2.0 Notes Chapter Two IAS 7

THE INSTITUTE OF FINANCE MANAGEMENT (IFM)
PRINCIPLES OF FINANCIAL REPORTING (ACU07314)

CHAPTER 2
IAS 7: STATEMENT OF CASH FLOWS
❖ Learning Outcomes
✓ Objectives/importance/usefulness of statement of cash flow (IAS 7)
✓ Definitions of terms in the standard
✓ Presentation of a statement of cash flows by;
▪ Direct method
▪ Indirect method
✓ Disclosures to the financial statements
2.0 Introduction
It has been argued that ‘profit’ does not always give a useful or meaningful picture of a company’s
operations. Readers of a company’s financial statements might even be misled by a reported profit figure.
✓ Shareholders might believe that if a company makes a profit after tax, of say, TZS100,000 then this
is the amount which it could afford to pay as a dividend. Unless the company has sufficient cash
available to stay in business and also to pay a dividend, the shareholders’ expectations would be
wrong.
✓ Employees might believe that if a company makes profits, it can afford to pay higher wages next
year. This opinion may not be correct the ability to pay wages depends on the availability of cash.
✓ Survival of a business entity depends not so much on profits as on its ability to pay its debts when
they fall due. such payments might include ‘revenue’ items such as material purchases, wages,
interest and taxation etc. but also capital payments for new non-current assets and the repayment
of loan capital when this falls due (for example on the redemption of debentures).
From these examples, it may be apparent that a company’s performance and prospects depend not so
much on the ‘profits’ earned in a period, but more realistically on liquidity or cash flows
2.1 Why cash and Profit differs?

✓ Profit is the difference between total revenue (includes credit sales) and total expenses
(includes accrued expenses)
✓ Cash is the money that is free and readily available to use
2.2 Objectives/importance/usefulness of statement of cash flow (IAS 7)

The main objective of cash flow statement is to enable users to:
(a) Assess the organization’s ability to generate future positive net cash flows,
(b) Assess the organization’s ability to meet its financial obligations as they fall due,
(c) Assess the effect on the organization’s financial position of investments undertaken during the
financial year,
(d) Cashflow give explanations as to the reasons for differences between profits and cash flows
to evaluate the changes in net assets and financial position of an organization (including its
liquidity and solvency) and its ability to affect the amounts and timing of cash flow in order to
adopt to changing circumstances and opportunities.
Majula A. Kabuche: CPA (T), MBA-BF (CBE), BAF-BS (MU): E-Mail: [email protected] 1
(e) To assess the ability of the organization to generate cash and cash equivalents and hence
enables users to develop models to assess and compare the present value of the cash flows of
different organizations.
(f) Cash flow may be used as indicator of the organization’s financial adaptability how able it is
reacting to future events; how adoptable it is to future threats and opportunities.
(g) Cash flow may be used in checking the accuracy of past assessments of future cash flows and
in examining the relationship between profitability and net cash flow and the impact of inflation
(changing prices)
2.3 Scope
A statement of cash flows should be presented as an integral part of an entity’s financial statements. All
types of entity can provide usefully information about cash flows as the need for cash is universal,
whatever the nature of their revenue-producing activities. Therefore, all entities are required by the
standard to produce a statement of cash flows.
2.4 Definitions of terms in the standard

The standard gives the following definitions, the most important of which are cash and cash equivalents.
➢ Cash: comprises cash on hand and demand deposits
➢ Cash equivalents: are short-term, highly liquid investments that are readily convertible to known
amounts of cash and which are subject to an insignificant risk of changes in value
➢ Cash flows are inflows and outflows of cash and cash equivalents.
➢ Operating activities are the principal revenue- producing activities of the entity and other
activities that are not investing or financing activities.
➢ Investing activities are the acquisition and disposal of non-current assets and other investments
not included in cash equivalents.
➢ Financing activities are activities that result in changes in the size and composition of the equity
capital and borrowing of the entity
2.4.1 Cash and cash equivalents

The standard expands on the definition of cash equivalents that they are not held for investment or other
long-term purposes, but rather to meet short-term cash commitments. To fulfill the above definition, an
investment’s maturity date should normally be within three months from its acquisition date. It would
usually be the case then that equity investments (i.e. shares in other companies) are not cash
equivalents. An exception would be where preferred shares were acquired with a very close maturity
date. Loans and other borrowings from banks are classified as investing activities. In some countries,
however, bank overdrafts are repayable on demand and are treated as part of an entity’s total cash
management system. In these circumstances an overdrawn balance will be included in cash and cash
equivalents. Such banking arrangements are characterized by a balance which fluctuates between
overdrawn and credit. Movements between different types of cash and cash equivalent are not included
in cash flows. The investment of surplus cash in cash equivalents is part of cash management, not part
of operating investing or financing activities.
2.5 Presentation of a statement of cash flows

