CashFlow Statements

CASHFLOWSTATEMENTS A cash flow state ment m ay easily be understoo d as asummary ofthe ca shbook– set out usi ng sta ndard formats. The standa rd formats requir e thecash movem ents sa per ca shbookto be sum marised in the ca sh flow state ment in3 ca tegories: 1) Operating ac tivities 2) Investing ctivi a ties 3) Financing activities Suppose ca ashbookwas provi dedasfollows Cashbook (Cash and Bank Sh Bala nceb/d a Paymentsto suppl iers Rece iptsfromdebtors b Payment for expe nses Rece iptsfrom cash sales c Purchase of fixedassets Procee ds on disposa l of fixed assets f Loans repa id Loans obtained h Bala ncec/d XX

Sh d e g I j XX

Thecash flow statement would be drawn up as follows: Cash low f state ment o f r the ye ar ende d (date) Opera tingActiviti e Rece ipts rfom de btors Rece ipts rfom cash sales Payments tosuppli ers Payments o f r expe nses ca sh inAct flow from ope rating ctivi a ties INet nves ting ivitie Procee ds on di sposa l of fixed asset Purchase of fixedassets Net cash flow from inve sting ctivi a ties FinancingActiviti e Loans obtained Loans repa id Net cash flow from financing ctivi a ties Net cash flow Add cash b/d Cash c/f

Sh b c (d) (e)

Sh

XX f (g) XX h (i) XX XX a_ _

It canbe se en from the b aove lustr il ation that the sh ca flow state ment is ust j arearrangement of cashbook entries. However, the lassif c ications rae rigid; a ech itemcan only be longin onecategory. This clas sification must befully unde rstood.The item s falling intoeach ca tegory a re gove rned by pa ragraphs 01 – 17 of A I S7. These are listed below: An enterpri seiaprese nts i busi ca sss. h floClass ws ifica fr omtion ope rating, i provi tingde and fio na ncing a itie sa in aus m anne whi ch is most a ppropr te to itsts ne by ctivi a nves ty s inf rma tion ctiv that llows ers tor as sess the impact ofthose cti a vities on theina f ncial po sition ofthe e nterprise and the m aount ofits ca sh and ca sh equivalents.This information mayalso beused to v ealua te therelationships a mong those activities. A singl e transa ction may incl ude cash flows tha t areclass ified differently. For exa mple, when the cash repa yment ofa loanncl i udesbothinterest andpital, ca the nterest i lem e ent m ay be classif ied a s an operating activity a nd the apital c elem ent is a clssified as afinancingcti avity. Page 1 of 7

1) Operat ing activi ties The amount of cash flows arising from operating activities is a key indicator of the extent to which the operati ons of the n eterpr ise havegenera ted uffici s ent cash flows to repa y loans, am intain he t operati ng capabil ity ofthe n eterpr ise, paydividendsand m ake ne w investme nts wi thoutrecour se to exte rnal sour ces of financing. Informa tion a bout thespecific componentsof historical ope rating ash c flows is useful, in conjuncti on with other orma inf tion, ni forecasting futureoperating ca sh flows.

Cashflows fr om opera ting a ctivities are prima rily derived from theprincipal even r ue-produci ng a ctivities of the ente rprise. Therefore, theygenera lly result rfom thetransa ctions a nd other eve nts thatnter e nto i h te determ ination of net prof it or oss. l Examples of ca sh flows fr om operating ctivi a ties are: (a) (b) (c) (d) (e)

