COMPANY CASHFLOW

Cash flow information involves the meaningful presentation of the cash generated and
applied by the entity. This information is presented in the form of a statement of cash flows
to the readers of financial statements.

A complete set of financial statements comprises:

. statement of financial position
. statement of comprehensive income
. statements of changes in equity
. statement of cash flows
. notes

Users of financial statements are interested in the information on cash flow which can be
derived from this statement. As the name indicates, this statement has to do with the cash
flow in an enterprise and all items in the annual financial statements which have nothing to
do with the cash flow are omitted when the statement of cash flows is compiled.

1.2 PURPOSE AND PRESENTATION OF STATEMENT OF CASH

FLOWS
The aim of the statement of cash flows is to furnish information to the various users of
financial statements. Each enterprise presents its cash flow from operations, investment and
financing in the way most suitable for its business.

The following would be a logical presentation:

. Net cash flow from operating activities

Ð Cash receipts from customers

Ð Cash paid to suppliers and employees
Ð Investment income
Ð Interest paid
Ð Tax paid
Ð Dividends paid

. Net cash flow from investing activities

. Net cash flow from financing activities
. Net change in cash and cash equivalents

Operating activities are the principal income-producing activities of the enterprise, apart
from other activities which are not investing or financing activities.

Investing activities are the acquisition and sale of non-current assets and other investments
which are not included in cash flow equivalents.

Financing activities are activities which result in changes in the size and composition of the
equity capital and loans to the enterprise.
1.3 ELEMENTS AND FRAMEWORK OF STATEMENT OF CASH
FLOWS
The elements of a statement of cash flows, are
. operating activities
. investing
activities .
financing
activities

Operating activities
The amount of cash arising from operating activities is a key indicator of the extent to which
the operations of the entity have generated sufficient cash to repay loans, maintain the
operating capability of the entity, pay dividends and make new investments without recourse
to external financing.

Cash flows from operating activities are primarily derived from the principal revenue-
producing activities of the entity. Therefore, they generally result from the transactions and
other events that is included in the determination of profit or loss. Examples of cash flows
from operating activities are:
. cash receipts from the sale of goods and the rendering of services;
. cash payments to suppliers for goods and services;
. cash payments to and on behalf of employees;
. cash payments and refunds of income taxes

Investing activities
The disclosure of cash flows from investing activities is important because the cash flows
represent the extent to which payments have been made for resources intended to generate
future receipts and cash flows. Examples of cash flows arising from investing activities are:
. cash payments to acquire property, plant and equipment and other non-current assets;
. cash receipts from sales of property, plant and equipment and other non-current assets
Financing activities
The disclosure of cash flows arising from financing activities is important because it is useful
in predicting claims on future cash flows by providers of capital to the entity. Examples of
cash flows arising from financing activities are:
. cash proceeds from issuing shares;
. cash payment to owners to acquire or redeem the entity's shares;
. cash proceeds from issuing debentures, loans, mortgage bonds and current or non-current
borrowings;
. cash repayments of amounts borrowed.

A statement of cash flows can be schematically represented as follows:

STATEMENT OF CASH FLOWS

CASH FLOW FROM

OPERATING ACTIVITIES
 Minus

CASH APPLIED IN
INVESTING ACTIVITIES

Plus/Minus

CASH INFLOW/(OUTFLOW) FROM

FINANCING ACTIVITIES

Is represented by or is equal to

net increase/decrease in CASH AND CASH EQUIVALENTS

The statement of cash flows is not compiled from separate transactions. To draft a statement
of cash flows for the year ended 31 December 19.8 we use the following:
. statement of comprehensive income for the year ended 31 December 19.8
. statement of financial position as at 31 December 19.7 and 31 December 19.8

. additional information

Remember that amounts which are not in brackets represent the inflow of cash and amounts
in brackets represent the outflow of cash.

An enterprise should report cash flow from operating activities by using either the direct or
the indirect method.

If the direct method is used the principal categories of gross cash proceeds and gross cash
payments are disclosed.

According to the indirect method profit or loss is adjusted for the effect of non-cash
transactions, and any deferrals or accruals of previous or future operating cash receipts or
payments and income or expenditure items which are related to investment or financing
cash flow.

The only difference between the direct and indirect method lies in the presentation of the
section dealing with cash flow from operating activities. The sections dealing with investing
activities and financing activities are represented in the same format, irrespective of the
method used.

Study the frameworks of the two methods.

