GREAT ZIMBABWE UNIVERSITY

MUNHUMUTAPA SCHOOL OF COMMERCE

DEPARTMENT OF ACCOUNTING & IS
COURSE TITLE: APPLIED GROUP FINANCIAL REPORTING/ADVANCED GROUP FINANCIAL
REPORTING
COURSE CODE: MAAC521/MPAC530

GROUP STATEMENTS OF CASH FLOWS

1 Cash flows
Statements of cash flows are a useful addition to the financial statements of companies because it is
recognised that accounting profit is not the only indicator of a company's performance.
Statements of cash flows concentrate on the sources and uses of cash and are a useful indicator of a
company's liquidity and solvency.

The main advantages of

Using cash flow accounting (including both historical and forecast cash flows) are as follows:
(a) Survival of a company depends on its ability to generate cash. Cash flow accounting directs
attention towards this critical issue.
(b) Cash flow is more comprehensive than 'profit' which is dependent on accounting conventions and
concepts.
(c) Creditors (long- and short-term) are more interested in an entity's ability to repay them than in its
profitability. Whereas 'profits' might indicate that cash is likely to be available, cash flow accounting is
more direct with its message.
(d) Cash flow reporting provides a better means of comparing the results of different companies than
traditional profit reporting.
(e) Cash flow reporting satisfies the needs of all users better.
(i) For management. It provides the sort of information on which decisions should be taken (in
management accounting, 'relevant costs' to a decision are future cash flows). Traditional profit
accounting does not help with decision-making.
(ii) For shareholders and auditors. Cash flow accounting can provide a satisfactory basis for stewardship
accounting.
(iii) For creditors and employees. Their information needs will be better served by cash flow
accounting.
(f) Cash flow forecasts are easier to prepare, as well as more useful, than profit forecasts.
(g) Cash flow accounts can be audited more easily than accounts based on the accruals concept.
(h) The accruals concept is confusing, and cash flows are more easily understood.
(i) Cash flow accounting can be both retrospective, and also include a forecast for the future. This is of
great information value to all users of accounting information.
(j) Forecasts can subsequently be monitored by the use of variance statements which compare actual
cash flows against the forecast.

Looking at the same question from a different angle, readers of accounts can be misled by the profit
figure.

(a) Shareholders might believe that if a company makes a profit after tax of, say $100,000 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.
(b) 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.

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(c) Creditors might consider that a profitable company is a going concern.
(i) If a company builds up large amounts of unsold inventories of goods, their cost would not be
chargeable against profits, but cash would have been used up in making them, thus weakening the
company's liquid resources.
(ii) A company might capitalise large development costs, having spent considerable amounts of money
on R & D, but only charge small amounts against current profits. As a result, the company might show
reasonable profits, but get into severe difficulties with its liquidity position.
(d) Management might suppose that if their company makes a historical cost profit, and reinvests some
of those profits, then the company must be expanding. This is not the case: in a period of inflation, a
company might have a historical cost profit but a current cost accounting loss, which means that the
operating capability of the firm will be declining.
(e) 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 'profit or loss' 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 (eg on the redemption of debentures).

2 IAS 7 Statement of cash flows: Single company

The aim of IAS 7 is to provide information to users of financial statements about the cash flows of an
entity's ability to generate cash and cash equivalents, as well as indicating the cash needs of the entity.
The statement of cash flows provides historical information about cash and cash equivalents, classifying
cash flows between operating, investing and financing activities.

2.1 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 useful 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.

2.2 Benefits of cash flow information

The use of statements of cash flows is very much in conjunction with the rest of the financial
statements.
Users can gain further appreciation of the change in net assets, of the entity's financial position
(liquidity and solvency) and the entity's ability to adapt to changing circumstances by affecting the
amount and timing of cash flows. Statements of cash flows enhance comparability as they are not
affected by differing accounting policies used for the same type of transactions or events.
Cash flow information of a historical nature can be used as an indicator of the amount, timing and
certainty of future cash flows. Past forecast cash flow information can be checked for accuracy as
actual figures emerge. The relationship between profit and cash flows can be analysed as can changes
in prices over time.

