STATEMENT OF CASH FLOWS

STATEMENT OF CASH FLOWS

It is a statement which shows the movement of cash and cash equivalents.
Cash means currency notes and coins.
Cash equivalent means anything ready convertible into cash. For example, Bank, O/D, short term highly liquid investments etc.
ADVANTAGES OF STATEMENT OF CASH FLOWS
1) It helps users to assess liquidity and solvency of the business.

2) It helps in the performance appraisal of the company.

3) It increases company’s image.

4) It looks at the growth potential of the business.

5) It helps in forecasting future cash flows.

6) It provides information on major business activities.

7) It reports cash generated from operations (CGFO) of the business.

DISADVANTAGES STATEMENT OF CASH FLOW
1) It is based upon historical data. So it is backward looking.
2) It ignores some important non-cash transactions like bonus issue and revaluation gain.
3) Cash is a narrow concept. It does not give complete picture of financial position.
4) It does not show exact liquidity (e.g. postpone purchases).
5) It can easily be affected by managerial decisions (e.g. postpone purchase, making certain payments in advance etc.)
ACTIVITIES INVOLVED IN STATEMENT OF CASH FLOWS

OPERATING ACTIVITIES
These are day to day business activities. For e.g. sales, purchases, operating expenses etc.
INVESTING ACTIVITIES
These are the investment activities of business. For e.g. buying and selling of non-current assets and investments, interest income
etc.
FINANCING ACTIVITIES
These are the financing activities of business. For e.g. issue of shares, issue/repayment of debentures, equity dividends paid etc.
METHODS TO CALCULATE CASH GENERATED FROM OPERATIONS

DIRECT METHOD INDIRECT METHOD

1) It is simply based upon cash transactions 1) It uses the information from profit and loss
that occurred during the year. account and balance sheet.

2) Cash book is used in this approach to 2) Profit and loss account and balance sheet to
calculate cash generated from operations. find out cash generated from operations.

3) Non-cash items (such as depreciation, 3) A non-cash item is considered in indirect

provision etc.) are not considered. method to get CGFO.

4) Formula 4) Formula
($) ($)
Cash sales xxx Operating profit xxx
Less: cash purchases (xxx) Add: depreciation/impairment xxx
Add: cash received from debtors xxx Add: provisions xxx
Less: cash paid to creditors (xxx) Add/(Less): disposal of assets xxx
Add: cash incomes xxx (Inc)/Dec : adjustment in stocks xxx
Less: cash expenses (xxx) (Inc)/Dec :adjustment in debtors xxx
Cash generated from operations (CGFO) xxx Inc/(Dec):adjustment in creditors/accruals xxx
(Inc)/Dec: adjustment in prepayments xxx
Cash generated from operations (CGFO) xxx

More detailed information is required. So this Less info is required in this method. So it is
method is not widely used and not widely used and recommended by IAS-7.
recommended by IAS-7
 PRACTICE QUESTIONS
EXAMPLE 1 (BASIC)

Balance sheet of Luciano Pasta Company as at 31-12-2001 is provided below with the comparative figures for the
previous year.

PARTICULARS 31-12-2000 31-12-2000 31-12-2001 31-12-2001

(£000) (£000) (£000) (£000)
NON-
CURRENT
ASSETS
PLANT 200 220
LESS: ACC.DEP (50) 150 (75) 145
CURRENT
ASSETS
INVENTORY 25 35
RECEIVABLES 31 28
BANK 4 60 0 63

TOTAL ASSETS 210 208

EQUITY
ORDINARY 100 100
SHARES (£1)
RETAINED 10 110 30 130
EARNING
NON-
CURRENT
LIABILITIES
LOANS 50 20
CURRENT
LIABILITIES
PAYABLES 45 32
BANK 0 16
TAX DUE 5 50 10 58

TOTAL EQUITY
AND 210 208
LIABILITIES

Income statement for the year 2001 is as follows:

Particulars £(000) £(000)