Cash rece ipts rfom the sa le of goods nd a the rende ring of servi ces; Cash rece ipts rfom royalties, fees, comm issions and othereve r nue; Cash pa yments to suppl iers fo r goods andrvi se ces; Cash paym ents toand on e bhalfof employees; Cash rece ipts and ca sh pay ments of an insur anceenterp rise forpremiumsnd a claims, annuit ies and other policy benefits; (f) Cash pa yments orrefunds ofincom e taxes unless the y can be spe cifically identi fied with financing and investing ac tivities; and (g) Cash rece ipts andpay ments rfom contr acts heldorf dea ling or tr ading purposes. Some transactions, such as the sale of an itemof plant, ma y give rise to a g ain orloss whichs iincl udedin the determinatio n of net profit or loss. However, theash c flows re lating to such trans actions a re ca sh flows from inve sting ctivi a ties . An enterpr ise mayhold securities and loans to inventory ac quired p s ecifically forresa le. dea ling or trading securities areclassif ied as by financialinstit utions are us ually clas sified produci ng activity of thatnte erprise.

for dea ling or tr ading purposes, in ch whica se theyaresimilar Therefor e, cash ows fl raising rom f thepurcha se and sa le of ope rating activities. Simil arly, cash advance s and loans m ade as ope rating activi ties since the y relate to the in ma revenue-

2) Investing Activi ties

The separate disclosure of cash flows arising from investing activities is important because the cash flows represe nt the e xtent ot which expe nditures ha ve be en ma de for resources ntende i d to genera te future income and ca sh flows. Examples of cash flows a rising rom f inves ting activities are: (a) Cash pay ments to cqui a re pro perty, a pl nt and qui e pme nt, n i tangibl es and otherongl term sse a ts. These payments include those relating to capitalised development costs and self-constructed property, apl nt and qui e pment; (b) Cash rece ipts rfom sales of property, ant pl n ad equipme nt, tang ibles and otherongl termassets; (c) Cash pa yments toacquir e equity ordebt instrume nts of other ente rprises and interes ts in joint ventures (oth er than pa yments or f those instruments consi dere d to be cas h equivalents and those held for dea ling or trading purpose s); (d) Cash rec eipts rfom sa les of equity ordebt instrume nts of other nterpri e ses and interests inoint j ventures (other anth rece ipts o f r those instruments consi dere d to be ca sh equivalentsnd a those ld he for dea ling or trading purpose s); (e) Cash adva nces nd a loans m ade tootherparti es (otherthan adva nce n ad loans m ade by afinancial institution); (f) cash receipts rf om the repa yment ofadvance s and oans l m ade to o therparti es (other than adva nces and loans ofa financia l institution); Page 2 of 7

(g) Cash pa yments o f r future contracts, orwa f rd con tracts, opti on cont racts nd a swa p contr acts ex cept when thecontracts re a held or f dea ling or tr ading purposes, or he tpay ments areclassified as financing cti a vities; and (h) Cash rec eipts rf om futur e contracts, orward f contr acts, opti on cont racts nd a swa p contr acts e xcept when the contr acts are eld h for dealing or tr ading purpose s, orthe rec eipts arelacssified as financing activities. When acontracts iaccounte d for as a he dgeof an identifiable posit ion , the a csh flows ofthe contracts are classified in he t same manne r as the ca sh flows ofthe posi tion bei ng he dged. 3) FinancingActivi ties The separate disclosure of cash flows arising from financing activities is important because it is useful in predicti ng claimson futurecash flowsby providers of capital to the enterpri se. Examples of ca sh flows arising rom f fi nancing cti a vities are; (a) Cash procee ds from issuing sha res or other equit y instrume nts; (b) Cash paym ents toownersot acqui re orrede emthe ente rprise’s shares (c) Cash procee ds from issuing debe ntures,oa lns, notes, bonds mortga ges and other shor t or long-t erm borrowings; (d) Cash repay ments ofamountsborrowed; and (e) Cash pa yments by a lessee for the reducti on ofthe outstanding iability l relati ng to afinancelease. The first category (operating activity) cash flows may be arrived at by two methods; (a) The direct method – whereby major classes of gross cash receipts and gross cash payments are disclosed; or (b) The indirect method – whereby the net profit or loss is adjusted for the effects of transactions of a noncash nature and rual accs/prepay ments [The e xami ner prefers ithe ndirect methodless as raw ata d ne eds to be suppli ed to the candi date nd a a more rigoro us understa nding of cash ow fl tate s ments is exp ected from the candidate] E ven though both thods me ead l to the sameend results, the rect di method s more i recomm endedsa it provi desmore information to the us er of thenanci fi al sta tem ents .