2.3 Definitions
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 long-term assets and other investments not
included in cash equivalents.

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Financing activities are activities that result in changes in the size and composition of the equity capital
and borrowings of the entity. (IAS 7)

2.4 Cash and cash equivalents

The standard expands on the definition of cash equivalents: they are not held for investment or other
long-term purposes, but rather to meet short-term cash commitments. To fulfil the above definition, an
investment's maturity date should normally be three months from its acquisition date. It would usually
be the case then that equity investments (ie 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 characterised 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 from 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. We can
look at each in more detail.

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, ie paying loan interest, dividends
and so on.
Most of the components of cash flows from operating activities will be those items which determine
the net profit or loss of the entity, ie 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
 Cash payments/refunds of income taxes unless they can be specifically identified with financing
or investing activities
 Cash receipts and payments from contracts held for dealing or trading purposes
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 financing.

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.

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  Cash payments to acquire property, plant and equipment, intangibles and other long-term
assets, including those relating to capitalised development costs and self-constructed property,
plant and equipment
 Cash receipts from sales of property, plant and equipment, intangibles and other long-term
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
 Cash payments for or receipts from futures/forward/option/swap contracts except where the
contracts are held for dealing purposes, or the payments/receipts are classified as financing
activities

2.5.3 Financing activities

This section 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 these headings:
 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
 Cash repayments of amounts borrowed
 Cash payments by a lessee for the reduction of the outstanding liability relating to a finance
lease

2.6 Reporting cash flows from operating activities

The standard offers a choice of method for this part of the statement of cash flows.
(a) Direct method: disclose major classes of gross cash receipts and gross cash payments.
(b) Indirect method: net profit or loss is adjusted for the effects of transactions of a non-cash nature,
any deferrals or accruals of past or future operating cash receipts or payments, and items of income or
expense associated with investing or financing cash flows.

The direct method is the preferred method because it discloses information, not available elsewhere in
the financial statements, which could be of use in estimating future cash flows. The example below
shows both methods.

2.6.1 Using the direct method

There are different ways in which the information about gross cash receipts and payments can be
obtained. The most obvious way is simply to extract the information from the accounting records. This
may be a laborious task, however, and the indirect method below may be easier.

2.6.2 Using the indirect method

This method is undoubtedly easier from the point of view of the preparer of the statement of cash
flows.
The net profit or loss for the period is adjusted for the following.
(a) Changes during the period in inventories, operating receivables and payables
(b) Non-cash items, eg depreciation, provisions, profits/losses on the sales of assets
(c) Other items, the cash flows from which should be classified under investing or financing activities
A proforma of such a calculation is as follows and this method may be more common.
$
Profit before taxation (statement of profit or loss and other comprehensive income) X

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Add depreciation X
Loss (profit) on sale of non-current assets X
(Increase)/decrease in inventories (X)/X
(Increase)/decrease in receivables (X)/X
Increase/(decrease) in payables X/(X)
Cash generated from operations X
Interest (paid)/received (X)
Income taxes paid (X)
Net cash flows from operating activities X

It is important to understand why certain items are added and others subtracted. Note the following
points.
(a) Depreciation is not a cash expense, but is deducted in arriving at the profit figure in the statement
of comprehensive income. It makes sense, therefore, to eliminate it by adding it back.
(b) 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.
(c) An increase in inventories means less cash – you have spent cash on buying inventory.
(d) An increase in receivables means the company's credit customers have not paid as much, and
therefore there is less cash.
(e) If we pay off payables, causing the figure to decrease, again we have less cash.

2.6.3 Indirect versus direct

The direct method is encouraged where the necessary information is not too costly to obtain, but IAS 7
does not require it, and favours the indirect method. In practice, therefore, the direct method is rarely
used. It is not obvious that IAS 7 is right in favouring the indirect method. It could be argued that
companies ought to monitor their cash flows carefully enough on an ongoing basis to be able to use the
direct method at minimal extra cost.