Sales 250
Less: Cost of sales:
Opening inventory 25
Purchases 150
Closing inventory (35) (140)
Gross profit 110
Operating expenses (45)
Depreciation (25)
Operating profit 40
Interest paid (4)
PBT 36
Tax due (10)
PAT 26
Dividends paid (6)
Retained profits 20
REQUIRED

Prepare statement of cash flows for Luciano Pasta Company for the year ended 31-12-2001 using indirect
method.
Answer

STATEMENT OF CHANGES IN CASH & CASH EQUIVALENTS

YEARS 2000 (£) 000 2001 (£) 000 CHANGE (£) 000
Bank +4 0 -4
Overdraft 0 -16 -16
Increase/(decrease) in +4 -16 -20
cash and cash
equivalents

Luciano Pasta Company

Statement of cash flow for the year ended 31St December 2001

(£) 000 (£) 000

Cash Flows from Operating Activities
Profit/(Loss)before Tax 36
+Finance cost 4
Operating Profit 40
+Depreciation 25
(Increase)/decrease in Inventory (10)
(Increase)/decrease in Receivables 3
Increase/(decrease) in Payables (13)
Cash Generated From Operations (CGFO) 45
- Interest paid (4)
- Tax paid (5)
Net cash Flows From Operating Activities (A) 36
Cash Flows from Investing Activities
Purchase of Non-current asset (Plant) (20)
Net cash Flows From Investing Activities (B) (20)
Cash Flows from Financing Activities
Share capital 0
Long term loans (30)
Equity Dividends paid (6)
Net cash Flows From Financing Activities (C) (36)
Net Increase / (Decrease) in cash and cash equivalents (20)
(A +B +C)
Opening Balance of Cash and Cash Equivalents +4
Closing Balance of Cash and Cash Equivalents (16)

WORKINGS

(1) INTEREST PAID

Opening balance + PL Charge – Closing balance

=0+4–0=4

(2) TAXATION PAID

Opening balance + PL Charge – Closing balance

= 5 + 10 – 10 = 5

(3) DIVIDENDS PAID

Opening balance + PL Charge– Closing balance

=0+6–0=6
EXAMPLE 2 (ASSIGNMENT)

Balance sheet of Giovanni Pizza Ltd as at 31-12-2001 is provided below with the comparative figures for the
previous year.

PARTICULARS 31-12-2000 31-12-2000 31-12-2001 31-12- 2001

(£000) (£000) (£000) (£000)
NON-
CURRENT
ASSETS
PLANT 500 800
LESS: ACC.DEP (100) 400 (200) 600
CURRENT
ASSETS
INVENTORY 57 41
RECEIVABLES 39 59
BANK 0 96 4 104

TOTAL ASSETS 496 704

EQUITY
ORDINARY 200 420
SHARES (£1)
RETAINED 93 293 147 567
EARNING
NON-
CURRENT
LIABILITIES
LOANS 150 50
CURRENT
LIABILITIES
PAYABLES 29 57
BANK 4 0
TAX DUE 20 30
53 87

TOTAL EQUITY
AND
LIABILITIES 496 704
Income statement for 2001 is as follows:

Particulars £(000) £(000)

Sales 820
Less: Cost of sales:
Opening inventory 57
Purchases 393
Closing inventory (41) (409)
Gross profit 411
Operating expenses (211)
Depreciation (100)
Operating profit 100
Interest paid (10)
PBT 90
Tax due (30)
PAT 60
Dividend paid (6)
Retained profits 54
REQUIRED

Prepare statement of cash flows for Giovanni Pizza Ltd for the year ended 31-12-2001 using indirect method.