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Format for cash flow tem sta ent (usi ng di rect cashow flmethod Operat ing activiti es Sh Cashrece iptsfrom custome rs X Cashpaidto suppl iers andemployees (X) Cashgenera tedfrom operati ons X Interest paid/received (X) Incom e taxes paid (X) Netcashflowfromopera ting acti vities Investingactivi ties Purcha seof property plantand equipme nt (X) Procee ds on disposa l of equipme nt X_ Netcashflowfrominve stingactivi ties

Financing act ivities

Procee ds from issua nceof share capital X Rede mption and purchas e of share capital (X) Procee ds fromlong-termborrowings X Repa ymentson long-term borrowings (X) Paymentson financelease obligations (X) Dividendspaid (X) Net cash flow fromfinancingactivities Net change in cashandcash equiv alents Cashand cash equivalents b/f Cashand cash equivalents c/f Forma t forcash ow fl s tat ements (using indir ect cashow fl m etho d) Sh Net profit beforetax X Adjustm ent for items not nvol i ving m ovem ent ofcash Depreciation X Profit and losse s on fixed asset disposa ls X_ X Adjustm entfor working capi tal tem i s (Increa se)/Decrea se in stocks X (Increa se)/Decrea se in debtors X (Decrease)/Incre ase in creditors X. Cashgenera tedfrom operati ons X Tax paid (X) Netcashinflowfromope rat ing act ivities Investing Activi ties Purcha seof property plantand equipme nt (X) Procee ds on disposa l of equipme nt X_ Net cash flow frominvestingactivities FinancingActiviti es Procee ds from issua nceof share capital X Rede mptionsand purchas e of share capital (X) Procee ds fromlong-term borrowings X Repa ymentson long-term borrowings (X) Paymentson financelease obligations (X) Dividendspaid (X) Net cash flow fromfinancingactivities Net change in cashandcash equiv alents Cashand cash equivalents b/f Cashand cash equivalents c/f Page 4 of 7

Sh

X

X

X_ X X_ XX Sh

X

X

X_ X X_ XX

Practise E xercise1 The balance sheet of Bidhaa Ltd for the years ended 31 December, 2010 and 31 December 2011 were summarised and shown below:

Fixedassets (at wri tten down lues va ) Premises Fixtures Vehicles Current sasets Stoc k Debtors Bankandcash Ordinarysharesof shs1pershare Reserves Profit and Loss Credito rs dueni less than oneeay r Trade creditors Taxation Proposeddividends Credito rs due in more than one eary 10%debentur es

2011 shs 10,000 17,00 0 12,50 0

2010 shs 10,000 11,0 00 8,000

17,000 8,000 23,000 87,500 60,00 0

14,000 6,000 29,500 78,500 50,0 00

5,000

4,000

4,000 1,500 2,000

2,500 1,000 1,000

15,000 87,500

20,000 78,500

Note:The 10% debentures were redeemed and cancelled on 31 December 2011

The profit and Loss account for the year ended 31 December 2011 was summarised thus: shs

Turnover Cost of sales Grossprofit Profit on disposa l of vehicles Less: Wage s andsalaries Other(cash)expe nses Depreciation Debe nture interest

shs 36,250 (21,75 0) 14,500 700 15,200

1,600 3,60 0 3,500 2,00 0 10,700 4,500 1,50 0 3,000 (2,00 0) 1,000 4,000 5,000

Profit beforetax Less:Tax Profit aftertax Less:Proposed dividends Reta ined profit: for year : Broughtforward : Carried forward

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Sepa rate bank and cash ccou nats or f the year end ed 31 Dece mbe r 2011 we re sum marised sa show n bel ow: Bank shs