2.7 Interest and dividends

Cash flows from interest and dividends received and paid should each be disclosed separately. Each
should be classified in a consistent manner from period to period as either operating, investing or
financing activities.
Dividends paid by the entity can be classified in one of two ways:
(a) As a financing cash flow, showing the cost of obtaining financial resources.
(b) As a component of cash flows from operating activities so that users can assess the entity's ability to
pay dividends out of operating cash flows.

2.8 Taxes on income

Cash flows arising from taxes on income should be separately disclosed and should be classified as cash
flows from operating activities unless they can be specifically identified with financing and investing
activities.
Taxation cash flows are often difficult to match to the originating underlying transaction, so most of the
time all tax cash flows are classified as arising from operating activities.

2.9 Components of cash and cash equivalents

The components of cash and cash equivalents should be disclosed and a reconciliation should be
presented, showing the amounts in the statement of cash flows reconciled with the equivalent items
reported in the statement of financial position.
It is also necessary to disclose the accounting policy used in deciding the items included in cash and
cash equivalents, in accordance with IAS 1, but also because of the wide range of cash management
practices worldwide.

2.10 Other disclosures

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All entities should disclose, together with a commentary by management, any other information likely
to be of importance.
(a) Restrictions on the use of or access to any part of cash equivalents.
(b) The amount of undrawn borrowing facilities which are available.
(c) Cash flows which increased operating capacity compared to cash flows which merely maintained
operating capacity.

2.11 Example of a statement of cash flows

In the next section we will look at the procedures for preparing a statement of cash flows. First, look at
this example, adapted from the example given in the standard.

2.11 Example of a statement of cash flows

In the next section we will look at the procedures for preparing a statement of cash flows. First, look at
this example, adapted from the example given in the standard.

2.11.1 Direct method

STATEMENT OF CASH FLOWS (DIRECT METHOD) YEAR ENDED 20X7

$m $m
Cash flows from operating activities
Cash receipts from customers 30,150
Cash paid to suppliers and employees (27,600)
Cash generated from operations 2,550
Interest paid (270)
Income taxes paid (900)
Net cash from operating activities c/fwd 1,380
Net cash from operating activities b/fwd 1,380
Cash flows from investing activities
Purchase of property, plant and equipment (900)
Proceeds from sale of equipment 20
Interest received 200
Dividends received 200
Net cash used in investing activities (480)
Cash flows from financing activities
Proceeds from issuance of share capital 250
Proceeds from long-term borrowings 250
Payment of finance lease liabilities (90)
Dividends paid* (1,200)
Net cash used in financing activities (790)
Net increase in cash and cash equivalents 110
Cash and cash equivalents at beginning of period (Note) 120
Cash and cash equivalents at end of period (Note) 230
* This could also be shown as an operating cash flow

2.11.2 Indirect method

STATEMENT OF CASH FLOWS (INDIRECT METHOD) YEAR ENDED 20X7
$m $m
Cash flows from operating activities
Profit before taxation 3,390
Adjustments for:
Depreciation 450
Investment income (500)
Interest expense 400

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 3,740
Increase in trade and other receivables (500)
Decrease in inventories 1,050
Decrease in trade payables (1,740)
Cash generated from operations 2,550
Interest paid (270)
Income taxes paid (900)
Net cash from operating activities 1,380
Cash flows from investing activities
Purchase of property, plant and equipment (900)
Proceeds from sale of equipment 20
Interest received 200
Dividends received 200

Net cash used in investing activities (480)

Cash flows from financing activities

Proceeds from issue of share capital 250
Proceeds from long-term borrowings 250
Payment of finance lease liabilities (90)
Dividends paid* (1,200)

Net cash used in financing activities (790)

Net increase in cash and cash equivalents c/f 110
Net increase in cash and cash equivalents b/f 110
Cash and cash equivalents at beginning of period (Note) 120
Cash and cash equivalents at end of period (Note) 230

* This could also be shown as an operating cash flow

20X7 20X6
$m $m
Cash on hand and balances with banks 40 25
Short-term investments 190 95
Cash and cash equivalents 230 120