Answer

STATEMENT OF CHANGES IN CASH & CASH EQUIVALENTS

YEARS 2000 (£) 000 2001 (£) 000 CHANGE (£) 000
Bank 0 +4 +4
Overdraft -4 0 +4
Increase/(decrease) in -4 +4 +8
cash and cash
equivalents

Giovanni Pizza Ltd

Statement of cash flow for the year ended 31St December 2001

(£) 000 (£) 000

Cash Flows from Operating Activities
Profit/(Loss)before Tax 90
+Finance cost 10
Operating Profit 100
+Depreciation 100
(Increase)/decrease in Inventory 16
(Increase)/decrease in Receivables (20)
Increase/(decrease) in Payables 28
Cash Generated From Operations (CGFO) 224
- Interest paid (10)
- Tax paid (20)
Net cash Flows From Operating Activities (A) 194
Cash Flows from Investing Activities
Purchase of Non-current asset (Plant) (300)
Net cash Flows From Investing Activities (B) (300)
Cash Flows from Financing Activities
Share capital 220
Long term loans (100)
Equity Dividends paid (6)
Net cash Flows From Financing Activities (C) 114
Net Increase / (Decrease) in cash and cash equivalents +8
(A +B +C)
Opening Balance of Cash and Cash Equivalents -4
Closing Balance of Cash and Cash Equivalents +4

WORKINGS

(1) INTEREST PAID

Opening balance + PL Charge – Closing balance

= 0 +10 – 0 = 10

(2) TAXATION PAID

Opening balance + PL Charge – Closing balance

= 20 + 30 – 30 = 20

(3) DIVIDENDS PAID

Opening balance + PL Charge– Closing balance

=0+6–0=6
EXAMPLE 3(Cash issue of shares & disposal of NCA)
Required:

Prepare a cash flow statement for the year ended 31 December 2006 using the indirect method. (15 marks)

ANSWER

STATEMENT OF CHANGES IN CASH & CASH EQUIVALENTS

YEARS 2005(£) 000 2006(£) 000 CHANGE (£) 000

Bank 576 130 -446
Overdraft -1800 -2000 -200
Increase/(decrease) in -1224 -1870 -646
cash and cash
equivalents

Pitt Plc.

Statement of cash flow for the year ended 31St December 2006

(£) 000 (£) 000

Cash Flows from Operating Activities
Profit/(Loss)before Tax 3300
+Finance cost 184
- Investment income (163)
Operating Profit 3321
+Depreciation 750
Loss/(gain) on disposal (800 – 700) (100)
(Increase)/decrease in Inventory (1211)
(Increase)/decrease in Receivables (91)
(Increase)/decrease in Prepayments (300)
Increase/(decrease) in Payables 151
Cash Generated From Operations (CGFO) 2520
 - Interest paid (184)
- Tax paid (1400)
Net cash Flows From Operating Activities (A) 936
Cash Flows from Investing Activities
Purchase of non-current asset (1625)
Sale of non-current asset 800
Purchase of investment (820 – 640) (180)
Investment income received 163
Net cash Flows From Investing Activities (B) (842)
Cash Flows from Financing Activities
Share capital & share premium 390
Loans (330)
Equity Dividends paid (800)
Net cash Flows From Financing Activities (C) (740)
Net Increase / (Decrease) in cash and cash equivalents -646
(A +B +C)
Opening Balance of Cash and Cash Equivalents -1224
Closing Balance of Cash and Cash Equivalents -1870

WORKINGS

(1) INTEREST PAID

Opening balance + PL Charge – Closing balance

= 0 +184 – 0 = 184

(2) TAXATION PAID

Opening balance + PL Charge – Closing balance

= 1400 + 1600 – 1600 = 1400

(3) DIVIDENDS PAID

Opening balance + PL Charge– Closing balance

= 0 + 800 – 0 = 800

(4) INVESTMENT INCOME RECEIVED

Opening balance + PL Charge – Closing balance

= 0 +163 – 0 = 163

(5) SHARE CAPITAL & SHARE PREMIUM

Debit (£) Credit (£)

Opening balance 2965
(2475 + 490)
Closing balance 3355 Cash issue 390
(2700 + 655) (Balancing figure)
Total 3355 Total 3355
(Or)