FRAMEWORK OF A STATEMENT OF CASH FLOWS IN ACCORDANCE

WITH THE DIRECT METHOD
Cash flow from operating activities R R
Cash receipts from customers xxx

Cash paid to suppliers and employees (xxx)

Net cash generated by operations xxx

Interest received xxx

Interest paid (xxx)

Dividends received xxx

Dividends paid (xxx)

Normal tax paid (xxx)

Net cash inflow from operating activities xxx

Cash flow from investing activities
Investment to maintain production capacity (xxx)

Replacement of non-current assets xxx

Investment to expand production capacity (xxx)
Additions to non-current assets xxx
Proceeds from the sale of non-current assets xxx

Net cash outflow from investing activities (xxx)

Cash flow from financing activities
Proceeds from the issue of shares xxx

Proceeds from long-term loans xxx

Redemption of redeemable preference shares (xxx)

Net cash inflow from financing activities xxx

Net increase in cash and cash equivalents xxx

Cash and cash equivalents at beginning of period xxx

Cash and cash equivalents at end of period xxx

FRAMEWORK OF A STATEMENT OF CASH FLOWS IN ACCORDANCE
WITH THE INDIRECT METHOD
Cash flow from operating activities R R
Profit before tax xxx
Adjustments for:
Depreciation xxx

Loss on sale of non-current assets xxx

Profit on sale of non-current assets (xxx)

Investment income (xxx)

Interest expense xxx

Operating profit before changes in working capital xxx

Changes in working capital xxx

Decrease/(increase) in inventory xxx

Decrease/(increase) in trade and other receivables xxx
(Decrease)/increase in trade and other payables (xxx)
Cash generated by operations xxx

Interest received xxx

Interest paid (xxx)

Dividends received xxx

Dividends paid (xxx)

Normal tax paid (xxx)

Net cash inflow from operating activities xxx

Cash flow from investing activities
Investment to maintain production capacity (xxx)

Replacement of non-current assets xxx

Investment to expand production capacity (xxx)
Additions to non-current assets xxx
Proceeds from the sale of non-current assets xxx

Net cash outflow from investing activities (xxx)

Cash flow from financing activities
Proceeds from the issue of shares xxx

Proceeds from long-term loans xxx

Redemption of redeemable preference shares (xxx)

Net cash inflow from financing activities xxx

Net increase in cash and cash equivalents xxx

Cash and cash equivalents at beginning of period xxx

Cash and cash equivalents at end of period xxx The following example will be used
throughout to illustrate certain aspects of cash flow information.
The following balances appear in the books of Ross Ltd for the financial year ended 30 June:
19.6 19.5

R R

Land and buildings 350 000 340 000

Plant and machinery 105 000 124 000

Motor vehicles 108 900 67 300

Investments Ð 25 200

Inventory 67 000 50 000

Trade and other receivables 37 400 50 000

Prepaid expenses 500 2 600

Bank 2 000 Ð

670 800 659 100

Ordinary share capital Ð R1 shares 280 000 250 000

Share premium 12 000 8 200

12% Long-term loan Ð 80 000

 Surplus from revaluation of land and buildings 15 000 Ð

Reserve for asset replacement 91 000 20 000

Retained earnings 97 700 200 000

10% R200 Debentures 40 000 Ð

Tax payable 23 300 46 600

Ordinary dividends payable 16 800 Ð

Accumulated depreciation

Ð Plant and machinery 27 000 18 000

Ð Motor vehicles 27 200 10 000

Trade and other payables 38 800 26 000

Accrued interest 2 000 Ð

Bank overdraft Ð

670 800 659 100

ROSS LIMITED
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE
19.6
R

Revenue 500 000

Cost of sales (250 000)
Gross profit 250 000
Other income (3 000 + 2 000) 5 000
Administrative expenses (78 200 + 63 600) (78 200)
Selling expenses (87 400)
Other costs (8 000)
Interest (7 300)
Profit before tax
Additional information
1. The long-term loan bears interest at 12% p.a. and was repaid on 31 December 19.5.
2. Share issue expenses of R1 200 were paid and written off. This write-off was recorded
insuch a way as to have the minimum effect on distributable reserves.
3. In December 19.5 a piece of land which cost R15 000 was sold at the carrying amount
andreplaced with another piece of land. On 30 June 19.6 the remaining land was
revalued. These were the only transactions in respect of land and buildings for the
current financial year.
4. During the current financial year a machine with a carrying amount of R51 000 was sold
ata loss of R8 000 and replaced with a new machine which cost R62 000. The total
depreciation on plant and machinery for the current financial year amounted to R39
000.
 5. A motor vehicle with a cost price of R14 400 and on which depreciation of R7 400
hadalready been written off was traded in for R9 000 on a new vehicle which cost R35
000.
6. No other machines or motor vehicles were sold during the year, but one additional
motorvehicle was purchased.
7. The provision for tax for the current financial year was R15 000. This includes
anunderprovision of R5 100 for the 19.5 tax year.
8. New shares were issued at a premium on 30 April 19.6.
9. On 31 December 19.5 an interim ordinary dividend of 4c per share was declared and
paid.
10. Ordinary dividends of 6c per share were declared on 30 June 19.6.
11. The investments were sold at fair value.
12. During the year, dividends to the value of R3 000 were received.