2.12 Criticisms of IAS 7

The main disadvantages of cash accounting are essentially the advantages of accruals accounting
(proper matching of related items). There is also the practical problem that few businesses keep
historical cash flow information in the form needed to prepare a historical statement of cash flows and
so extra record keeping is likely to be necessary.
The inclusion of cash equivalents has been criticised because it does not reflect the way in which
businesses are managed: in particular, the requirement that to be a cash equivalent an investment has
to be within three months of maturity is considered unrealistic.
The management of assets similar to cash (ie 'cash equivalents') is not distinguished from other
investment decisions.
Further issues have been identified by the IASB include the following.
(a) Volatility of cash flows. Under accruals accounting, by contrast, uneven inflows and outflows are
assigned to the period in which they are earned or incurred.
(b) Exclusion of non-cash transactions, such as the acquisition of assets under leases and goods and
services acquired in exchange for shares. While it may be possible to modify the cash flow statement

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to include such transactions, that undermine the purpose of the statement. It would also be difficult to
determine which non-cash transactions should be included and which should not.
(c) There are many variants of ‘free cash flow’. It would probably be difficult to obtain agreement on
what is the single measure that should be prescribed by an accounting standard. It would seem likely
that no single measure would be the best for all purposes.
These deficiencies have led the IASB to consider better disclosures as part of their Disclosure Initiative
project.

Question
Kane Co's statement of profit or loss and other comprehensive income for the year ended 31 December
20X8 and statements of financial position at 31 December 20X7 and 31 December 20X8 were as
follows.
KANE CO
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED
31 DECEMBER 20X8
$'000 $'000
Sales 720
Raw materials 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 CO
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER
20X8 20X7
$'000 $'000 $'000 $'000
Assets
Property, plant and equipment
Cost 1,596 1,560
Depreciation 318 224
1,278 1,336
Current assets
Inventory 24 20
Trade receivables 76 58
Bank 48 56
148 134
Total assets 1,426 1,470
Equity and liabilities
Equity
Share capital 360 340
Share premium 36 24
Retained earnings 686 490
1,082 854
Non-current liabilities
Long-term loans 200 500
Current liabilities
Trade payables 42 30

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Taxation 102 86
144 116
1,426 1,470
During the year, the company paid $90,000 for a new piece of machinery.
Required
Prepare a statement of cash flows for Kane Co for the year ended 31 December 20X8 in accordance
with the requirements of IAS 7, using the indirect method.

Answer
KANE CO
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 20X8
$'000 $'000
Net cash flow from operating activities
Operating profit 420
Depreciation charges 118
Loss on sale of property, plant and equipment 18
Increase in inventories (W4) (4)
Increase in receivables (W4) (18)
Increase in payables(W4) 12
Cash generated from operations 546
Interest paid (28)
Dividends paid (W2) (72)
Tax paid (W3) (108)
Net cash flow from operating activities 338

Cash flows from investing activities

Payments to acquire tangible non-current assets (90)
Receipts from sales of tangible non-current assets (W1) 12
Net cash outflow from investing activities (78)

Cash flows from financing activities

Issues of share capital (W2) 32
Long-term loans repaid (W3) (300)
Net cash flows from financing (268)
Decrease in cash and cash equivalents (8)
Cash and cash equivalents at 1.1.X8 56
Cash and cash equivalents at 31.12.X8 48

1 Assets

PPE
$’000
b/d 1,336
Depreciation (non-cash) (118)
Disposals* (NBV) (30)
Cash paid (given in question but working shown for clarity) 90 β
c/d 1,278

*Property, plant and equipment disposals

$’000
Non-current asset cost c/d 1,560
Purchases 90
Disposals (balancing figure) (54)

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Non-current asset cost c/d 1,596

$’000
Non-current asset depreciation b/d 224
Depreciation charge for year 118
Depreciation on disposals (balancing figure) (24)
Non-current asset depreciation c/d 318
NBV of disposals (54 − 24) 30
Net loss reported (18)
Proceeds of disposals 12

2 Equity
Share capital Retained earnings
(incl premium)
$’000 $’000
b/d (340 + 24) 364 490
Profit for the year 268
Acquisition of subsidiary
Cash received/(paid) β 32 (72)
c/d (360 + 36) 396 686

3 Liabilities
Long-term
borrowings Tax payable
$’000 $’000
b/d 500 86
P/L 124
Cash (paid)/rec'd β (300) (108)
c/d 200 102

