Chapter 6

Disclosure: Statement of cash

flows

Presenter

Associate Professor Parmod Chand

 Announcements

Mid Semester Exam - The MSE format and instructions are

available on Moodle now. It will be held on Friday 21st
January at 6pm.
Tutes/Lectures – No tutes or lectures on Thursday 20th
January. Tutes and lectures resume on Monday 31st January.
Assignment - The assignment is available on Moodle now. It
is due on 31st of January.
Purpose of the statement of cash flows (S of CF)

To provide information about the historical changes in cash (and

equivalents) during the period, i.e:
 Ability to generate cash: ability, certainty and timing
 Evaluating financial structure: staying liquid and solvent while
meeting obligations and paying dividends
 Understanding reasons for the difference between profit/(loss)
and net cash flow from operations
 Comparing entities’
 Operating performance
 Present value of future cash flows
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 General format of the S of CF

• Appendices to AASB 107/IAS 7 provide examples of

acceptable formats for the S of CF
• Refer figure 16.1 of text for an example
• AASB 107/IAS 7 requires all cash flows to be reported on a
gross basis
• A net basis is allowed only in the following circumstances:
• Cash receipts and payment on behalf of customers
where this reflects the activities of the customer

• Cash receipts and payment where there is quick

turnover, large amounts and short maturities
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 General format of the S of CF

• Operating cash flows may be reported using one of two methods:

• Direct method. Discloses classes of gross cash receipts and
payments

• Indirect method. Discloses:

• Classes of gross cash receipts and payments
• Non-cash items
• Items relating to investing or financial activities
(non-operating items)
• The effects of accruals

• The direct method is encouraged

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 Concept of cash

Cash
• Cash on hand and demand deposits
• Includes bank overdrafts

Cash equivalents
• Short-term, highly liquid investments readily convertible into
known amounts of cash , and which are subject to an
insignificant risk of changes in value
• Held to meet cash commitments and have a short maturity
(3 months or less)
• Eg, short-term interest bearing deposits
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 Classifying cash flows

• Regardless of format used AASB 107/IAS 7 requires that

all cash flows be classified into the following categories:

• Operating activities (O)

• Investing activities (I)
• Financing activities (F)

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 Classifying cash flows

Interest and dividends

• AASB 107/IAS 7 does not prescribe how interest and dividends should
be classified (ie O/I/F)
• Does require them to be separately disclosed and classified
consistently across periods
• Note textbook approach as follows:
• Interest received > investing
• Interest paid > operating
• Dividends received > investing
• Dividends paid > financing
Income tax
• AASB 107/IAS 7 also requires separate disclosure of income tax as an
operating activity
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 Classifying cash flow activities:
Operating activities
The principal revenue-producing activities of an entity.
Examples include:
Cash inflows from… Cash outflows to…
Sale of goods/rendering Suppliers and employees
of services for goods and services
Royalties, fees, Government for income
commissions taxes
Interest received Lenders for interest
(may be investing) (may be financing)
Dividends received
(may be investing)
Classifying cash flow activities:
Investing activities
The acquisition/disposal of long-term assets and other
investments. Examples include:

Cash inflows from… Cash outflows to…

Sale of non-current assets Acquire non-current
(PP&E, assets
intangibles, share (PP&E, intangibles, share
investments) investments)
Repayments of loans Lend money to other
advanced to other parties parties
Classifying cash flow activities:
Financing activities
Activities that result in size and composition changes in equity
capital and borrowings. Examples include:

Cash inflows from… Cash outflows to…

Issuing shares and other Buy back shares
equity instruments
Issuing debentures and Repay debentures and
other borrowings other borrowings

Pay dividends
(may be operating)
 Preparing a S of CF – direct method

• Unlike statements of financial position and comprehensive

income, cash flow is NOT prepared from the trial balance
• Comparative statements of financial position are often used,
with supplementary information statement of
comprehensive income and specific general ledger
transactions
• Cash flows can be calculated in a number of ways. Common
methods include:
• Spreadsheet approach
• Reconstruction (T-account) method
• Formula method

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 Preparing a S of CF – direct method

• Many cash flows are relatively easy to calculate – by looking at

the movements in the statement of financial position during
the year and the statement of comprehensive income. The
following cash flows can be a little more complicated:
• Receipts from customers
• Payments to suppliers, employees and others
• Income tax paid
• Dividends paid

• These more complicated cash flows is discussed in Question 1.

