AC4301 Corporate Accounting II
HKAS 7 Statement of Cash Flows
In-class Assignment Solution
Question 1
The main advantage of including a statement of cash flows in Corporate Annual Report
is that it provides additional information not contained in the other financial statements.
It is thus complementary to the other financial statements. A statement of profit or
loss and other comprehensive income and a statement of financial position provide
information on the profit or loss for a period and the financial position at the end of that
period. However, because they are prepared by allocating transactions to the period in
which they are considered to relate rather than on the basis of the date of the transaction
or the cash flow they do not necessarily show the liquidity, viability or financial
adaptability of an enterprise.
The advantages of including cash flow statements in a set of financial statements are:
(a) Cash is the life-blood of an entity and survival may depend upon generating
cash rather than profit. The ability of a business to meet its obligations is a
measure of business risk and thus cash flows should be reported as relevant
information to user groups.
(b) The generation of positive cash flows may help finance investment programmes
and reduce the dependence of an entity on external funding and thus ensure the
success of the entity.
(c) Cash flow is a measure of the ability of an entity to reward investors by paying
dividends.
(d) The availability of cash is a measure of an entity's capacity to command other
resources and to adapt to meet changing market conditions. A healthy cash
balance is therefore a measure of an entity's adaptability.
(e) Investors and other user groups are concerned about future cash flows and the
reporting of past cash flows may help predict future cash flows. However, the
extrapolation of trends will not be easy and it may take some years of reporting
cash flows for analysts to handle the information with confidence.
1
Question 2
Plate Limited
Statement of Cash Flow for the year ended 31 December Year 1
$m $m
Cash flows from operating activities
Net profit before interest and tax 139
Adjustments for:
Amortization on intangible assets 7
Depreciation 22
Gain on disposal of non-current assets (6)
(Working (ii))
Financial assets written off 15
Gain on disposal of financial assets (45)
(Working (v))
Operating profit before working capital changes 132
Increase in inventories (246-128) (118)
Increase in trade receivables (509-335) (174)
Decrease in accounts payable (244-311) (67)
Cash generated from operations (227)
Interest paid (Working (vi)) (28)
Income tax paid (Working (vii)) (7)
Net cash used in operating activities (262)
Cash flows from investing activities
Purchase of intangible assets (Working (i)) (50)
Purchase of non-current assets (Working (ii)) (438)
Purchase of financial assets (40)
Proceeds from sale of financial assets 50
Proceeds from sale of tangible assets 250
Increase in short-term investment (50-30) (20)
Interest income received 79
Net cash used in investing activities (169)
Cash flows from financing activities
Proceeds from issue of ordinary share capital 75
Proceeds from additional bank loan (759-557) 202
Dividend paid (49)
Net cash generated from financing activities 228
Net decrease in cash and cash equivalents (203)
Cash and cash equivalents at beginning of year (185)
Cash and cash equivalents at end of year (388)
2
Workings:
(i) Purchase of intangible assets: $m
Balance at 1.1 Year 1 234
Amortization (7)
Addition (balance) 50
Balance at 31.12 Year 1 277
(ii) Gain on disposal of non-current assets: $m
Sales proceeds 250
Cost (244)
Gain on disposal 6
(iii) Purchase of non-current assets: $m
Balance at 1.1 Year 1 600
Depreciation (22)
Revaluation 251
Disposal (244)
Addition (balance) 438
Balance at 31.12 Year 1 1,023
(iv) Cost on disposal of financial assets: $m
Balance at 1.1 Year 1 200
Written down (15)
Additions 40
Disposal (balance) (5)
Balance at 31.12 Year 1 220
(v) Gain on disposal of financial assets: $m
Sales proceeds 50
Cost (5)
Gain on disposal 45
(vi) Interest paid: $m
Balance at 1.1 Year 1 22
Interest expense during year 55
Payment (balance) (28)
Balance at 31.12 Year 1 49
(vii) Tax paid: $m
Balance at 1.1 Year 1 25
Tax charged in income statement 24
Payment (balance) (7)
Balance at 31.12 Year 1 42
3
(b) Depreciation arises as a result of accruals/matching. It does not involve a
movement in cash. The movement in cash occurred when the asset was
originally bought. Hence depreciation is required to be added back to the
operating profit so as to arrive at the cash flow derived from operating activities.
Dividends paid do involve cash movement. Operating profit is derived before
accounting for dividends so no adjustment to operating profit is required.