4 Working capital changes

Inventories Trade receivables Trade payables
$m $m $m
b/d 20 58 30
∴ Increase 4β 18 β 12 β
c/d 24 76 42

3 Consolidated statements of cash flows

Consolidated cash flows should not present a great problem if you understand how to deal with
acquisitions and disposals of subsidiaries, non-controlling interest and dividends.
Consolidated statements of cash flows follow the same principles as for single company statements,
with some additional complications.
Cash flows that are internal to the group should be eliminated in the preparation of a consolidated
statement of cash flows. Where a subsidiary undertaking joins or leaves a group during a financial year
the cash flows of the group should include the cash flows of the subsidiary undertaking concerned for
the same period as that for which the group's statement of profit or loss and other comprehensive
income includes the results of the subsidiary undertaking.

3.1 Acquisitions and disposals of subsidiaries and other business units

An entity should present separately the aggregate cash flows arising from acquisitions and from
disposals of subsidiaries or other business units and classify them as investing activities.

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Disclosure is required of the following, in aggregate, in respect of both acquisitions and disposals of
subsidiaries or other business units during the period.
 Total purchase/disposal consideration
 Portion of purchase/disposal consideration discharged by means of cash/cash equivalents
 Amount of cash/cash equivalents in the subsidiary or business unit disposed of
 Amount of assets and liabilities other than cash/cash equivalents in the subsidiary or business
unit acquired or disposed of, summarised by major category
The amounts shown in the statements of cash flows for purchase or disposal of subsidiaries or business
units will be the amounts paid or received net of cash/cash equivalents acquired or disposed of.

3.2 Consolidation adjustments and non-controlling interest

The group statement of cash flows should only deal with flows of cash and cash equivalents external to
the group, so all intra-group cash flows should be eliminated. Dividends paid to non-controlling interest
should be included under the heading 'cash flow from financing' and disclosed separately.

3.3 Example: Non-controlling interest

The following are extracts of the consolidated results for Jarvis Co for the year ended 31 December
20X8.
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME (EXTRACT)
$'000
Group profit before tax 90
Income tax expense (30)
Profit for the year 60
Profit attributable to:
Owners of the parent 45
Non-controlling interest 15
60
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (EXTRACT)
20X7 20X8
$'000 $'000
Non-controlling interest 300 306

Calculate the dividends paid to the non-controlling interest during the year

Solution
The non-controlling interest share of profit after tax represents retained profit plus dividends paid.
Dividends paid to non-controlling interests
$’000
b/d 300
TCI attributable to NCI 15
315
Dividends paid to NCI (balancing figure) (9)
c/d 306

Points to note:
(a) In this example, there is no ’other comprehensive income’ so the total comprehensive income (TCI)
here is equal to the profit for the year.
(b) On the statement of financial position, the NCI balance includes the NCI share of retained earnings
(ie after deduction of dividends). Dividends are not deducted in the statement of profit or loss and
other comprehensive income so the NCI share of total comprehensive income is stated before

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deduction of dividends. Therefore the balancing figure in this working must be the dividends paid to
the NCI.

3.4 Associates and joint ventures

An entity which that reports its interest in an associate or a joint venture using the equity method
includes in its statement of cash flows the cash flows in respect of its investments in the associate or
joint venture, and distributions and other payments or receipts between it and the associate or joint
venture.

Dividends should be included in operating or investing cash flows.

3.5 Example: Associate

The following are extracts of the consolidated results of Pripon Co for the year ended 31 December
20X8.
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME (EXTRACT)
$'000
Group profit before tax 150
Share of associate's profit after tax (60 – 30) 30
180
Tax (group) 75
Profit after tax 105

CONSOLIDATED STATEMENT OF FINANCIAL POSITION (EXTRACTS)

20X7 20X8
$'000 $'000
Investment in associate 264 276
Calculate the dividend received from the associate.