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 Question 1
The following information has been provided on the following
slides in relation to A Ltd for the year ending 30 June 2019:
• - Statement of profit or loss and other comprehensive
income (extract)
• - Statement of financial position
• - Additional information

Required:
(a) Prepare the statement of cash flows of A Ltd for the year
ending 30 June 2019 (using the direct method of disclosure
for cash flows from operating activities)
(b) Calculate the cash flows from operating activities under the
indirect method
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Question 1
A Ltd Statement of Profit or Loss and Other Comprehensive Income
for the year ending 30 June 2019 <<extract>>
Sales revenue 550,000
Interest revenue 4,300
Gain on sale of plant & equipment 2,500
Discount received 700
TOTAL REVENUE 557,500
Cost of goods sold 277,000
Depreciation – plant & equipment 38,500
Bad debts expense 30,000
Other expenses 135,000
TOTAL EXPENSES 480,500
Income tax expense 52,500
PROFIT FOR THE YEAR 24,500
 Question 1

A Ltd comparative Statements of Financial Position

2018 2019
Cash at bank 152,000 3,000
Accounts receivable 97,500 180,000
Inventory 182,500 305,500
Prepayments 8,000 9,500
Interest receivable 1,000 1,500
Deferred tax asset 4,000 5,600
Plant & equipment 207,000 300,000
Accum. Depreciation – (27,000 (55,500
PP&E ) )
Total assets 625,000 749,600
Question 1
A Ltd comparative Statement of Financial Position
2018 2019
Bank overdraft 120,000 36,700
Accounts payable 36,200 29,300
Other payables 3,000 1,800
Deferred tax liability 500 6,000
Current tax liability 47,000 53,000
Dividend payable 20,000 15,000
Share capital 250,000 450,000
Retained earnings 148,300 157,800
Total liabilities & equity 625,000 749,600
• The Accounts Receivable balance is net of an allowance for bad debts of $20,000 ($10,000 in
2018).
Additional Information
• Plant & equipment that had originally cost $55,000 and had been depreciated by $10,000 was
sold during the year.
 Question 1 Solutions
Prior to commencing the detailed calculation it is advisable to
read through all of the information provided and identify the
types of cash flows that need to be calculated.

Operating Investing Financing

Receipts from Payments for plant & Proceeds from
customers equipment share issue
Payments to Proceeds on sale of Dividends paid
suppliers, plant & equipment
employees & others
Interest received
Income tax paid
 Question 1 Solutions…
A Ltd Statement of Cash Flows for the year ending 30 June 2019
Cash flows from operating activities
Receipts from customers
Payments to suppliers, employees and
others
Cash used by operations
Interest received
Income tax paid
Net cash flows from operating activities
Cash flows from investing activities
Payments for plant & equipment
Proceeds on sale of plant & equipment
Net cash flows from investing activities
Continued on following slide
 Question 1 Solutions…

A Ltd Statement of Cash Flow for the year ending 30 June

2019

Cash flows from financing activities

Proceeds from share issue
Dividends paid
Net cash flows from financing activities
Net decrease in cash & cash equivalents
Cash & cash equivalents at beginning of year

Cash & cash equivalents at end of year

 Question 1 Solutions…
A Ltd Statement of Cash Flows for the year ending 30 June 2019
Cash flows from operating activities
Receipts from customers
437,500
Payments to suppliers, employees and (543,900)
others
(106,400)
Cash used by operations
Interest received 3,800
Income tax paid (42,600)
Net cash flows from operating activities (145,200)
Cash flows from investing activities
Payments for plant & equipment (148,000)
Proceeds on sale of plant & equipment 47,500
Net cash flows from investing activities (100,500)
Continued on following slide
 Question 1 Solutions…
A Ltd Statement of Cash Flow for the year ending 30 June 2019

Cash flows from financing activities

Proceeds from share issue 200,000 1

Dividends paid (20,000)

Net cash flows from financing activities 180,000
Net decrease in cash & cash equivalents (65,700)
Cash & cash equivalents at beginning of year 32,000 2

Cash & cash equivalents at end of year (33,700)

