FACULTY OF BUSSINESS SCIENCES

DEPARTMENT OF ACCOUNTING SCIENCES

ACC252- GENERAL AND DISTINCTIVE FINANCIAL REPORTING
GROUP PRESENTATION 1 :QUESTION 7

FIRSTNAMES SURNAMES REGNUMBER

TINASHE MUTAZU R245974V MALE
TENDAI SHELTON MAPUNDO R247696H MALE
PROMISE S NDLOVU R245347G FEMALE
PRINCESS T MAGOSVONGWE R246234B FEMALE
SIBONGILE DHLAMINI R245005X FEMALE
TASHAMISWA GONA R247212H FEMALE
MICHELLE E MAZADZA R245006E FEMALE
TATENDA C MHIKE R246205F MALE
JOCYLINE MATAVIRE R257749G FEMALE
CHRISTINE MANDINDI R249604E FEMALE
BRIAN J JONGA R2473567 MALE
EMMACULATE TATENDATOPERA R242078B FEMALE
KELLY RUTENDO MACHEKERA R247630W FEMALE
Chivasa Gamuchirai T R248837C
Zivengwa Simion R245202H
Daka Tatenda R246526Z
Derah Tatenda Keith R246803B
Mugabe Blessing T R249578F
Tadiwanashe Takabvirwa R245798J
BACKGROUND OF IAS 7 — STATEMENT OF CASH FLOWS
Historical Background

 The Statement of Cash Flows is governed by IAS 7, issued originally by the International
Accounting Standards Committee (IASC) in December 1992 and effective from 1
January 1994.

 It replaced an earlier statement known as the Statement of Changes in Financial Position

(which focused on funds flow, not cash flow).

 The IASB (International Accounting Standards Board) later adopted and retained IAS 7
with only limited amendments, emphasizing that information about cash flows is more
useful than broader “funds flow” information.

Objective of IAS 7

The main objective is:

To require the provision of information about the historical changes in cash and cash equivalents
of an entity, showing the movement of cash through operating, investing, and financing activities
during a reporting period.

This helps users of financial statements:

 Assess an entity’s ability to generate cash and meet obligations;

 Understand how profits are converted into cash;

 Evaluate differences between profit and net cash flow;

 Evaluate liquidity and solvency, and the ability to adapt to changing circumstances.

Scope and Applicability

 IAS 7 applies to all entities that prepare financial statements under IFRS.

 A statement of cash flows is a mandatory component of a complete set of financial

statements under IAS 1 Presentation of Financial Statements.

Key Definitions
  Cash: Cash on hand and demand deposits.

 Cash equivalents: Short-term, highly liquid investments readily convertible into known
amounts of cash and subject to insignificant risk of value changes (e.g., Treasury bills,
short-term money market funds).

 Operating activities: Principal revenue-producing activities and other activities that are
not investing or financing.

 Investing activities: Acquisition and disposal of long-term assets and other investments
not included in cash equivalents.

 Financing activities: Activities that change the size and composition of equity capital
and borrowings.

CLASSFICATION OF CASHFLOWS

1) Operating Activities

These are cash flows from the main business operations — the activities that generate profit.
Examples:

 Cash received from customers

 Cash paid to suppliers and employees

 Cash paid for operating expenses and taxes

They show whether the company can generate enough cash from its core business.

2) Investing Activities

These are cash flows from buying and selling long-term assets or investments.
Examples:

 Purchase or sale of property, plant, and equipment (PPE)

 Purchase or sale of investments

 Loans made to or collected from others

They show how the company is investing for future growth.

3) Financing Activities

These are cash flows from raising or repaying capital.

Examples:

 Issuing or buying back shares

 Borrowing or repaying loans

 Paying dividends to shareholders

They show how the company funds its operations and returns money to investors.

METHODS OF REPORTING OPERATING ACTIVITIES

IAS 7 allows two approaches:

1. Direct Method (preferred by IASB)

o Discloses major classes of gross cash receipts and payments (e.g., cash from
customers, cash paid to suppliers).

o Provides clearer information but requires more detailed data.

2. Indirect Method

o Starts with profit before tax or net profit and adjusts for non-cash items and
changes in working capital to derive net operating cash flow.

o Easier to prepare because it uses accrual-based accounting data.

