CASH FLOW STATEMENT (IAS 7)

CASH FLOW STATEMENT

A cash flow statement is a financial statement that shows the movement of money into and out of
the firm during the accounting period. Thus a simple cash book may be regarded as a cash flow
statement.
A cash flow statement is needed as a consequence of the difference between profit and cash. For
example why is the business making a profit yet has overdraft in the bank or why did the company
make a loss yet has cash in hand and at bank?
This statement helps us to:
- Provide additional information in business activities.
- Help assess the current liquidity of the firm.
- Allow the users to see the major types of cash flows in and out of the business.
- Help the user to estimate future cash flow.
- Determine the cash flows generated from credit transactions as oppose to other sources of cash
flow.

PRESENTATION OF CASH FLOW STATEMENT

The cash flow statement is often prepared with information from the statement of financial position
and the income statement of the enterprise. The presentation starts with a reconciliation of operating
profit and operating cash flow. IAS 7 requires that cash flow statements be represented using three
standard recordings. These standard headings are:
- Operating activities (income statement, current assets, and current liabilities).
- Investing activities (non-current assets).
- Financing activities (non-current liabilities, equity and reserves).

i) OPERATING ACTIVITIES
This section of statement is aimed at determine the net cash flow from operating. This section is
prepared with information from the income statement and working capital i.e. current assets and
current liabilities.
There are two methods used to determine the net cash flow from operating activities, namely, the
direct and indirect method.

 The direct method: It is so called because it records the gross operating (cash flow from
ordinary activities, eg. Sales, purchases, debtors and creditors, expenses and other short term
incomes) cash flows. The information for the direct method could be found in the account
records or retrieved from the financial statements using control accounts (to calculate the cash
received from debtors and cash paid to creditors); and other adjustments accounts of expenses
and income prepaid or accrued (to calculate the cash paid for such expenses and cash received
from such incomes).
Presentation of the Operating activities using the direct method
Operating activities FCFA FCFA
Cash sales and Cash received from debtors X
Other operating cash received (incomes) X X
Less:
- Cash purchases and Cash payment to creditors X
- Cash paid to and on behalf of employees X
- Other cash payment (expenses) X X
Net Cash flow operating activities X

 The indirect method: This method determines the net cash flow from operating activities
beginning with profit and not cash as is the case of the direct method. Starting from the Net
profit before tax, the adjusted profit is calculated by making adjustment for non-cash expenses
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CASH FLOW STATEMENT (IAS 7)
and non-incomes. The non-cash expenses (for example depreciation, bad debts, increase or
decrease in bad debt provision, and loss on disposal of non-current assets and decrease in
revaluation of non-current assets) that reduced the net profit in the income statement are added
back in the cash flow statement and the non-cash incomes (for example bad debts recovered,
profit on disposal of non-current assets, decrease in provision for doubtful debts, increase in
revaluation in non-current assets) that increased the net profit in the income statement are
subtracted.
To the adjusted profit (operating profit before working capital changes), the change in working
capital (inventory, account receivables and payables, prepayments and accruals) is added. The
corporation tax paid and interest paid for the period is also subtracted to have the net cash flow
from operating activities.

Presentation of the Operating activities using the indirect method

Operating activities FCFA FCFA
Net profit before tax X
Adjustment for:
- Depreciation X
- (Profit) / loss on disposal of non-current assets (X) / X
- Bad debts X
- (Decrease) /provision or Increase in bad debt provision (X) / X
- (Increase) / decrease in revaluation of non-current assets (X) / X (X) / X
Operating profit before working capital changes (X) / X
Changes in working capital:
- (Increase) / decrease in stock (X) / X
- (Increase) / decrease in debtors (X) / X
- (Increase) / decrease in prepaid expenses (X) / X
- (Increase) / decrease in creditors X / (X)
- (Increase) / decrease in accrued expenses X / (X) (X) / X
Tax paid (X)
Interest paid (X) (X)
Net cash flow from operating activities X / (X)

ii) INVESTING ACTIVITIES

This section of the cash flow statement is prepared using movements in the non-current assets. For
example proceeds on disposal on non-current assets, purchases of non-current assets, increase in
investment (shares brought in other companies), and dividend from investment.
Investing Activities FCFA FCFA
Purchase of non-current assets (X)
Cash received on disposal of non-current assets X
(Increase) / decrease in Investment (X)/X
Dividend or interest received from investment X
Net cash flow from Investing Activities X/(X)

iii) FINANCING ACTIVITIES

This section of the cash flow statement is prepared using movements in the non-current liabilities
and equity (capital and reserves). For example loan obtained or repaid, proceeds from issues of
shares, proceeds from share premium, dividend paid, and redemption of debentures.