Solution
Investment in associate
$’000
b/d 264
Share of profit after tax (60 – 30) 30
Dividend received (β) (18)
c/d 276
Note. In the statement of financial position, the investment in associate balance includes the group
share of the associate’s retained earnings (ie after deduction of dividends). Dividends are not deducted
in the statement of comprehensive income so the group share of the associate’s profit and other
comprehensive income (if any) is stated before deduction of dividends. Therefore the balancing figure
in this working must be the dividends received from the associate.

Question
Topiary Co is a 40 year old company producing garden statues carved from marble. 22 years ago it
acquired a 100% interest in a marble importing company, Hardstuff Co. In 20W9 it acquired a 40%
interest in a competitor, Landscapes Co and on 1 January 20X7 it acquired a 75% interest in Garden
Furniture Designs. The draft consolidated accounts for the Topiary Group are as follows.

DRAFT CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20X7
$'000 $'000
Operating profit 4,455
Share of profit after tax of associate 1,050
Income from long-term investment 465

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Interest payable (450)
Profit before taxation 5,520
Tax on profit
Income tax 1,173
Deferred taxation 312
(1,485)
Profit for the year 4,035

Attributable to: owners of the parent 3,735

non-controlling interest 300
4,035

DRAFT CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER

20X6 20X7
$'000 $'000 $'000 $'000
Assets
Non-current assets
Tangible assets
Buildings at net book value 6,600 6,225
Machinery: cost 4,200 9,000
aggregate depreciation (3,300) (3,600)
net book value 900 5,400
7,500 11,625
Goodwill 300
Investments in associates 3,000 3,300
Long-term investments 1,230 1,230
11,730 16,455
Current assets
Inventories 3,000 5,925
Receivables 3,825 5,550
Cash 5,460 13,545
12,285 25,020
24,015 41,475
Equity and liabilities
Equity
Share capital: 25c shares 6,000 11,820
Share premium account 6,285 8,649
Retained earnings 7,500 10,335
19,785 30,804
Non-controlling interest – 345
Total equity c/f 19,785 31,149
Total equity b/f 19,785 31,149
Non-current liabilities
Obligations under finance leases 510 2,130
Loans 1,500 4,380
Deferred tax 39 90
2,049 6,600
Current liabilities
Trade payables 840 1,500
Obligations under finance leases 600 720
Income tax 651 1,386
Accrued interest and finance charges 90 120
2,181 3,726

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 24,015 41,475
Note
1 There had been no acquisitions or disposals of buildings during the year.
Machinery costing $1.5m was sold for $1.5m resulting in a profit of $300,000. New machinery was
acquired in 20X7 including additions of $2.55m acquired under finance leases.

2 Information relating to the acquisition of Garden Furniture Designs

$'000
Machinery 495
Inventories 96
Trade receivables 84
Cash 336
Trade payables (204)
Income tax (51)
756
Non-controlling interest (189)
567
Goodwill 300
867

2,640,000 shares issued as part consideration 825

Balance of consideration paid in cash 42
867

3 Loans were issued at a discount in 20X7 and the carrying amount of the loans at 31 December
20X7 included $120,000 representing the finance cost attributable to the discount and allocated in
respect of the current reporting period.

Required
Prepare a consolidated statement of cash flows for the Topiary Group for the year ended 31 December
20X7 as required by IAS 7, using the indirect method. There is no need to provide notes to the
statement of cash flows.

Answer

TOPIARY CO
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 20X7
$'000 $'000
Cash flows from operating activities
Net profit before tax 5,520
Adjustments for:
Depreciation (W1) 975
Profit on sale of plant (300)
Share of associate's profits (1,050)
Investment income (465)
Interest payable 450
Operating profit before working capital changes 5,130
Increase in trade and other receivables (W4) (1,641)
Increase in inventories (W4) (2,829)
Increase in trade payables (W4) 456
Cash generated from operations 1,116
Interest paid (W5) (300)
Income taxes paid (W3) (750)