Cash flow from operating activities (according to the direct method)

Cash receipts from customers
This amount is determined by reconstructing the trade and other receivables account.

Cash receipts from customers

Trade and other receivables
R R

Balance b/d 50 000 Bank* 512 600

Sales 500 000 Balance c/d

550 000 37 400
* Balancing figure

Cash paid to suppliers and employees

This amount is calculated by comparing the figures for inventory and trade and other
payables as given in the two statement of financial position. If inventory increased from one
year to the next, the effect on cash flow would be negative. If the number of trade and other
payables increased from one year to the next, this means that less cash flowed out and the
figure would then be positive in respect of cash flow. All purchases of inventory and expenses
which were paid for in cash are also included in the calculation.
Cash paid to suppliers and employees
R R

Balances b/d Balance b/d

Inventory 50 000 Trade and other payables 26 000

Prepaid expenses 2 600 Cost of sales 250 000
Bank* 417 700 Administrative

Balance c/d expenses 78 200

Trade and other payables 38 800 Selling expenses 87 400

Balances c/d
Inventory 67 000
 Prepaid expenses
500
509 100
* Balancing figure
Depreciation to the value of R63 600, does not give rise to a cash flow.
Plant and machinery 39 000 (Given)
Vehicles 24 600 [27 200 ± (10 000 ± 7 400)]
63 600

Cash generated by operations

This amount is obtained by subtracting the cash paid to suppliers and employees from cash
receipts from customers.

Interest paid, dividends received and paid and tax paid

All payments to the SA Revenue Service and to suppliers of funds are normally made from
cash generated by operating activities. Interest paid, tax and dividends paid during a year
should therefore be disclosed separately from cash generated by operating activities.
Dividends paid

Unpaid amount at beginning of year (statement of financial position 19.5)

Amount debited against income* (total dividends declared for 19.6)

Unpaid amount at end of year (statement of financial position 19.6) (16 800)

10 000
*Ordinary dividends

Ð Interim (250 000 6 4c)

Ð Final (280 000 6 6c)

26 800

Normal tax paid

Unpaid amount at beginning of year (statement of financial position 19.5)

Amount debited against income (additional information 8)

Unpaid amount at end of year (statement of financial position 19.6) (23 300)

38 300

We can now complete the section described as cash flow from operating activities according
to the direct method.
Cash flow from operating activities (according to the direct method)

ROSS LTD
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 19.6
R
Cash flow from operating activities
Cash receipts from customers 512 600

Cash paid to suppliers and employees (417 700)

Cash generated by operations 94 900

Interest paid (7 300 7 2 000) (5 300)

Dividends received 3 000

Dividends paid (10 000)

Normal tax paid (38 300)

Net cash inflow from operating activities 44 300

Cash flow from operating activities (according to the indirect method)

When the statement of cash flows is prepared according to the indirect method, you must
ignore the calculations for cash received from customers and cash payments to suppliers and
employees. Cash generated by operations are now calculated by adjusting profit or loss for
the effect of non-cash transactions, and any deferrals or accruals of previous or future
operating cash receipts or payments and income or expenditure items which are related to
investment or financing cash flow. The calculations for interest, dividends and tax remain
unaltered, irrespective of the method used.

Cash flow from operating activities (according to the indirect method):

ROSS LIMITED
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 19.6
R
Cash flow from operating activities

Profit before tax 10 500

Adjustments for:
Depreciation 63 600
Profit on sale of non-current asset (2 000)
Loss on sale of non-current asset 8 000
Interest expense 7 300
Investment income (3 000)
Operating profit before changes in working capital 84 400
Changes in working capital 10 500
Increase in inventory (50 000 ± 67 000) (17 000)
Decrease in trade and other receivables (50 000 ± 37 400) 12 600
Decrease in prepaid expenses (2 600 ± 500) 2 100
Increase in trade and other payables (38 800 ± 26 000) 12 800
Cash generated by operations 94 900

Interest paid (7 300 ± 2 000) (5 300)

Dividends received 3 000

Dividends paid (10 000)

Normal tax paid (38 300)

Net cash inflow from operating activities 44 300

 Cash flow from investing activities
Cash flow which is related to investing activities may include both the inflow and the outflow
of cash. The outflow of cash includes the purchase of assets and investments, and the inflow
of cash includes items such as proceeds from the sale of non-current assets.