Question 3
Susan Trading Limited
Statement of cash flows for the year ended 31 December of Year 1
$m $m
Cash flows from operating activities
Profit before interest and tax 103
Adjustments for:
Depreciation on non-current assets 37
Gain on disposal of non-current assets (W(i)) (2)
Amortization of development costs 1
Operating profit before working capital changes 139
Decrease in inventories (140-155) 15
Increase in trade receivables (130-110) (20)
Increase in trade payables (228-151) 77
Cash generated from operations 211
Interest paid (W(ii)) (12)
Interest element of lease (3)
Income tax paid (W(iii)) (16)
Net cash generated from operating activities 180
Cash flows from investing activities
Purchase of non-current assets (104)
Proceeds from disposal on non-current assets (W(i)) 21
Net cash used in investing activities (83)
Cash flows from financing activities
Proceeds from issuance of shares (165-135) 30
Repayment of long-term loan (31-60) (29)
Capital element of lease rental payment (W(iv)) (7)
Dividend paid (12)
Net cash used in financing activities (18)
Net increase in cash and cash equivalents 79
Cash and cash equivalents at beginning of year 23
Cash and cash equivalents at end of year 102
4
Workings:
(i) Disposal of non-current assets:
$m
Proceeds of disposal 21
Cost of disposal (19)
Gain on disposal 2
(ii) Interest paid:
$m
Balance at 1.1 Year 1 8
Income statement finance cost 4
Payment (balance) (12)
Balance at 31.12 Year 1 -
(iii) Income tax paid:
$m
Balance at 1.1 Year 1 10
Income statement tax charge 22
Payment (balance) (16)
Balance at 31.12 Year 1 16
(iv) Finance lease:
$m
Balance at 1.1 Year 1 (30 + 3) 33
Addition 28
Payment (balance) (7)
Balance at 31.12 Year 1 (49 + 5) 54
5
Question 4
Indirect Method
Peoples’ Medical Trading Company Limited
Cash Flow statement for the year ended 31 March of Year 1
$000 $000
Cash flows from operating activities
Profit before interest and tax 3,300
Adjustments for:
Depreciation 850
Loss on disposal of non-current assets 250
Operating profit before working capital changes 4,400
Decrease in inventories 3,000
Decrease in trade receivables 4,000
Increase in prepayment and other assets (300)
Decrease in accounts payable and accruals (820)
Decrease in trade payables (6,300)
Cash generated from operations 3,980
Interest paid (100)
Income tax paid (900)
Net cash generated from operating activities 2,980
Cash flows from investing activities
Interest income received 500
Purchase of non-current assets (1,960)
Proceeds from sale of equipment 100
Net cash used in investing activities (1,360)
Cash flows from financing activities
Repayment of bank loan (700)
Dividend paid (2,700)
Net cash used in financing activities (3,400)
Net decrease in cash and cash equivalents (1,780)
Cash and cash equivalents at beginning of year 9,300
Cash and cash equivalents at end of year 7,520
Workings:
Loss on disposal of non-current assets:
$000
Sales proceeds 100
Cost (350)
Loss on disposal (250)
6
Purchase of non-current assets:
$000
Balance at 1.1 Year 1 7,520
Addition during year 1,960
Depreciation (850)
Disposal (balance) (350)
Balance at 31.12 Year 1 8,280
Income tax paid:
$000
Balance at 1.1 Year 1 350
Profit or loss - tax charge 700
Payment (balance) (900)
Balance at 31.12 Year 1 150
Direct Method
Peoples’ Medical Trading Company Limited
Cash Flow statement for the year ended 31 March of Year 1
$000 $000
Cash flows from operating activities
Cash received from customers 64,000
Payment to suppliers and employees (60,020)
Cash generated from operations 3,980
Interest paid (100)
Income tax paid (900)
Net cash from operating activities 2,980
Cash flows from investing activities
Interest income received 500
Purchase of fixed assets (1,960)
Proceeds from sale of fixed assets 100
Net cash used in investing activities (1,360)
Cash flows from financing activities
Repayment of bank loan (700)
(3,000+2,500)–(3,000+1,800)
Dividend paid (2,700)
Net cash from financing activities (3,400)
Net decrease in cash and cash equivalents (1,780)
Cash and cash equivalents at beginning of year 9,300
Cash and cash equivalents at end of year 7,520
7
Workings:
Cash received from customers
$000
Sales for the year 60,000
Decrease in accounts receivable 4,000
64,000
Cash payment to suppliers and employees:
$000 $000
Cost of good sold 45,000
Decrease in inventories (3,000)
Purchases 42,000
Add: Decrease in trade payables 6,300
Cash to suppliers of goods 48,300
Operating expense other than depreciation 10,600
(3500+8200-850-250 loss on disposal of asset)
Add: Decrease in accrued expenses 820
Add: Increase in prepayment 300 11,720
60,020
(b)
Such pledged bank deposits should not be included as cash equivalents as they do not
meet the definition of cash or cash equivalents. These deposits could not be
withdrawn on demand or within 3 months (i.e. not liquid cash). Moreover, the reason
for keeping such pledged bank deposits is not for cash management purpose. Hence,
in the cash flow statement, the movement of such pledged bank deposits should be
disclosed as financing or investing activities according to the nature and intention of the
underlying transaction and not as part of cash and cash equivalents.