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Net cash from operating activities 66
Cash flows from investing activities
Purchase of subsidiary undertaking (W6) 294
Purchase of property, plant and equipment (W1) (3,255)
Proceeds from sale of plant 1,500
Dividends from investment 465
Dividends from associate (W1) 750
Dividends paid to non-controlling interest (W2) (144)
Net cash used in investing activities (390)
Cash flows from financing activities
Issue of ordinary share capital (W2) 7,359
Issue of loan notes (W3) 2,760
Capital payments under finance leases (W3) (810)
Dividends paid (W2) (900)
Net cash flows from financing activities 8,409
Net increase in cash and cash equivalents 8,085
Cash and cash equivalents at 1.1.X7 5,460
Cash and cash equivalents at 31.12.X7 13,545

Workings

1 Assets
Plant and Long-term
Buildings machinery Goodwill Associate investment
$'000 $'000 $'000 $'000 $'000
b/d 6,600 900 - 3,000 1,230
P/L 1,050
Dep'n*/ Amort'n/ -β
Impairment (375) β (600)
Acquisition of sub/assoc - 495 300
Non-cash additions (W3) - 2,550 -
Disposals - (1,200) -
Cash paid/(rec'd) β - 3,255 β - (750) β
c/d 6,225 5,400 300 3,300 1,230

*Depreciation charges

$'000
Accumulated depreciation b/d 3,300
Depreciation on disposal (1,500 − 1,200*) (300)
Depreciation charge (balancing figure) 600
Accumulated depreciation c/d 3,600

*Disposal $'000
Proceeds 1,500
Net book value (balancing figure) (1,200)
Profit on disposal 300

Freehold buildings ($6,600,000 – $6,225,000) = $375,000

Total depreciation charge: ($375,000 + $600,000) = $975,000
Note. The share of the associate’s profit, recognised in the consolidated statement of profit or loss and
other comprehensive income, is not a cash item so is added back on the face of the statement of cash

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flows in the section that calculates the cash generated from operations. The dividend received from the
associate is the cash item and appears in the investing activities section.

2 Equity
2 Equity
Share Retained
Share capital premium earnings NCI
$'000 $'000 $'000 $'000
b/d 6,000 6,285 7,500 -
P/L 3,735 300
Acquisition of subsidiary 660 165 189
Cash (paid)/rec'd β 5160 2,199 (900) (144)
c/d 11.820 8,649 10,335 345

3 Liabilities
Loans Finance
lease Tax payable
$'000 $'000 $'000
(600 + 510) (651 + 39)

b/d 1,500 1,110 690

P/L (W5)120 (1,173 + 312)
1,485
New lease commitment (machinery) 2,550
Acquisition of subsidiary 51
Cash (paid)/rec'd β 2,760 (810) (750)
c/d
4,380 2,850 1,476
(720 + 2.130) (1,386 + 90)

4 Working capital changes

Inventories Receivables Payables
$'000 $'000 $'000
Balance b/d 3,000 3,825 840
Acquisition of subsidiary 96 84 204
3,096 3,909 1,044
Increase/(decrease) (balancing figure) 2,829 1,641 456
Balance c/d 5,925 5,550 1,500

5 Interest
$'000
Balance b/d 90
SPLOCI (450 − 120) (excluding the discount credited to the 330
carrying value of loans)
Interest paid in cash (balancing figure) (300)
Balance c/d 120

6 Purchase of subsidiary
$'000
Cash received on acquisition of subsidiary 336
Less cash consideration (42)
Cash inflow 294

Note. Only the cash consideration is included in the figure reported in the statement of cash flows. The
shares issued as part of the consideration are reflected in the share capital working (W2) above.