IAS 7 requires statements of cash flows to report cash flows during the period classified by operating,
investing and financing activities. The manner of presentation of cash flows between operating,
investing and financing activities depends on the nature of the entity. By classifying cash flows between
different activities in this way users can see the impact on cash and cash equivalents of each one, and
their relationships with each other.
2.5.1 Operating activities
This is perhaps the key part of the statement of cash flows because it shows whether, and to what extent,
companies can generate cash from their operations. It is these operating cash flows which must, in the
end pay for all cash outflows relating to other activities, i.e. paying loan interest, dividends and so on.
Most of the components of cash flows from operating activities will be those items which determine net
profit or loss of the entity, i.e. they relate to the main revenue- producing activities of the entity. The
standard gives the following as examples of cash flows from operating activities.
✓ Cash receipts from the sale of goods and the rendering of services
✓ Cash receipts from royalties’, fees, commissions and other revenue
✓ Cash payments to suppliers for goods and services
✓ Cash payments to and on behalf of employees
Certain items may be included in the net profit or loss for the period which do not relate to operational
cash flows, for example the profit or loss on the sale of a piece of plant will be included in net profit or
loss, but the cash flows will be classed as investing.
2.5.2 Investing activities

The cash flows classified under this heading show the extent of new investment in assets which will
generate future profit and cash flows. The standard gives the following examples of cash flows arising
from investing activities.
✓ Cash payments to acquire property, plant and equipment, intangibles and other non-current
assets, including those relating to capitalized development costs and self-constructed property,
plant and equipment
✓ Cash receipts from sales of property, plant and equipment, intangibles and other non-current
assets
✓ Cash payments to acquire shares or debentures of other entities
✓ Cash receipts from sales of shares or debentures of other entities
✓ Cash advances and loans made to other parties
✓ Cash receipts from the repayment of advances and loans made to other parties
2.5.3 Financing Activities

This sections of the statement of cash flows shows the share of cash which the entity’s capital providers
have claimed during the period. This is an indicator of likely future interest and dividend payments. The
standard gives the following examples of cash flows which might arise under this heading.
✓ Cash proceeds from issuing shares
✓ Cash payments to owners to acquire or redeem the entity’s shares
✓ Cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short or long
term borrowings
✓ Principal repayments of amounts borrowed under finance leases
Where the reporting entity uses an asset held under a finance lease, the amounts to go in the statement
of cash flows as financing activities are repayments of the principal (capital) rather than the interest. The
interest paid will be shown under operating activities.
2.6 Reporting Cash Flows on a Net Basis

2.6.1 Financial Institutions- IAS 7 permits financial institutions to report cash flows arising from
certain activities on a net basis. Net reporting would be acceptable under the following
conditions:
✓ Cash receipts and payments on behalf of customers when the cash flows reflect the activities
of the customers rather than those of the bank; e.g. the acceptance and repayment of demand
deposits
✓ Cash flows relating to deposits with fixed maturity dates
✓ Placements and withdrawals of deposits from other financial institutions
✓ Cash advances and loans to bank customers and repayments thereon.
2.6.2 Entities other than Financial Institutions- The preference is clearly for the “gross” cash
receipts and cash payments. This gives the users of the FS more meaningful information.
There are 2 exceptions where netting of cash flows is permitted.
i. Items with quick turnovers, large amounts, and short maturities may be presented as net cash
flows.
ii. Cash receipts and payments on behalf of customers reflect the activities of the customers
rather than those of the entities.
2.7 Foreign Currency Cash Flows

✓ Cash flows arising from transactions in a foreign currency shall be recorded in an entity’s
functional currency by applying to the foreign currency amount the exchange rate between the
functional currency and the foreign currency at the date of the cash flow.
✓ The cash flows of a foreign subsidiary shall be translated at the exchange rates between the
functional currency and the foreign currency at the dates of the cash flows.
✓ Unrealised gains and losses arising from changes in foreign currency exchange rates are not
cash flows.
✓ The effect of exchange rate changes on cash and cash equivalents held or due in a foreign
currency is reported in the statement of cash flows and presented separately from cash flows
from operating, investing and financing activities and includes the differences, if any, had those
cash flows been reported at end of period exchange rates
2.8 Interest and Dividends