IAS 7 encourages the Direct Method, but allows the Indirect Method.
Even when the direct method is used, entities are encouraged to present a reconciliation
between profit and operating cash flow.

TREATMENT OF INTEREST AND DIVIDENDS

IAS 7 permits some flexibility, but must be applied consistently:

 Interest paid → Operating or Financing activity

 Interest received & Dividends received → Operating or Investing activity

  Dividends paid → Financing activity

Non-cash Transactions

Significant non-cash investing or financing activities (e.g., acquiring an asset by issuing shares or
converting debt into equity) must be disclosed separately, not in the cash flow statement.

Importance of the Statement of Cash Flows

 It links the income statement and balance sheet by showing how accrual profit
translates into actual cash.

 Provides insights into liquidity, cash management, investment capacity, and financial
strategy.

 Helps assess the quality of earnings—whether profit is supported by strong cash flows.

 Essential for creditors, investors, and management when making economic decisions

SOLUTION TO QUESTION

BOOKS OF SPACE LTD

Statement of Cashflow of Space Ltd according to the indirect method for the year ended 28
February 2022
CASH FROM OPERATING ACTIVITIES $ $
Adjusted profit before tax 22;375
Adjustments for noncash items
Depreciation (noncash expense) 115,000
Loss on sale of plant and equipment (noncash expense) 18,000
Finance charges (interest expense) 72,125
Dividends on investments (15,0000)
Operating profit before working capital changes 212,500
Working capital changes:
Increase in rent receivable (1 month due) (7,500)
Increase in trade payables (bonus reversal) (10,000)
Cash generated from operations 19,5000
Interest paid (72,125)
Income tax paid (18725)
Net cash flows from operation activities 104,150
Cashflows from investing activities
Purchase of replacement machinery (115000)
Proceeds from sale of machinery 30,000
Dividends received 15,000
Net cash flow used in investing activities (70,000)
Cashflow from financing activities
Proceeds from issue of ordinary shares 50,000
Interim dividend ($0,10*200,000 shares) (20,000)

Net cash flow from financing activities 30,000

Net decrease in cash and cash equivalents (40,000)
Cash and cash equivalents at the beginning of the year -
Cash and cash equivalents at the end of the year (40,000)

WORKINGS
ADJUSTED PROFIT BEFORE TAX
Reported profit before tax Profit provided per 66,875
income statement
Less, erroneous revenue Share issue proceeds (50,000)
incorrectly recorded as
revenue
Add: Accrued rent income 10 months rent earned, 7,500
but only 9 months
recorded
Less, unrecorded rates Rates expense of (12,000)
$12,000incurred but not
yet recorded
Add: bonus reversal Reversing the $10,000 10,000
bonus provision increases
profit
Adjusted profit before tax 22,375

WORKINGS
1. Disposal account (machines)
DR $ CR $
balance b/d (machine 45,000 Cash machine 1 30,000
1)
(machine 2) 38,000 Cash machine 2 Bal 35,000
figure
Loss on sale of machine 18,000
83,000 83,000
2. Revenue account
DR $ CR $
Error: share issue 50,000 balance b/d 13,00,00
0
balance c/d 257,50 Accrued rent 7,500
0

balance b/d 257,500

[Link] PLANT AND EQUIPMENT ACCOUNT (at cost)

PPE DR $ CR $
balance b/d - Disposal machine 1 45,000
Purchases 115,00 Disposal machine 2 38,000
0
balance c/d 32,00
115,00 115,00
0 0
balance b/d 32,000

Important IAS 7 Classifications:

1. Share Issue (note vii): The $50,000 is a financing activity. Because it was
wrongly in “revenue”. It must be deducted from profit to prevent double
counting.

2. Dividends paid (note vii) : IAS 7 allows these to be operating or financing.

3. Interest paid (note i): IAS 7 allows this to be operating or financing.

4. Interest paid (note i) : IAS 7 allows this to be operating or financing . It is usually
classified operating ( to arrive at cash from operations ) or financing ( cost of
obtaining capital).

5. Interim calculation : 200,000 shares * $0,10= $200,000

6. Final dividend note: they reduced the final dividend by 60% of the interim
(0,10*40%) =$0,04 per share).