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CASH FLOW STATEMENT (IAS 7)
Financing Activities FCFA FCFA
Proceeds from issue of shares X
Proceeds from share premium X
Loan obtained / (loan repaid) X/(X)
Dividend paid (X)
Net cash flow from Financing Activities X/(X)

CASH AND CASH EQUIVALENTS

These are highly liquid short term investments that are rapidly convertible in to known amount of
cash and which are subject to insignificant risk of changes in value. Cash refers to cash in hand and
at bank (which may be bank overdraft) and cash equivalents may be treasury bills, bills of exchange
and promissory notes.
The sum of the operating activities, the investing activities and the financing activities gives the
net cash and cash equivalents.
The cash and cash equivalent at the start of the period (the sum of cash in hand, cash at bank and
treasury bills, bill of exchange etc. at the beginning of the period), is added to the net cash and cash
equivalents and the balance obtained gives the cash and cash equivalent at the end of the period (the
sum of cash in hand and at bank and treasury bills etc. at the end of the period).

Cash flow statement for the year ended 31st December 20xx
FCFA FCFA
Net cash flow from Operating Activities X/(X)
Net cash flow from Investing activities X/(X)
Net cash flow from Financing Activities X/(X)
Net cash and cash equivalents X/(X)
Add cash and cash equivalents at start X/(X)
Cash and cash equivalents at close X/(X)

Worked examples
Example 1 (2019 sample set 7005 P3 Q4)
The balance sheet of upper House Plc is given below

2017 2018
CFAF CFAF CFAF CFAF
Trade mark 4,000
Office equipment 30,000 32,800
Stock 15,000 15,500
Debtors 6,000 7,000
Cash 14,000 35,000 19,580 42,080
TOTAL ASSET 65,000 78,880
Financed By:
Share capital 35,000 55,000
Reserves 5,000 6,050
Profit retained 7,000 3,830
Loan 10,000 5,000
Creditors 8,000 9,000
TOTAL LIABILITIES 65,000 78,880

Notes:
Profit and Loss for 2017 was distributed as follows:
- General reserves 1,050,000 CFAF and dividend paid and proposed 5,590,000 CFAF
- Depreciation for 2018 amounted to 5,300,000 CFAF.

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CASH FLOW STATEMENT (IAS 7)
- During 2018 office equipment was bought for 15,000,000 CFAF cash. Also office equipment was
sold for cash 7,500,000 CFAF with original value worth 10,000,000 CFAF and accumulated
depreciation of 3,100,000 CFAF.
- There was an issue of shares which was paid by cash.
Required:
Prepare a cash flow statement for Upper House Plc as at 31/12/2018 as requires by IAS7. (35 Marks)

Example 2: GCE 2015 P3 Q4 and 2017 P3 Q3

The following data relates to the OUR PARENTS and CO Ltd during 2011 and 2012
2012 2011
FCFA FCFA
Cash 400 000 1 400 000
Accounts receivable 2 500 000 3 250 000
Prepaid insurance 500 000 700 000
Inventory 3 700 000 3 400 000
Fixed assets 31 600 000 27 000 000
Accumulated depreciation (4 500 000) (3 000 000)
Total assets 34 200 000 34 200 000

Accounts payable 1 800 000 1 600 000

Wages payable 400 000 700 000
Notes payable 17 300 000 16 000 000
Capital stock 8 800 000 8 400 000
Retained earnings 5 900 000 6 050 000
Total liabilities and equity 34 200 000 34 200 000

2012
FCFA
Sales 20 000 000
Cost of goods sold (12 300 000)
Depreciation expense (1 500 000)
Insurance expense (1 100 000)
Wage expense (5 000 000)
Net income 100 000
During 2012, dividends declared and paid were 250 000 FCFA. during 2012, OUR PARENT and CO Ltd
paid 4 600 000 FCFA in cash to acquire new fixed assets. The accounts payable was used only for inventory
and no debt was retired during the period.