Page 16 of 19
Question
STATEMENTS OF FINANCIAL POSITION
Tastydesserts Custardpowders
and subsidiaries
31 December 31 December 31 October
20X2 20X1 20X2
$'000 $'000 $'000
Non-current assets
Property, plant & equipment 4,764 3,685 694
Goodwill 42
Investment in associates 2,195 2,175 –
7,001 5,860 694
Current assets
Inventories 1,735 1,388 306
Receivables 2,658 2,436 185
Bank balances and cash 43 77 7
4,436 3,901 498
11,437 9,761 1,192
Equity
Share capital 4,896 4,776 400
Share premium 216
Retained earnings 2,540 2,063 644
7,652 6,839 1,044
Non-current liabilities
Loans 1,348 653 –
Deferred tax 111 180 –
1,459 833 –
Current liabilities
Payables 1,915 1,546 148
Bank overdrafts 176 343
Current tax payable 235 200 –
2,326 2,089 148
11,437 9,761 1,192
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20X2
$'000
Profit before interest and tax 546
Finance costs –
Share of profit of associates 120
Profit before tax 666
Income tax expense 126
PROFIT/TOTAL COMPREHENSIVE INCOME FOR THE YEAR 540
Attributable to:
Owners of the parent 540
Non-controlling interests 0
540
The following information is also given:
(a) The consolidated figures at 31 December 20X2 include Custardpowders.
(b) The amount of depreciation on property, plant and equipment during the year was $78,000. There
were no disposals.
(c) The cost on 31 October 20X2 of the shares in Custardpowders was $1,086,000 comprising the issue
of $695,000 unsecured loan stock at par, 120,000 ordinary shares of $1 each at a value of 280c and
$55,000 in cash.
(d) No write down of goodwill was required during the period.
(e) Total dividends paid by Tastydesserts (parent) during the period amounted to $63,000.

Page 17 of 19
Required
Prepare a statement of cash flows for Tastydesserts and subsidiaries for the year ended 31 December
20X2 using the indirect method.
Notes to the statement of cash flows are not required.

Answer
TASTYDESSERTS
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 20X2

$'000 $'000

Cash flows from operating activities

Profit before taxation 666
Adjustments for:
Depreciation 78
Share of profit of associates (120)
Interest expense –
624
Increase in receivables (W4) (37)
Increase in inventories (W4) (41)
Increase in payables (W4) 221
Cash generated from operations 767
Interest paid –
Income taxes paid (W3) (160)
Net cash from operating activities 607
Cash flows from investing activities
Acquisition of subsidiary Custardpowders net of cash acquired (W5) (48)
Purchase of property, plant and equipment (W1) (463)
Dividends received from associates (W1) 100
Cash flows from financing activities
Dividends paid (63)
Net cash used in financing activities (63)
Net increase in cash and cash equivalents 133
Cash and cash equivalents at beginning of year (266)
Cash and cash equivalents at end of year (133)

Workings

1 Assets
Property,
plant and
equipment Goodwill Associate
$'000 $'000 $'000
b/d 3,685 - 2,175
P/L 120
Depreciation/ Impairment (78) -β
Acquisition of sub/assoc 694 42 (W5)
Cash paid/(rec'd) β 463 - (100)
c/d 4,764 42 2,195
Note. The share of the associate’s profit, recognised in the consolidated statement of profit or loss and
other comprehensive income, is not a cash item so is added back on the face of the statement of cash
flows in the section that calculates the cash generated from operations. The dividend received from the
associate is the cash item and appears in the investing activities section.

Page 18 of 19
2 Equity

Equity
Share Retained
Share capital premium earnings
$'000 $'000 $'000

b/d 4,776 - 2,063

P/L 540
Acquisition of subsidiary 120 216
Cash (paid)/rec'd β - - (63)*
c/d 4,896 216 2,540

*Dividend paid is given in question but working shown for clarity.

3. Liabilities
Loans Tax payable
$'000 $'000
(200 + 180)
b/d 653 380
P/L 126
Acquisition of subsidiary 695 -
Cash (paid)/rec'd - (160) β
c/d 1,348 346
(235 + 111)

4. Working capital changes

Inventories Receivables Payables
$'000 $'000 $'000
Balance b/d 1,388 2,436 1,546
Acquisition of subsidiary 306 185 148
1,694 2,621 1,694
Increase/(decrease) (balancing figure) 41 37 221
Balance c/d 1,735 2,658 1,915

5 Purchase of subsidiary
$'000
Cash received on acquisition of subsidiary 7
Less cash consideration (55)
Cash outflow (48)
Note. Only the cash consideration is included in the figure reported in the statement of cash flows.
The shares issued as part of the consideration are reflected in the share capital working (W2) above.
Goodwill on acquisition (to show no impairment):
$'000
Consideration: 55 + 695 (W3) + 120 (W2) + 216 1,086

Non-controlling interest -
Net assets acquired (1,044)
Goodwill 42

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