✓ Cash flows from interest and dividends received and paid shall each be disclosed separately.
✓ Each shall be classified in a consistent manner from period to period as either operating,
investing or financing activities.
✓ The total amount of interest paid during a period is disclosed in the statement of cash flows
whether it has been recognised as an expense in profit or loss or capitalised in accordance with
IAS 23 Borrowing Costs.
✓ Interest paid, and interest and dividends received are usually classified as operating cash flows
for a financial institution
✓ There is no consensus on the classification of these cash flows for other entities
They may be classified as:
• Operating cash flows because they enter into the determination of profit or loss
• Financing cash flows because they are costs of obtaining financial resources
• Investing cash flows because they are returns on investments
2.9 Taxes on Income

Cash flows arising from taxes on income shall be separately disclosed and shall be classified as cash
flows from operating activities unless they can be specifically identified with financing and investing
activities
2.10 Acquisitions and Disposals of Subsidiaries and other Business Units
✓ IAS 7 recognises that an entity may acquire or dispose subsidiaries or other business units during
the year and thus requires that the aggregate cash flows from acquisitions and from disposals of
subsidiaries or other business units should be presented separately as part of the investing
activities section of the CFS.
✓ AS 7 recognises that an entity may acquire or dispose subsidiaries or IAS 7 has also prescribed
these disclosures in respect to both acquisitions and disposals:
• The total consideration included.
• The portion thereof discharged by cash and cash equivalents.
• The amount of cash and cash equivalents in the subsidiary or business unit acquired or
disposed.
• The amount of assets and liabilities (other than cash and cash equivalents) acquired or
disposed, summarised by major category.
2.11 Components of Cash and Cash Equivalents

2.11.1 Disclose:
✓ Components of cash and cash equivalents
✓ The policy which it adopts in determining the composition of cash and cash equivalents
✓ The effect of any change in the policy for determining components of cash and cash equivalents
✓ A commentary by management of the amount of significant cash and cash equivalent balances
held by the entity that are not available for use by the group.
2.11.2 Other Disclosures

Disclosure of the following together with a commentary is encouraged:
✓ The amount of undrawn borrowing facilities that may be available for future operating activities
and to settle capital commitments, indicating any restrictions on the use of these facilities
✓ The aggregate amounts of the cash flows from each of operating, investing and financing
activities related to interests in joint ventures reported using proportionate consolidation
✓ The aggregate amount of cash flows that represent increases in operating capacity separately
from those cash flows that are required to maintain operating capacity
✓ The amount of the cash flows arising from the operating, investing and financing activities of
each reportable segment.
2.12 The format/methods of preparing cash flow statement

There are two formats used to prepare cash flow statements, namely;
(a) Direct Method
This method is recommended for reporting cash flows from operating activities, the direct because it
discloses information, not available elsewhere in the financial statements, which could be of use in
estimating future cash flows.
Under this method, all information pertaining to major classes of gross cash receipts and gross payment
may be obtained clearly either from accounting records or by adjusting sales, cost of sales, interest and
similar incomes and interest expenses and similar charges for a financial institution
Also the following items are reflected openly in this method;
✓ Charges during the period in inventories and trade debtors and creditors
✓ Other non- cash items
✓ Other items from which the cash effects are investing and financial cash flows.
(b) Indirect method
Under this method, the net cash flow from operating activities is determined by adjusting as profit or
loss for the effects of;
✓ Changes during the period in stocks and trade debtors and creditors.
✓ Non-cash items such as depreciation, provisions, deferred taxes, unrealized foreign currency
gain/losses, undistributed profits of associates, minority interests etc.
✓ All other items for which the cash effects are investing and finally cash flows.
2.13 The general Concept of cash flow

The general concept of cash flows is to analyze the movement of Cash inflows and Cash outflows
The movement of cash inflows and cash outflows is analyzed from three activities
i. Operating activities
ii. Investing activities
iii. Financing activities
2.13.1 How to calculate the net increase/decrease of cash and cash equivalent
Before using the two method of direct and indirect method you can calculate the net cash by finding
the difference between opening and closing cash and cash equivalent
Example: Extract of Statement of Financial Position
2021 ($) 2022 ($)

Current Assets
Short term investment in Treasury bill 20 10
Cash in bank - 40
Cash in hand 70 65
90 115
Current liability
Bank 15 -
Determine Net cash and cash equivalent
Solution:
✓ Opening cash and cash equivalent = 90 – 15 (bank overdraft) = $75

