASE in inventory is an INFLOW of funds. Because you have sold inventory, which
means there was an inflow of money to the business.

2. (Increase) / Decrease in prepaid expenses:

- An INCREASE in prepaid expenses indicates that you have paid an expense in advance.

An INCREASE in prepaid expenses is an OUTFLOW of funds. Because you have paid

expenses in advance, which means there was an outflow of money from out of the business.

- A DECREASE in prepaid expense indicates that you have now have an expense, but you
don’t need to pay it now as it was already paid previously in advance.

A DECREASE in prepaid expenses is regarded as an INFLOW of funds. Because you don’t

have to pay the expense now as it was already paid previously in advance.
3. Increase / (Decrease) in creditors:
- An INCREASE in creditors indicates that you have bought something during the year, but you
have not yet paid for it.

An INCREASE in creditors is regarded as an INFLOW of funds. Because you have bought

something for which you have not yet paid for, which means there was NO outflow of money
from out of the business.

- A DECREASE in creditors indicates that you have paid the creditors during the year, that’s
why your outstanding creditors has decreased.

A DECREASE in creditors is an OUTFLOW of funds. Because you have paid your creditors
during the year, which means there was an outflow of money from out of the business.

4. Increase / (Decrease) in accrued expenses:

- An INCREASE in accrued expenses indicates that you have not yet paid an expense.

An INCREASE in accrued expenses is regarded as an INFLOW of funds. Because you have

an expense for which you have not yet paid for, which means there was NO outflow of
money from out of the business.

- A DECREASE in accrued expenses indicates that you have paid the outstanding expenses
during the year, that’s why your accrued expenses have decreased.

A DECREASE in accrued expenses is an OUTFLOW of funds. Because you have paid your
outstanding expenses (accrued expenses) during the year, which means there was an
outflow of money from out of the business.

5. Examples:
5.1 Example 1:

The following Statement of Financial Position are provided to you:

ACCF 211
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2019

2019 2018
Note R R
ASSETS

Non-current assets XXX XXX

Property, plant and equipment XXX XXX
10% Fixed deposit: ABBA Bank XXX XXX

Current assets XXX XXX

Inventory 285 000 230 500
Trade and other receivables 1 136 000 112 600
Cash and cash equivalents XXX XXX

Total assets XXXX XXXX

EQUITY AND LIABILITIES

Capital and reserves XXX XXX

Ordinary no par value share capital XXX XXX
8% Preference share capital XXX XXX
Revaluation surplus XXX XXX
Retained earnings XXX XXX

Non-current liabilities XXX XXX

Long-term borrowings XXX XXX

Current liabilities XXX XXX

Trade and other payables 2 192 000 174 500
Short-term portion of borrowings XXX XXX
SARS: Income tax payable XXX xxx
Shareholders for dividends XXX XXX

Total equity and liabilities XXXX XXXX

Additional information:

1. Trade and other receivables consist of:

2019 2018
R R
Trade debtors 98 000 86 000
Prepaid expenses 38 000 26 600
136 000 112 600
 2. Trade and other payables consist of:
2019 2018
R R
Trade creditors 182 000 160 000
Accrued expenses 10 000 14 500
192 000 174 500

Required:

1. What is the amount of the change in working capital for inventory?

2. What is the amount of the change in working capital for prepaid expenses?
3. What is the amount of the change in working capital for trade creditors?
4. What is the amount of the change in working capital for accrued expenses?

Answers:

Lecturer note NB!!!: Take note that the change in working capital is exactly the same for
the direct method as well as for the indirect method.

VERY IMPORTANT NB!!!: ALWAYS start with the previous year figure and compare it
with the current (latest) financial year to see if there is an increase or a decrease in the
amount. YOU SHOULD THEN KNOW THE RULES AS PER POINT 1 TO 4 AS EXPLAINED
ABOVE.

1. Increase in inventory of R54 500 (R285 000 - R230 500) from 2018 to 2019. (Outflow of
funds – See point 1 above).

2. Increase in prepaid expenses of R11 400 (R38 000 - R26 600) from 2018 to 2019.
(Outflow of funds – See point 2 above).

3. Increase in creditors of R22 000 (R182 000 – R160 000) from 2018 to 2019. (Inflow of
funds – See point 3 above).

4. Decrease in accrued expenses of R4 500 (R10 000 – R14 500) from 2018 to 2019.
(Outflow of funds – See point 4 above).

5.2 Example 2:

The following Statement of Financial Position are provided to you:

INFINITY (PTY) LTD
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2019

2019 2018
Note R R
ASSETS

Non-current assets XXX XXX

Property, plant and equipment XXX XXX
10% Fixed deposit: ABBA Bank XXX XXX

Current assets XXX XXX

Inventory 260 000 285 000
Trade and other receivables 1 128 000 115 200
Cash and cash equivalents XXX XXX

Total assets XXXX XXXX

EQUITY AND LIABILITIES

Capital and reserves XXX XXX

Ordinary no par value share capital XXX XXX
8% Preference share capital XXX XXX
Revaluation surplus XXX XXX
Retained earnings XXX XXX

Non-current liabilities XXX XXX

Long-term borrowings XXX XXX

Current liabilities XXX XXX

Trade and other payables 2 156 000 174 600
Short-term portion of borrowings XXX XXX
SARS: Income tax payable XXX xxx
Shareholders for dividends XXX XXX

Total equity and liabilities XXXX XXXX

Additional information:

1. Trade and other receivables consist of:

2019 2018
R R
Trade debtors 120 000 98 000
Prepaid expenses 8 000 17 200
128 000 115 200
2. Trade and other payables consist of:
2019 2018
R R
Trade creditors 140 000 166 000
Accrued expenses 16 000 8 600
156 000 174 600

Required:

1. What is the amount of the change in working capital for inventory?

2. What is the amount of the change in working capital for prepaid expenses?
3. What is the amount of the change in working capital for trade creditors?
4. What is the amount of the change in working capital for accrued expenses?

Answers:

Lecturer note NB!!!: Take note that the change in working capital is exactly the same for
the direct method as well as for the indirect method.

VERY IMPORTANT NB!!!: ALWAYS start with the previous year figure and compare it
with the current (latest) financial year to see if there is an increase or a decrease in the
amount. YOU SHOULD THEN KNOW THE RULES AS PER POINT 1 TO 4 AS EXPLAINED
ABOVE.

1. Decrease in inventory of R25 000 (R260 000 - R285 000) from 2018 to 2019. (Inflow of
funds – See point 1 above).

2. Decrease in prepaid expenses of R9 200 (R8 000 – R17 200) from 2018 to 2019. (Inflow
of funds – See point 2 above).

3. Decrease in creditors of R26 000 (R140 000 – R166 000) from 2018 to 2019. (Outflow of
funds – See point 3 above).

4. Increase in accrued expenses of R7 400 (R16 000 – R8 600) from 2018 to 2019. (Inflow
of funds – See point 4 above).