Opening ba lanceb/ Rece ipts rfom de btors Rece ipts rfom fixedasset disposals – vehicles Ordinary sha re issue Transfer from cash

Openingbalances b/d

Cash

shs 25,30 4,20 Payment to trade credi tors 30,500 3,750 Wage s, sa laries Other expense s 1,200 500 Debentureinterest 10,000 - Fixedassets 4,650 - fixtures vehicles Tax paid Dividends paid 10% debe ntures: redeemed _ _ Transfer to bank Closing ba lances c/d 71,65 8,45 21,30 170

Bank shs

23,25 700 2,400 2,000

Cash shs 900 1,200

7,000 8,000 1,000 1,000 5,000

-

21,300

4,650 1,700

71,65

8,45

st solution) for 1 Sugg ested Soluti on(refer only to cash book

BidhaaLtd Cash low f state ment or f the y ear ended13December 20 11 (Direct M ethod) Opera ting acti vities shs Cashrecei ptsfrom custo mers(30500 + 375 0) 34,250 Cashpaidto suppl iersandemployee s (23250 + 700+ 900) (24,850) Othercashpaym ents(2400+ 1200 ) Cashgenera tedfrom operati ons 5,80 0 Tax paid (1,000) Debe nture interest paid (2,000 ) Net cash inflow fromoperatingactivities Investingactivi ties Paymentsto acqui re fixtures (7,000 ) Paymentsto acquire vehicl es (8,000 ) Procee ds on disposa l of vehicles 1,700 Net cash outflow frominves ting activities FinancingActiviti es Ordinaryshare issue 10,000 Rede mption of debe ntures (5,000 ) Dividendspaid (1,00 0)

Net change in cashandcashequiv alents Cashand cash equivalents b/f (25,30 0 + 4,200 ) Cashand cash equivalents c/f (21,30 0 + 1,70 0)

shs

(3,600)

2,800

(13,3 00)

4,000 (6,500) 29,500_ 23,000

Note: 1) When allcash move ments have bee n brought n, i the openi ng cas h is adde d thereono tgene rate the closing cash 2) Under the rect di me thod,the ca sh flow state ment has be en drawn upom fr thecash bookonly. 3) The term “cash and cash equivalents” refers to:

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Cash n i hand Cash ta bank Shortterm investments For the oluti s on using the indirect method, noefe r renceto thecash book is am de. Informa tion prov ided to ena ble prepara tion ofthe ca sh flow state ment unde r this method consi sts: 1) Beginning ofthe ye ar ba lanceshee t 2) End of year balancesheet 3) A profit and o l ssaccountor f the year 4) Additiona l information Thus accounts need reconstruction to obtain required values for the cash flow statement to be drawn up.   

BidhaaLtd Cash low f state ment o f r the ye ar ende d 31 December 201 1 (Indirect me thod) Opera ting acti vities shs shs Net profit beforetax 4,500 Adjustm ent for items not invo lving movem ent offunds Depreciation 3,500 Profit on disposa l of vehicles (700) 7,300 Adjustment for working capital items Increa se in stock (3,000) Increa se in debtors (2,000) Increa se in creditor s (trade) 1,500 Cashgenera tedfrom operati ons 3,80 0 Taxation paid (1,000) Net cash inflow fromoperatingactivities 2,800 Investingactivi ties

Paym re eses Pay mentsto to aacqui cqui refixtur vehicl Procee ds on disposa l of vehicles Net cash outflow frominvestingactivities Financing ctiviti a es Ordinaryshare issue Rede mption of debe ntures Dividendspaid

(7,000 ) (8,000) 1,700 (13,300) 10,00 0 (5,000) (1,00 0)

Net change in cashandcashequiv alents Cashand cash equivalents b/f (25,30 0 + 4,200 ) Cashandcas h equivalents c/f (21,30 0 + 1,70 0)

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4,000 (6,500) 29,5 00 _ 23,000_