Required:
Prepare the cash flow statement for OUR PARENTS and CO Ltd using the direct and indirect methods

Example 4: GCE 2016 P3 Q2

The balance sheet of ASANG PL is given a follows for 2012 and 2013
31/12/2012 31/12/2013
000 FCFA 000 FCFA 000 FCFA 000 FCFA
FIXED ASSETS:
Land 20 000 20 000
Buildings 150 000 135 000
Equipment 70 000 240 000 59 500 214 500
CURRENT ASSETS:
Stock 30 000 53 000
Debtors 45 000 40 000
Prepayments 6 000 17 000
Bank and cash 2 300 13 000
83 300 123 000
CURRENT LIABILITIES:

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CASH FLOW STATEMENT (IAS 7)
Creditors 60 000 57 000
Accruals ------- 500
Corporation tax 800 2 000
Proposed dividend 2 500 3 000
(63 300) (62 500)
Working capital 20 000 60 500
Capital employed 260 000 275 000
FINANCED BY:
Equity:
Ordinary share capital 150 000 160 000
Share premium -------- 1 500
Reserves 100 000 104 000
Profit retained 8 000 258 000 8 400 273 900
LONG TERM LIABILITIES
Debentures 2 000 1 100
Capital employed 260 000 275 000

Additional information:
(i) Dividends and taxes of one year are paid in the following year. No fixed assets were sold or
purchased.
(ii) 1 000 ordinary shares f 10 000 FCFA each were issued at 11 500 FCFA each and were fully paid
up by cash.
Required:
Prepare a cash flow statement for the year ended 31/12/2013 for the company in conformity with IAS 7.

Example 4: GCE 2018 P3 Q4

The following are the summarised balance sheet of WAAM PLC as at 31st December of the last two years:
2014 2015
000 FCFA 000 FCFA 000 FCFA 000 FCFA
Fixed assets:
Lands and buildings 2 112 000 2 352 000
Plant and machinery 648 000 695 520
Office equipment 165 600 132 000
2 025 600 3 179 520
Current assets:
Stock 59 600 85 440
Debtors 61 920 53 640
Bank and cash 50 760 76 920
212 280 216 000
Liabilities less than 1 year:
Creditors 64 080 74 520
Corporation tax 49 200 57 600
Proposed dividend 96 000 78 000
209 280 210 120
Net current assets 3 000 5 880
Net assets 2 928 600 3 185 400
Financed by:
Capital and reserves:
Ordinary share capital 1 000 FCFA each 2 040 000 2 448 000
Share premium 576 000 168 000
Revaluation Reserves -------- 240 000
Profit Reserves 94 200 154 200
Profit and loss 218 400 175 200
2 928 600 3 185 400

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CASH FLOW STATEMENT (IAS 7)
Additional information:
- During 2015, machinery costing 234 000 000 FCFA was purchases. There was no disposal of
machinery
- Office equipment with a book value of 9 600 000 FCFA was sold in 2015 for 7 800 000 FCFA. This
had been replaced new office equipment cost 22 800 000 FCFA
- During 2015, there was a bonus issue of one ordinary share for every five already held. This was
done by using part f the share premium.

Required:
Prepare a cash flow statement in accordance with IAS 7 for the year ended 31st December 2015.
Use indirect method.

USEFUL REMARKS:
Non-current asset Acount
FCFA FCFA
Balances B/F X Depreciation ?X
Cash and bank (purchases value) ?X Disposal (NBV) X
Balance C/D X
Y Y

Expense Acount
FCFA FCFA
prepayments B/F X Arrears B/F X
Cash and bank ? Income and expenditure A/C X
Arrears C/D X prepayments C/D X
Y Y

Income Acount
FCFA FCFA
Arrears B/F X prepayments B/F X
Income and expenditure A/C X Cash and Bank ?
advances C/D X Arrears C/D X
Y Y

Sales ledger control Acount

FCFA FCFA
Debtors B/F X Cash and cheques from debtors ?
Credit sales X Bad debts X
Dishonoured cheque X Returns inwards (credit note) X
Discount allowed X
Debtors C/D X
Y Y

Purchases ledger control Acount

FCFA FCFA
Cash and cheques to creditors ? Creditors B/F X
Returns outwards (debit note) X Credit purchases X
Creditors C/D X
Y Y

HOPE THESE NOTES BE OF HELP TO YOU

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