✓ Closing cash and cash equivalent = $ 115
Net increase of cash and cash equivalent= Closing cash equivalent -Opening cash and cash equivalent
Net increase of cash and cash equivalent = $115 -$75 =$40
Format for Statement of cash flows (Indirect Method)
Cash flow from operating activities TZS TZS
Net profit from operating activities (PBIT) XX
Adjustments of Non-cash items
-Depreciation xx
-Profit/Loss on sale of NCA (xx)/xx
-Provision increase/decrease xx/(xx) XX
Operating profit before working capital movements XX
Increase/decrease in inventories (xx)/xx
Increase/decrease in receivables (xx)/xx
Increase/decrease in payables xx/(xx) XX
Cash generated from operations XX
Tax paid (xx)
Interest paid (xx)
Dividend paid (xx) (XX)
Net cashflow from operating activities XX
Cash flow from Investing activities
Purchases of NCA (xx)
Proceeds from sale of NCA xx
Proceeds from government grants xx
Investment income received (Dividend/Interest) xx
Net cashflow from investing activities XX
Cash flow from financing activities
Issue of shares xx
Redemption of shares (xx)
Loan/debenture/bonds xx
Redemption of loan/debenture/bonds (xx) XX
Net cash flow from financing activities XX
Net increase/decrease in cash and cash equivalent XX
Cash and cash equivalent at beginning of the period xx
Cash and cash equivalent at the end of the period XX
Format for Statement of cash flows (Direct Method)

Cash received from customers xx
Cash payments to suppliers (xx)
Other cash payments xx
Cash generated from operations XX
Tax paid (xx)
Interest paid (xx)
Dividend paid (xx) (XX)
Net cashflow from operating activities XX
Purchases of NCA (xx)
Proceeds from sale of NCA xx
Proceeds from government grants xx
Investment income received (Dividend/Interest) xx
Net cashflow from investing activities XX
Issue of shares xx
Redemption of shares (xx)
Loan/debenture/bonds xx
Redemption of loan/debenture/bonds (xx) XX
Net cash flow from financing activities XX
Net increase/decrease in cash and cash equivalent XX
Cash and cash equivalent at beginning of the period xx
Cash and cash equivalent at the end of the period XX
Analysis of cash and cash equivalents

This year Last Year
Tshs Tshs
Cash on hand and balances with banks x x
Short-term investments x x
Cash and cash equivalents x x
Points to note
It is important to understand why certain items are added and others subtracted. Not the following
points
✓ Depreciation is not a cash expense, but is deducted in arriving at profit. It makes sense, therefore,
to eliminate it by adding it back.
✓ By the same logic, a loss on a disposal of a non-current asset (arising through under provision of
depreciation) needs to be added back and a profit deducted.
✓ An increase in inventories means less cash –you have spent cash on buying inventory.
✓ An increase in receivables means the company’s debtors have not paid as much and therefore
there is less cash.
✓ If we pay off payables, causing the figure to decrease, again we have less cash
Example
The draft final accounts of Leila Ltd for the year ended 31st December 2021 are as follows:
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31ST DECEMBER 2021
TZS
Sales revenue 306,500
Cost of sales 260,000
Gross profit 46,500
Selling, general and administration expenses 14,000
Operating profit 32,500
Investment income 5,000
Net profit before Interest and Expenses 37,500
Interest expenses 4,000
Net profit before tax 33,500
Taxation 3,000
Net profit on ordinary activities after tax 30,500
Extra ordinary items
(Net insurance proceeds from flood disaster settlement) 1,800
Net profit transferred to income surplus 32,300
Less: Dividends 12,000
Net profit retained for the year 20,300
STATEMENT OF FINANCIAL POSITION AS AT 31ST DECEMBER 2021

Non-Current Assets 2021 TZS 2020 TZS
Investment 25,000 25,000
PPE at cost 37,300 19,100
Accumulated depreciation of PPE (14,500) (10,600)
47,800 33,500
Current Assets
Cash 100 250
Short term investment 3,700 1,350
Accounts receivable 19,300 12,000
Inventory 10,000 19,500
TOTAL ASSETS 80,900 66,600
Shareholders equity
Stated capital 15,000 12,500
Income surplus 34,100 13,800
Net worth 49,100 26,300
Non -current Liabilities
Long term debt 14,900 10,400
Finance lease obligation 8,100
Current liabilities
Trade payables 2,500 18,900
Interest payables 2,300 1,000
Income tax payables 4,000 10,000
Total liabilities 31,800 40,300
Net worth and total liabilities 80,900 66,600
Additional information
1. During the year, the company acquired some new items of PPE of which items costing TZS 9,000
were acquired on a finance lease. An item which had cost TZS 800 was disposed off for cash at
a carrying value of TZS 200.
2. Accounts receivable at the end of the year included TZS 1,000 of interest receivable. During the
year interest income received amounted to TZS 2,000. Investment income consists of interest
income and dividend income.
3. The board of directors were not satisfied with the draft accounts for 2021 on grounds that in spite
of the profit after tax TZS 2,300 the position has worsened by TZS150. They suspect
embezzlement of cash on the part of the Financial Director.
Required:
As the financial accountant, you are required to prepare a detailed statement of cash flows in a
manner prescribed by IAS 7 to explain the situation to the investigator who has detailed from a serious
fraud office and to allay the fears and suspicions of the directors
Solution
STATEMENT OF CASH FLOWS AST AT 31ST DECEMBER 2021 (INDIRECT METHOD)