Share issue for cash = 225000 shares x 1 = 225000 + 165000 = £390000

Dr: Cash 390000
Dr: Share capital 225000
Cr: Share premium 165000
EXAMPLE 4 (Bonus issue then cash issue & disposal of NCA)
Required: Prepare a cash flow statement for Sloop Plc. for the year ended 31st March 2008. (16 marks)

ANSWER

STATEMENT OF CHANGES IN CASH & CASH EQUIVALENTS

YEARS 2007(£m) 2008 (£m) CHANGE (£m)

Bank 106 18 -88
Overdraft -302 -390 -88
Increase/(decrease) in -196 -372 -176
cash and cash
equivalents

Sloop Plc.

Statement of cash flow for the year ended 31St December 2008

(£m) (£m)
Cash Flows from Operating Activities
Profit/(Loss)before Tax 660
+Finance cost 36
- Investment income (30)
Operating Profit 666
+Depreciation 150
Loss/(gain) on disposal (160 – 140) (20)
(Increase)/decrease in Inventory (242)
(Increase)/decrease in Receivables (18)
(Increase)/decrease in Prepayments (60)
Increase/(decrease) in Payables (20)
Cash Generated From Operations (CGFO) 456
- Interest paid (34)
- Tax paid (280)
Net cash Flows From Operating Activities (A) 142
Cash Flows from Investing Activities
Purchase of non-current asset (324)
Sale of non-current asset 160
Purchase of investment (154 – 118) (36)
Investment income received 30
Net cash Flows From Investing Activities (B) (170)
Cash Flows from Financing Activities
Share capital & share premium 76
Loans (64)
Equity Dividends paid (160)
Net cash Flows From Financing Activities (C) (148)
Net Increase / (Decrease) in cash and cash equivalents -176
(A +B +C)
Opening Balance of Cash and Cash Equivalents -196
Closing Balance of Cash and Cash Equivalents -372
WORKINGS

(1) INTEREST PAID

Opening balance + PL Charge – Closing balance

= 8 + 36 – 10 = 34

(2) TAXATION PAID

Opening balance + PL Charge – Closing balance

= 280 + 320 – 320 = 280

(3) DIVIDENDS PAID

Opening balance + PL Charge– Closing balance

= 0 + 160 – 0 = 160

(4) INVESTMENT INCOME RECEIVED

Opening balance + PL Charge – Closing balance

= 0 +30 – 0 = 30

5) SHARE CAPITAL & SHARE PREMIUM

Debit (£m) Credit (£m)

Share capital 98 Opening balance 592
(494 + 98)
Share premium 98
Retained earnings 102
Closing balance 770 Cash issue 76
(740 + 30) (balancing figure)
Total 868 Total 868

Bonus issue = 200m shares x £1 = £200.

Dr: Share premium 98
Cr: Retained earnings 102 (balancing figure)
Cr: Share capital 200
Cash issue
Dr: Cash 76
Cr: Share capital 46 (balancing figure)
Cr: Share premium 30
QUESTION 5 (INDIRECT METHOD VS DIRECT METHOD)

Balance sheet and Income Statement of Algernon Ltd as at 31-12-2007 is provided below with the comparative figures for the
previous year.

PARTICULARS 31-12-2006 (£) 31-12-2006 (£) 31-12-2007 (£) 31-12-2007(£)

ASSETS
NON- CURRENT
ASSETS
LAND 43,000 63,000
PLANT 10,000 11,000
LESS: ACC.DEP (4,000) (5,000)
6,000 6,000

BUILDING 50,000 90,000

LESS: ACC.DEP (10,000) (11,000)
40,000 46,000 79,000 85,000
89,000 148,000

INVESTMENT 50,000 80,000

CURRENT ASSETS
INVENTORY 55,000 65,000
RECEIVABLES 40,000 50,000
BANK 3,000 98,000 NIL 115,000

TOTAL ASSETS 237,000 343,000

EQUITY AND
LIABILITIES
CAPITAL &
RESERVES
SHARES (£1) 40,000 50,000
SHARE PREMIUM 12,000 14,000
REV.SURPLUS NIL 20,000
RETAINED 45,000 97,000 45,000 129,000
EARNING
NON- CURRENT
LIABILITIES
10% LOAN NOTES 100,000 150,000
CURRENT
LIABILITIES
PAYABLES 40,000 40,000 60,000 64000
BANK NIL 4,000
TOTAL EQUITY 237,000 343,000
AND LIABILITIES