As regards the amount of assets purchased, we distinguish between the amount for
replacement and that for addition to assets. Replacement refers to the maintenance of
operations and replacement to the expansion of operations.

. Assets purchased
When the increase in the balance of the accumulated depreciation accounts on the two
statement of financial position is equal to the depreciation in the statement of
comprehensive income then no assets were sold or written off during the year. Any increase
in the asset account (at cost price) can then be directly accounted for as purchases of assets.

. Revaluation of property
Property is quite frequently revalued, and when this happens during a particular financial
year it is handled as described below. The increase in the value of the property has come
about as a result of the revaluation and can be ignored when drafting the statement of cash
flows since there was in fact no flow of cash. The increase in the non-distributable reserve
represents the increase in the value of the property.

. Purchase and sale of assets

If an enterprise has purchased or sold assets during the year it is desirable to reconstruct the
ledger accounts concerned.

Land and buildings

R R

Balance b/d 340 000 Proceeds on sale 15 000

Revaluation# 15 000 Balance c/d 350 000

Replacement* 10 000 365 000

365 000
Balance b/d 350 000

# Increase in balance of surplus on revaluation account

* Balancing figure

Motor vehicles at cost price

R R

Balance b/d 67 300 Cost of trade-in 14 400

Replacement (given) 35 000 Balance c/d 108 900

Addition* 21 000 123 300

123 300
* Balancing figure Balance b/d 108 900

Accumulated
depreciation: Motor vehicles
R R
Accumulated depreciation Balance b/d 10 000

on trade-in 7 400 Depreciation* 24 600

Balance c/d 27 200 34 600

34 600
Balance b/d 27 200
* Balancing figure
Realisation account
R R

Cost price of trade-in 14 400 Accumulated deprecia-

Profit on trade-in 2 000 tion on trade-in 7 400

[(14 400 7 7 400) 7 9 000] 16 400 Proceeds 9 000

16 400
Plant and machinery at carrying amount
R R

Balance b/d 106 000 Carrying amount Ð Sold 51 000

Replacement (given) 62 000 Depreciation 39 000

168 000 Balance c/d 78 000

168 000
Balance b/d 78 000

Realisation account
R R
Carrying amount sold 51 000 Proceeds on sale 43 000
(51 000 7 8 000)
Loss on sale 8 000
51 000 51 000

We are now able to complete the section described as cash flow from investing activities.

Cash flow from investing activities (both methods)

R R

Investment to maintain production capacity (107 000)

Replacement of land 10 000

Replacement of motor vehicle 35 000
Replacement of machine 62 000
Investment to expand production capacity (21 000)

Addition to motor vehicles 21 000

Proceeds on sale of investments 25 200

Proceeds of sale of land 15 000

Proceeds on sale of motor vehicle 9 000

Proceeds on sale of machine 43 000

Net cash outflow from investment activities (35 800)

Cash flow from financing activities (both methods)

An enterprise must report separately on the main classes of gross cash receipts and gross
cash payments which resulted from financing activities.

The effecting of new loans, the redemption of existing loans and the issue of shares are
usually derived from the given statement of financial position.
19.6 19.5 Change

R R R

10% R200 Debentures 40 000 Ð 40 000

Long-term loan Ð 80 000 80 000
Ordinary share capital Ð R1 shares 280 000 250 000 30 000
The ordinary share capital increased by R30 000. The total amount received upon issue of the
ordinary shares was therefore R30 000 + R5 000 = R35 000. The share issue expenses
amounted to R1 200 (additional information (2)) and this sum is deducted, which leaves us
with net proceeds of R33 800.

To complete the picture, we can now reconcile the share premium account as well.

Share premium
R R

Share issue expenses Balance b/d 8 200

written off 1 200 Bank* 5 000

Balance c/d 12 000 13 200
13 200
Balance b/d 12 000

* Balancing figure

We can now complete the section which deals with cash flow from financing activities.

Cash flow from financing activities (both methods)

R R

Proceeds from debentures issued 40 000

Payment on redemption of long-term loan (80 000)

Proceeds on issue of shares (35 000 ± 1 200) 33 800

Net cash outflow from financing activities (6 200)

Net change in cash and cash equivalents

The net effect of the first three sections of the statement of cash flows produced the net
change.
R

Net cash inflow from operating activities 44 300

Net cash outflow from investing activities (35 800)
Net cash outflow from financing activities (6 200)
Net increase in cash and cash equivalents
Cash and cash equivalents beginning of year
Cash a 2 000