Net profit from operating activities (PBIT) 32,500
Adjustments of Non-cash items
-Depreciation (W3) 4,500
Operating profit before working capital movements 37,000
Decrease in inventories (19,500 -10,000) 9,500
Increase in receivables (W4) (6,300)
Decrease in payables (18,900 -2,500) (16,400) (13,200)
Cash generated from operations 23,800
Interest paid (W6) (2,700)
Tax paid (W7) (9,000)
Dividend paid (12,000)
Proceeds from flood disaster settlement 1,800 (21,900)
Net cashflow from operating activities 1,900
Purchases of NCA (W2) (10,000)
Proceeds from sale of NCA 200
Interest income received 2,000
Dividend income received 2,000
Net cashflow from investing activities (5,800)
Issue of shares (15,000-12,500) 2,500
Loan proceeds (14.900-10,400) 4,500
Payment for lease (9,000-8,100) (900)
Net cash flow from financing activities 6,100
Net increase/decrease in cash and cash equivalent 2,200
Cash and cash equivalent at beginning of the period 1,600
Cash and cash equivalent at the end of the period 3,800
Majula A. Kabuche: CPA (T), MBA-BF (CBE), BAF-BS (MU): E-Mail: [email protected]
10
Workings
W1: Net increase/decrease of cash and W2: Cash used to purchase PPE
cash equivalent Closing balance of PPE = 37,300
Closing cash =8,800 Add cost of disposal = 8,000
Opening cash =(1,600) Less: Opening balance of PPE= (19,100)
Net increase = 2,200 Finance lease = (900)
10,000
W3: Annual depreciation charges W4: Movement in Account receivable

Closing annual depreciation =14,500 Balance end = 19,300
Add: Acc dep of sold assets (800-200) = 600 Less: Interest receivable = (1,000)
Less: Opening Acc depreciation = (10,600) Balance at the beginning = (12,000)
Annual depreciation =4,500 Movement in receivable =6,300
W5: Investment income W6: Interest paid

Balance = 5,000 Payable at the beginning = 1,000
Interest income received = (2,000) P&L = 4,000
Interest receivable =(1,000) 5,000
Dividend (Balancing) =2,000 Less: Closing payable = 2,300
Interest paid (Balancing) =2,700
W7: Tax paid

Payable at the beginning = 10,000
P&L = 3,000
13,000
Less: Closing payable = 4,000
Tax paid (Balancing) =9,000
PRACTICE QUESTIONS
QUESTION 1
The statement of profit or loss for Mudunku Ltd .appears as follows;
11
31.12.2021 31.12.2022
TZS. TZS
Sales 2,004,800 3,485,000
Cost of sales 1,432,000 2,788,000
Gross profit (i) 572,800 697,000
Expenses:
Salaries 157,200 172,400
Rent 24,000 24,000
Advertising 13,000 18,000
Bad debts 2,000 6,000
Other expenses 62,200 61,000
Depreciation 90,400 70,160
Loss on disposal of vehicle – 9,440
Total expenses (ii) 348, 800 361,000
Net profit for the year (i)- (ii) 224,000 336,000
Taxation (112,000) (168,000)
Dividends (60,000) (120,000)
Profit b/f 74,000 126,000
126,000 174,000
The statement of financial position of the company appear as follows:

Current Assets: 31.12. 2021 31.12.2022
Current Assets: TZS. TZS
Stock in trade 113,000 232,400
Trade debtors (net) 136,400 191,600
Prepayments - 24,000
Cash 23,000 6,600
Total current assets (i) 272,400 454,600
Less: Current Liabilities
Trade creditors 77,000 93,600
Accrued expenses 3,600
Tax payable 42,400 30,000
Dividends payable 25,000 33,000
Bank overdraft – 56,000
Total current Liabilities (ii) 148,000 212,600
Net current assets (i)-(ii) 124,400 242,000
Fixed Assets 361,600 338,000
486,000 580,000
FINANCED BY:
Ordinary Share Capital 300,000 360,000
Share Premium Account – 6,000
Profit and Loss Account 126,000 174,000
Long term loan 60,000 40,000
486,000 580,000
It has been ascertained that a vehicle acquired at a cost of TZS120,000 on April 1 2020 and depreciated
at 20% p.a on reducing balance basis has been disposed off on June 30 th 2022 for TZS. 64,000.
12
Required
Prepare the statement of cash flow by
a) Direct Method
b) Indirect Method
QUESTION 2
Mlay E Enterprises statement of financial position as at 31 December (Figures are in TZS ‘000’)
2021 2022
TZS TZS
Non-current assets at cost 5,600 8,300
Less Acc.Depreciation (2,300) (3,150)
3,300 5,150
Purchase of subsidiary co. (31.12.217) 1,000
Current Assets:
Stock 7,204 4,516
Debtors 3,120 3,994
Provision for Bad debts (210) (180)
2910 3814
Cash 60 90
10,174 8,420
Less: Current Liabilities
Creditors 1,520 1,416
Taxation 580 735
Proposed dividend 800 1,200
Bank overdraft 105 629
(3005) (3,980)
10,469 10,590
Financed by:
Issued share capital 4,000 5,000
Share premium account – 1,000
Profit and loss account 3,469 4,090
Loan 3,000 500
10,469 10,590
Mlay E Enterprises Profit and Loss Account for the year ended 31 December 2022
TZS‘000’
Profit on ordinary activities before taxation* 2,536
Interest received on loan 120
2,656
Interest paid (100)
Profit on ordinary activities before tax 2,556
Tax on ordinary activities (735)
1,821
Undistributed profit from last year (retained profit b/d) 3,469
5,290
Proposed dividend 1,200
13
Retained profit c/d (undistributed profits carried forward to next year 4,090
Additional Information:
1. Profit before tax on non- current asset sold of TZS 85,000.The items sold had a cost TZS
1,120,000 had depreciated at TZS 740,000 and were sold for TZS 465,000
2. 1,000 ordinary shares of TZS1 were issued at TZS 2
3. Below is the analysis of the cash book
Cash received from customers 91,900,000
Cash paid to suppliers (62,080,000)
Cash paid to and on behalf of employees (22,600,000)
Less increase in stock (1,436,000)
Other cash payments (499,000)
Net cash inflow operating activities 5,721,000
Required
From the information above that relate to Mlay E enterprise prepare the statement of cash flow for the
year ended 31st December 202 by using direct method and reconcile the cash from operating activities
by using indirect method
QUESTION 3
Kane company’s statement of profit or loss and other comprehensive income for the year ended 31
December 2022 and statements of financial position at 31 December 2021 and 31 December 2022
were as follows:
Kane Cos statement of profit or loss as at 31 December 2022
$000 $000
Sales 720
Raw material consumed 70
Staff costs 94
Depreciation 118
Loss on disposal of long term asset 18
300
420
Interest payable 28
Profit before tax 392
Income tax expense 124
Profit for the year 268
Kane Cos Statement of Financial Position as At 31 December

2022 2021
$000 $000 $000 $000
14
Assets
Property plant and equipment
Cost 1596 1560
Depreciation 318 224
1278 1336
Current assets
Inventory 24 20
Trade receivables 76 58
Bank 48 56
148 134
Total assets 1426 1470
Equity and liabilities
Equity
Share capital 360 340
Share premium 36 24
Retained earnings 686 490
1082 854
Non-current liabilities
Long term loans 200 500
Current liabilities
Trade payables 42 30
Taxation 102 86
144 116
1426 1470
During the year, the company paid $90,000 for new piece of machinery
Required
Prepare a statement of cash flows for Kane Co for the year ended 31 December 2022 in accordance
with the requirements of IAS 7, using indirect method
QUESTION 4 (CPA Ireland)

