STATEMENT OF CASH FLOW- IAS7

1.1 Introduction

The statement of cash flows is an integral part of the financial reporting. The statement of cash flows
presents the inflows and outflows of cash and cash equivalents by category over a period of time.

The statement of cash flows provides users with a basis to:

a) Assess the ability of the enterprise to meet its debt obligations

b) Assess the entity’s ability to generate and utilize cash

c) Assess the ability of the enterprise to finance its current operations using its own cash or external
sources of cash

d) Reconcile profit or loss and cash flows

e) Estimate future cash flows.

1.2 Limitations of the Statement of Cash Flows

a) The statement may not be able to provide the required information for the future because it uses
historical data.

b) Some non-cash transactions that are not disclosed on the face of the statement are of interest to
users because they will impact on future cash flows.

1.3 Differences between Statement of Cash Flows and Profits

A. The accrual accounting concepts are used to accrue at the profit whereas the statement of cash flows
is based on the cash available during the period and the uses of this cash.

B. It is a better measure of the ability of the entity to meet its debt obligation than profits

1.4 CLASSIFICATION OF CASH FLOWS- IAS7

The Statement of cash flows is prepare using standard headings as explained below:

a. Operating Activities: These are principal revenue – producing activities of the entity and other
activities that are not investing or financing activities.

b. Investing Activities: These are activities of the entity that relates to acquisition and disposal of non-
current assets, long-term investments and investment properties

c. Financing Activities: These are activities that results in changes in the size and composition of the
equity and borrowing of an entity. Examples are proceeds from the issue of shares, redemption of loan
notes etc.

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d. Cash and Cash Equivalents

i. Cash comprises cash on hand and demand deposits with banks

ii. Cash equivalents are short- term highly liquid investments that are readily convertible into known
amounts of cash and that are subject to an insignificant amount of risk of changes in value .Examples are
demand deposits, bank overdraft and other easily reliable short term securities.

iii. Net increase or decrease in cash and cash equivalents is the overall increase or decrease in cash and
cash equivalents during the period. The balance of cash and cash equivalents at the end of the year is
obtained by adding the cash and cash equivalent at the beginning of the period to the net increase or
decrease in cash equivalent.

1.5 Preparation of a Statement of Cash Flows

Operating activities: It is one of the important components that assist in forecasting future operation
cash flows of the entity.

Common examples are:

A. Cash inflows

i. Cash receipts from customers from sales of goods or rendering of service

ii. Royalties fees, commission and other revenue received in cash

iii. Income tax refunds received, unless they can be specially identified with investing or financing
activities

B. Cash outflows

i. Cash payments made to suppliers of goods and services

ii. Cash payments made to and on behalf of employees‟

iii. Income tax paid, unless the payments can be specifically identified with financing or investing
activities

1.6 Methods

There are two methods of preparing cash flows from operating activities. The direct method and the
indirect method. In practice, the vast majority of entities use the indirect method.

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1.6.1 Direct Method

The direct method presents the items that affected cash flows and the amount of those cash flows.

Illustration 1.1

Direct method

Cash flows from operating activities 2020

TSH ‟000

Cash received from customers X

Cash paid to suppliers (X)

Cash paid to employees (X)

Cash generated from operations X

Interest paid (X)

Income tax paid (X)

Net cash from operating activities X

Illustration 1.2

Chku Ltd is preparing it statement of cash flows using the direct method and has provided this
information.

TSH‟000”

Credit sale 20,000

Trade and other receivable at year end 3,000

Trade and other receivable at beginning of the year 5,000

Purchase on credit 8,000

Trade payable at year end 3,800

Trade payable at beginning of year 4,000

Operating expenses incurred 6,000

Accrued expenses, beginning of the year 1,000

Accrued expenses, end of the year 800

Depreciation of property, plant and equipment 1,200

Tax paid 3,200

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Required: Prepare the cash flows from operating activities using the direct method.

1.6.2 Indirect Method

Under this method the profits or loss is adjusted for the effects of transactions of noncash nature. It
derives net cash flows from operating activities from the net operating results for the year as reported
in the statement of profit or loss.

Example 3

Indirect Method

Cash flows from operating activities

2010

TSH “000” TSH‟000”

Profit before taxation X

Adjustment for:

-Depreciation X

-Income from investment X

-Interest expense ( X) X

Movement in working capital:

Decrease in inventories X

Increase in receivable (X)

Increase in payables X X

Interest paid (X)

Tax paid (X) (X)

Net cash flows from operating activities X

Illustration 1.3

Ajileye Ltd has provided the following information

TSH “000,000”

Profit before tax 800

Depreciation on PPE 400

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Loss on sale of building 200

Interest paid 200

Interest expenses 300

Income tax paid 100

Account receivable year end 1,700

Account receivable beginning to the year 1,000

Account payable year end 1,000

Account payable beginning of the year 400

Inventory year end 800

Inventory beginning of the year 1,000

Required: prepare the statement of cash flow from operating activities using the indirect method.