INCOME STATEMENT (EXTRACT)

2006(£) 2007(£)

SALES 200,000 200,000

COST OF SALES (100,000) (120,000)

GROSS PROFIT 100,000 80,000

OPERATING EXPENSES (50,000) (47,000)

PBIT 50,000 33,000

INTEREST (10,000) (13,000)

PBT 40,000 20,000

ADDITIONAL INFORMATION FOR THE YEAR ENDED 31-12-2007

(1) Dividends paid £20,000.

(2) Land was revalued during the year.
(3) No tax was paid during the year.

REQUIRED

Prepare statement of cash flows for Algernon Ltd for the year ended 31-12-2007 using indirect method and direct
method.
ANSWER

STATEMENT OF CHANGES IN CASH & CASH EQUIVALENTS

YEARS 2006 (£) 2007 (£) CHANGE (£)

Bank 3000 0 -3000
Bank overdraft 0 4000 -4000
Increase/(decrease) in 3000 -4000 -7000
cash and cash
equivalents

Algernon Limited

Statement of cash flow for the year ended 31st December 2007

(£) (£)
Cash Flows from Operating Activities
Profit/(Loss)before Tax 20000
+ Interest 13000
Operating Profit 23000
+Depreciation 2000
(Increase)/decrease in Inventory -10000
(Increase)/decrease in Receivables -10000
Increase/(decrease) in Payables 20000
Cash Generated From Operations (CGFO) 35000
- Interest paid -13000
Net cash Flows From Operating Activities (A) 22000
Cash Flows from Investing Activities
Purchase of Plant (11000 – 10000) -1000
Purchase of building (90000 – 50000) -40000
Purchase of investment (80000 – 50000) -30000
Net cash Flows From Investing Activities (B) -71000
Cash Flows from Financing Activities
Share capital & share premium 12000
Loan notes 50000
Equity Dividends paid (given) -20000
Net cash Flows From Financing Activities (C) 42000
Net Increase / (Decrease) in cash and cash equivalents -7000
(A +B +C)
Opening Balance of Cash and Cash Equivalents 3000
Closing Balance of Cash and Cash Equivalents -4000

WORKINGS

(1) INTEREST PAID

Opening balance + PL Charge – Closing balance

= 0 + 13000 – 0 = 13000

DIRECT METHOD

The only difference is the way to calculate cash generated from operations. Under direct method CGFO is
calculated in the following way:

(£)
Cash received from customers 190000
Cash paid to suppliers -110000
Cash expenses (47000 – 2000) -45000
Cash generated from operations (CGFO) 35000
DEBTORS ACCOUNT

Debit (£) Credit (£)

Opening balance 40000 Cash 190000

Sales 200000 Closing balance 50000

Total 240000 Total 240000

CREDITORS ACCOUNT

Debit (£) Credit (£)

Cash 110000 Opening balance 40000

Closing balance 60000 Purchases* 130000

Total 170000 Total 170000

* Purchases can be calculated by rearranging the cost of sales equation

Cost of sales = opening stock + purchases – closing stock

120000 = 55000 + Purchases – 65000

Purchases = £130000

OPERATING EXPENSES ACCOUNT

Debit (£) Credit (£)

Opening balance 0 PL 47000
*Depreciation 2000
Cash paid 45000 Closing balance 0
Total 47000 Total 47000