Oakview limited is involved in the manufacture of soups and its financial statements are as
follows: Oakview Limited Statement of Financial Position as at 31 December 2015
2015 2014
€ ’000 €’000
Non-Current Assets
Property, Plant & equipment 1,942 1,628
Total Non-Current Assets 1,942 1,628
Current Assets
Inventories 196 129
Cash & Cash equivalents 53 54
Total Current Assets 436 382
15
Total Assets 2,378 2,010
Equity & Liabilities
Equity
Share Capital 140 100
Share Premium 45 45
Retained earnings 1,499 1,014
Revaluation surplus 48 26
Total Equity 1,732 1,185
Non-Current Liabilities
Long Term loan 512 646
Total non-Current liabilities 512 646
Current Liabilities
Trade Payables 115 146
Bank overdraft - 12
Current Tax Payables 19 21
Total Current Liabilities 134 179
Total Equity & Liabilities 2,378 2,010
Oakview Limited Statement of Profit or Loss & Other Comprehensive Income for the year-ended
31 December 2015
€’000
Revenue 3,658
Cost of sales (2,672)
Gross Profit 986
Distribution Costs (169)
Administration expenses (157)
Finance Costs (34)
Profit before Tax 626
Income Tax expense (95)
Profit for the Year 531
Other Comprehensive Income
Gain on Property revaluations 22
Other Comprehensive Income for the year, net of tax 22
Total Comprehensive Income for the year, net of tax 553
Notes:
(i) Property, Plant & equipment with a carrying value of €200,000 was sold for €180,000. This
asset had originally cost €250,000.
(ii) Depreciation of Property, Plant & equipment during the year amounted to €98,000.
(iii) Dividends paid during the year amounted to €46,000 and are reported in the statement of
Changes in equity.
Required
Prepare a statement of Cash flows for the year-ended 31st December 2015 for Oakview
Limited in accordance with IAS 7 - Statement of Cash Flows.
16
Skelug limited is involved in the manufacture of concrete products and its financial statements are as
follows:
Skelug Limited Statement of Profit or Loss & Other Comprehensive Income for the year-ended
31 December 2014
€’000
Revenue 4,300
Cost of sales (3,600)
Gross Profit 700
Administration expenses (124)
Finance Costs (42)
Income Tax expense (46)
Losses on Property revaluations, net of tax (46)
Skelug Limited Statement of Financial Position as at 31 December 2014
2014 2013
€’000 €’000
Non-Current Assets
Property, Plant & equipment 1,830 1,461
Current Assets
Inventories 262 289
Cash & Cash equivalents 98 81
Total Current Assets 521 516
Equity
Share Capital 300 200
Share Premium 50 20
Retained earnings 1,451 1,277
Revaluation surplus 74 120
Long Term loan 280 200
Total Non-Current Liabilities 280 200
Current Liabilities
Bank overdraft 10 18
Total Equity & Liabilities 2,351 1,977
Notes:
17
(i) Property, Plant & equipment with a carrying value of €320,000 was sold for €280,000. This
asset had originally cost €450,000.
(ii) Depreciation of Property, Plant & equipment during the year amounted to €356,000.
(iii) Dividends paid during the year amounted to €138,000 and are reported in the statement of
Changes in equity.
Required
Prepare a statement of Cash flows for the year-ended 31 December 2014 for Skelug Limited in
accordance with IAs 7 Statement of Cash Flows.

Franfie Limited is involved in the service industry and its financial statements are as follows:
Franfie Limited Statement of Financial Position as at 31 December 2017
2017 2016
€ ’000 €’000
Non-Current Assets
Property, Plant and Equipment 2,850 2,050
Current Assets
Inventories 580 600
Trade Receivables 420 300
Cash and Cash Equivalents 30 50
Total Current Assets 1,030 950
Equity
Share Capital 1,100 900
Share Premium 200 100
Retained Earnings 980 610
Revaluation Surplus 300 100
Long-Term Loan 950 800
Total Non-Current Liabilities 950 800
Current Liabilities
Bank Overdraft 20 120
18
Total Equity and Liabilities 3,880 3,000
Franfie Limited Statement of Profit or Loss & Other Comprehensive Income for the year-ended
31 December 2017
€’000
Revenue 11,700
Cost of Sales (10,400)
Gross Profit 1,300
Administration Expenses (250)
Finance Costs (50)
Income Tax Expense (60)
Gains on Property Revaluations 200
Other Comprehensive Income for the year, net of tax 200
Notes:
(i) Property, Plant & Equipment with a carrying value of €280,000 was sold during 2017 for
€290,000. This asset had originally cost €450,000.
(ii) Depreciation of Property, Plant & Equipment during 2017 amounted to €400,000.
(iii) Dividends paid during 2017 amounted to €50,000 and are reported in the Statement of
Changes in Equity.
Required:
Prepare a Statement of Cash Flows for the year-ended 31 December 2017 for Franfie Limited in
accordance with IAS 7 - Statement of Cash Flows.
QUESTION 7
Kingdom is a public listed manufacturing company. Its draft summarized financial statements
for the year ended 30 September 2013 (and 2012 comparatives) are:
Statements of profit or loss and other comprehensive income for the year ended 30 September:
2013 2012
$’000 $’000
Revenue 44,900 44,000
Cost of sales (31,300) (29,000)
Gross profit 13,600 15,000
Distribution costs (2,400) (2,100)
Administrative expenses (7,850) (5,900)