1. Calculated directly from a review 2. Cash balances comprise the following:
of the statement of financial position 2018 2019
($450,000 - $250,000). No further Cash at bank 152,000 3,000
workings required Bank o/draft (120,000) (36,700)
Net cash balance 32,000 (33,700)
 Question 1 Solutions…
Receipts from customers
Allowance for bad debts
Bad debts w/off 20,000 Op balance 10,000
Cl balance 20,000 Bad debts expense 30,000
Total debits 40,000 Total credits 40,000
Accounts Receivable
Op balance 107,500 Bad debts w/off 20,000
Sales 550,000 Cash received 437,500
Cl balance 200,000
Total debits 657,500 Total credits 657,500
 Question 1 Solutions…
Payments to suppliers
Payments for inventory
Inventory
Op balance 182,500 Cost of sales 277,000
Purchases 400,000 Cl balance 305,500
Total debits 582,500 Total credits 582,500

Accounts Payable
Discount received 700 Op balance 36,200
1 Cash paid 406,200 Purchases 400,000
Cl balance 29,300
Total debits 436,200 Total credits 436,200
1. This amount does not yet get recorded into the statement of cash flow – it will be added
to payments to other suppliers and employees (refer next slide)
 Question 1 Solutions…
Payments to suppliers
Total other expenses 135,000
Increase in prepayments
1 1,500
(9,500 – 8,000) SOFPos
m/ment
Decrease in other expenses payable
1
1,200
(1,800 – 3,000) SOFPos m/ment
Cash paid for other supplies and services 137,700
Cash paid for inventory 406,200
Total payments to suppliers employees and others 543,900
1. If net m/ment is
DR > Add back to (increase) expenses
CR > Deduct from (decrease) expenses
 Question 1 Solutions…
Interest received & tax paid
Interest Receivable
Op balance 1,000 Cash received 3,800
Interest revenue 4,300 Cl balance 1,500
Total debits 5,300 Total credits 5,300

Current Tax Liability

Increase in DTL 5,500 2 Op balance 47,000
Cash paid 42,600 ITE 52,500
Cl balance 53,000 Increase in DTA 1 1,600

Total debits 101,100 Total credits 101,100

1. (5,600 – 4,000) = 1,600 DR therefore CR to CTL

2. (6,000 – 500) = 5,500 CR therefore DR to CTL

 Question 1 Solutions
Plant & equipment
Plant & equipment
Op balance 207,000 Plant sold (cost) 55,000
Cash paid 148,000 Cl balance 300,000
Total debits 355,000 Total credits 355,000
From additional
information

Calculation for proceeds on sale of plant & equipment

Proceeds on sale BALANCE 47,500
Carrying amount of P&E sold (45,000)
Gain on sale Statement of Profit or 2,500
Loss and Other
Comprehensive Income
 Question 1 Solutions…
Dividends paid
Retained Earnings
Div paid/declared 15,000 Op balance 148,300
Cl balance 157,800 Current year profit 24,500
Total debits 172,800 Total credits 172,800

Dividends Payable
Cash paid 20,000 Op balance 20,000
Cl balance 15,000 Div paid/declared 15,000
Total debits 35,000 Total credits 35,000
 Operating activities - indirect method

• Under the indirect method profit/(loss) is adjusted for

1. non-cash items
2. items relating to investing or financing activities (non-
operating items)
3. the effects of accruals

• The first two types of adjustments are identified by reviewing

the statement of profit or loss and other comprehensive
income
• The third type of adjustments are identified by identifying
movement in statement of financial position accounts during
the year for all balances that relate to operating activities 29
Question 1 Solutions…
Operating activities - indirect method

Current year profit after tax 24,500 Per statement of profit

or loss and other
Gain on sale of P&E (2,500) comprehensive income
Depreciation expense 38,500 CR Items > deducted
DR Items > added back
Inc. in A/C Receivable (net) (82,500)
Inc. in Inventory (123,000)
Inc. in Prepayments (1,500)
Inc. in Interest Receivable (500) Movement per statement
of financial position
Inc. in DTA (1,600) DR m/ments > deducted
CR m/ments > added
Dec. in A/C Payable (6,900) back

Dec. in Other Payables (1,200)

Inc. in DTL 5,500
Inc. in CTL 6,000
C/flows from op. activities (145,200)
 Limitations of the S of CF

• Only past cash flows are reported

• Non-cash transactions and events are not included

• Much detail is included in the notes

• Liquidity/solvency evaluation are not adequately

addressed

• May be subject to management manipulation

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 Tute Questions

Leo 11e Chapter 6

1. Review Question 5
2. Review Question 8
3. Case Study 1
4. Practice Question 6.3
5. Practice Question 6.8

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