* Operating expenses in PL includes depreciation of £2000. Depreciation is non-cash item and should be
deducted from cash payment. So net cash payment will be £45000

QUESTION 6 (INDIRECT METHOD VS DIRECT METHOD)

Following are the key extracts of financial statements of Burns plc. for the year 2019 and 2020
ending on 31st December

2019 (£) 2020 (£)

Sales 210000 240000
Opening stock 24000 30000
Purchases 96000 120000
Closing stock (30000) (54000)
Cost of sales 90000 96000
Gross profit 120000 144000
Depreciation (12000) (18000)
Operating expenses (60000) (48000)
Operating profit 48000 78000
Interest (2400) (6000)
PBT 45600 72000
TAX (9120) (14400)
PAT 36480 57600
 2019 (£) 2020 (£)
Non-current assets 54000 66000
Prepaid operating expenses 2400 4800
Trade receivables 18000 66000
Closing stock 30000 54000
Cash 12000 ?
Trade payables 66000 60000
Tax payable 31200 9120
Long term loans 36000 60000
Share capital 12000 48000
Share premium 24000 36000
Retained earnings 18000 51600

Required

(a) Prepare statement of cash flow according to IAS 7 using indirect method for the year ended 31st
December 2020

(b) Calculate the value of cash generated from operations using direct method

Burns plc.

Statement of cash flow for the year ended 31St December 2020

(£m) (£m)
Cash Flows from Operating Activities
Profit/(Loss)before Tax 72000
+Finance cost 6000
Operating Profit 78000
+Depreciation 18000
(Increase)/decrease in Inventory (24000)
(Increase)/decrease in Receivables (48000)
(Increase)/decrease in Prepayments (2400)
Increase/(decrease) in Payables (6000)
Cash Generated From Operations (CGFO) 15600
- Interest paid (6000)
- Tax paid (36480)
Net cash Flows From Operating Activities (A) (26880)
Cash Flows from Investing Activities
Purchase of non-current asset (Assuming cost given) (12000)
Net cash Flows From Investing Activities (B) (12000)
Cash Flows from Financing Activities
Share capital & share premium 48000
Loans 24000
Equity Dividends paid (24000)
Net cash Flows From Financing Activities (C) 48000
Net Increase / (Decrease) in cash and cash equivalents 9120
(A +B +C)
Opening Balance of Cash and Cash Equivalents 12000
Closing Balance of Cash and Cash Equivalents 21120
WORKINGS

(1) INTEREST PAID

Opening balance + PL Charge – Closing balance

= 0 + 6000 – 0 = 6000

(2) TAXATION PAID

Opening balance + PL Charge – Closing balance

= 31200 + 14400 – 9120 = 36480

(3) DIVIDENDS PAID

Opening balance + PAT– Closing balance

= 18000 + 57600 – 0 = 51600 = 24000

(4) NON-CURRENT ASSETS

Debit (£) Credit (£)

Opening balance 54000
Cash purchases 12000 Closing balance 66000
Total 66000 Total 66000
(5) SHARE CAPITAL & SHARE PREMIUM

Debit (£) Credit (£)

Opening balance 36000
(12000 + 24000)
Closing balance 84000 Cash issue 48000
(48000 + 36000) (balancing figure)
Total 84000 Total 84000
(b)

CGFO by direct method

(£)
Cash received from customers 192000
Cash paid to suppliers (126000)
Cash paid to employees (50400)
Cash generated from operations (CGFO) 15600

(1) RECEIVABLES

Debit (£) Credit (£)

Opening balance 18000 CASH 192000
SALES 240000 Closing balance 66000
Total 258000 Total 258000

(2) PAYABLES

Debit (£) Credit (£)

CASH 126000 Opening balance 66000
Closing balance 60000 Purchases 120000
Total 186000 Total 186000

(3) PREPAID OPERATING EXPENSES

Debit (£) Credit (£)

Opening balance 2400 PL 48000
Cash 50400 Closing balance 4800
Total 52800 Total 52800