1.7 Investing Activities

The cash flows from investing activities represent the extent to which expenditure had been made for
resources intended to generate future income and cash flow.

Examples

a. Cash inflows

i. A proceed from sale of property, plant and equipment

ii. Proceed from sale of investments

iii. Collection of cash advances

vi. Dividend received

v. Interest received

b. Cash outflows

i. Purchase of property, plant and equipment .

ii. Purchase of investment

iii. Cash advances made to third parties

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1.8 Financing Activities

Cash flows from financing activities included funds provided by and paid to owners and third parties.
Examples

a. Cash inflows

i. Cash received on issue of shares

ii. Cash received from issuing debt instruments

iii. Proceeds from bank borrowings

b. Cash outflows

i. Payment of dividends to shareholders

ii. Repayment of principal portion of debt, including lease obligations

iii. Repayment of bank borrowings

Illustration 1.4.1

The statement of financial position of Alade Ltd as at 31 December 2015 and 2016 are given below:

2016 2015

TSH‟000 TSH‟000

Non-current assets

Land and buildings 7,170 6,940

Plant and equipment 5,404 6,214

12,574 13,154

Intangible assets

Patents 1,704 1,570

Current assets

Inventory 11,434 11,470

Receivables and prepayments 9,870 9,394

Cash and bank balances 930 230

36,512 35,818

Current liabilities

Trade and other payable (5,590) (5,344)

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Current taxation (1,790) (1,970)

Bank overdraft (544) (1,410)

28,588 27,094

Deferred taxation (3,110) (3,090)

25,478 24,004

Capital and reserves

Ordinary share capital 8,800 8,800

Share premium 1,034 1,034

Accumulated profits 15,644 14,170

25,478 24,004

Notes

a) Depreciation has been charged for the year ended 31 December 2016 as follows
TSHS‟000
Land and building 174
Plant & machinery 1,200
Patents 46

b) Plants sold during the year realized TSHS 80, 000. The cost of the plant when it was acquired was
TSHS 304, 000, accumulated depreciation at date of disposal amounted to TSHS 264, 000.

c) The tax charge was TSHS 2,080,000

d) Dividend paid in the year amount to TSHS 1,854,000

e) The profit for the year before tax was TSHS 5,428,000

Required: Prepare the statement of cash flows using the indirect method for the year ended 31
December 2016.

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Illustration 1.4.2

The statement of financial position of Propensity Ltd as at 31 December 2017 and 2018 are given below:

2018 2017

Assets TSH‟000 TSH‟000

Non-current assets

Land 47,500 24,300

Plant 230,000 190,000

Accumulated depreciation-Plant (85,500) (71,100)

Current Assets

Inventory 48,000 45,500

Account Receivable 21,500 26,000

Prepaid Insurance 2,500 1,800

Cash 47,500 24,300

Total Assets 284,000 226,500

Equity and Liabilities

Equity:

Common stocks 115,000 70,000

Retain Earnings 64,900 61,000

Total Equity 179,900 131,000

Liabilities:

Notes Payable 85,000 75,000

Accounts Payable 17,200 19,000

Salaries payable 1,900 1,500

Total Liabilities 104,100 95,500

284,000 226,500

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Propensity Ltd

Income Statement for the Year Ended 31 Dec 2018

TSH‟000 TSH‟000

Sales Revenue 238,000

Cost of Sales 153,000

Gross Profit 85,000

Operating Expenses:

Depreciation 14,400

Insurance 12,000

Salaries 42,600

Other operating expenses 11,100

Total Operating expense 80,100

Operating Income 4,900

Other Income and Expenses:

Gain on sale of land 4,800

Interest expenses (3,500)

Total Income before tax 6,200

Income tax (1,860)

Net Income 4,340

Additional Information:

1. Propensity Ltd sold land with an original cost of Tshs 10,000,000 for Tshs 14,800.000 cash.
2. A new parcel of land was purchased for Tshs 20,000,000 in exchange for a note payable.
3. Plant was purchased for Tshs 40,000,000 cash.
4. Propensity declared and paid a Tshs 440,000 Cash dividend to shareholders.
5. Propensity issued common stock in exchange for Tshs 45,000,000 cash.

Required: Prepare the Statement of Cash Flow for the year ended 31 Dec 2018 using Indirect Method.