19
Investment properties – rentals received 350 400
– fair value changes (700) 500
Finance costs (600) (600)
Profit before taxation 2,400 7,300
Income tax (600) (1,700)
Profit for the year 1,800 5,600
Other comprehensive income (1,300) 1,000
Total comprehensive income 500 6,600
Statements of financial position as at 30 September:

2013 2012
$’000 $’000 $’000 $’000
Assets
Non-current assets
Property, plant and equipment 26,700 25,200
Investment properties 4,100 30,800 5,000 30,200
Current assets
Inventory 2,300 3,100
Trade receivables 3,000 3,400
Bank NIL 5,300 300 6,800
Total assets 36,100 37,000
Equity and liabilities
Equity
Equity shares of $1 each 17,200 15,000
Revaluation reserve 1,200 2,500
Retained earnings 7,700 26,100 8,700 26,200
Non-current liabilities
12% loan notes 5,000 5,000
Current liabilities
Trade payables 4,200 3,900
Accrued finance costs 100 50
Bank 200 NIL
Current tax payable 500 5,000 1,850 5,800
Total equity and liabilities 36,100 37,000
The following information is relevant:

– On 1 July 2013, Kingdom acquired a new investment property at a cost of $1·4 million. On this
date, it also transferred one of its other investment properties to property, plant and equipment at its
20
fair value of $1·6 million as it became owner-occupied on that date. Kingdom adopts the fair value
model for its investment properties.
– Kingdom also has a policy of revaluing its other properties (included as property, plant and
equipment) to market value at the end of each year. Other comprehensive income and the
revaluation reserve both relate to these properties.
– Depreciation of property, plant and equipment during the year was $1·5 million. An item of plant
with a carrying amount of $2·3 million was sold for $1·8 million during September 2013.
Required: Prepare the statement of cash flows for Kingdom for the year ended 30 September 2013 in
accordance with IAS 7 Statement of Cash Flows using the indirect method.
21

2.0 Notes Chapter Two IAS 7

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THE INSTITUTE OF FINANCE MANAGEMENT (IFM)

PRINCIPLES OF FINANCIAL REPORTING (ACU07314)

2.1 Why cash and Profit differs?

✓ Cash is the money that is free and readily available to use

2.2 Objectives/importance/usefulness of statement of cash flow (IAS 7)

2.4 Definitions of terms in the standard

2.4.1 Cash and cash equivalents

2.5 Presentation of a statement of cash flows

2.5.2 Investing activities

2.5.3 Financing Activities

2.6 Reporting Cash Flows on a Net Basis

2.7 Foreign Currency Cash Flows

2.8 Interest and Dividends

2.9 Taxes on Income

2.11 Components of Cash and Cash Equivalents

2.11.2 Other Disclosures

2.12 The format/methods of preparing cash flow statement

2.13 The general Concept of cash flow

Example: Extract of Statement of Financial Position

2021 ($) 2022 ($)

✓ Opening cash and cash equivalent = 90 – 15 (bank overdraft) = $75

Net increase of cash and cash equivalent = $115 -$75 =$40

Format for Statement of cash flows (Indirect Method)

Cash flow from operating activities TZS TZS

Analysis of cash and cash equivalents

STATEMENT OF FINANCIAL POSITION AS AT 31ST DECEMBER 2021

STATEMENT OF CASH FLOWS AST AT 31ST DECEMBER 2021 (INDIRECT METHOD)

Cash flow from operating activities TZS TZS

W3: Annual depreciation charges W4: Movement in Account receivable

W5: Investment income W6: Interest paid

W7: Tax paid

The statement of financial position of the company appear as follows:

Profit for the year 268

Kane Cos Statement of Financial Position as At 31 December

QUESTION 4 (CPA Ireland)

QUESTION 6 (CPA Ireland)

Revenue 44,900 44,000

Cost of sales (31,300) (29,000)

Gross profit 13,600 15,000

Distribution costs (2,400) (2,100)

Administrative expenses (7,850) (5,900)

– fair value changes (700) 500

Finance costs (600) (600)

Profit before taxation 2,400 7,300

Income tax (600) (1,700)

Profit for the year 1,800 5,600

Other comprehensive income (1,300) 1,000

Total comprehensive income 500 6,600

Statements of financial position as at 30 September:

The following information is relevant:

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