Acca f3 Financial Accounting (int) Study Text

Part F  Preparing basic financial statements 

  23:  Statements of cash flows

399

 $'000 

$'000

Cash flows from investing activities 

Payments to acquire property, plant and equipment (W2) 

(201)

Payments to acquire intangible non-current assets 

(50)

Receipts from sales of property, plant and equipment 

32

Receipts from sale of non-current asset investments 

  30

Net cash flows from investing activities 

 (189) 

Cash flows from financing activities 

Issue of share capital 

60

Long-term loan 

120

Net cash flows from financing 

180

Increase in cash and cash equivalents (Note) 

 64 

Cash and cash equivalents at 1.1 X2 (Note) 

 (97)

Cash and cash equivalents at 31.12.X2 (Note) 

 (33)

NOTES TO THE STATEMENT OF CASH FLOWS 

Note: Analysis of the balances of cash and cash equivalents as shown in the statement of financial position 

Change

20X2

20X1

in year

$'000

$'000

$'000

Cash in hand

2

1

1

Short term investments

50

 –

50

Bank overdraft

(85)

(98)

13

(33)

(97)

64

Workings

1

Depreciation charge 

$'000

$'000

Depreciation at 31 December 20X2

340

Depreciation 31 December 20X1

290

Depreciation on assets sold (85   45)

 40

250

Charge for the year

  90

2

Purchase of property, plant and equipment 

PROPERTY, PLANT AND EQUIPMENT 

$'000

$'000

1.1.X2 Balance b/d

595

Disposals

85

Revaluation (100   91)

9

Purchases (bal fig)

201

31.12.X2 Balance c/d

720

805

805

In the December 2008 exam, there was a question requiring the calculation of the purchase of property, 

plant and equipment for the statement of cash flows. Only 38% answered the question correctly. Make 

sure you use a working to calculate the figure as shown above. 

2.2 The advantages of cash flow accounting 

The advantages of cash flow accounting are as follows. 

(a) 

Survival in business depends on the 

ability to generate cash. Cash flow accounting directs 

attention towards this critical issue. 

Exam focus 

point

---

400

23: Statements of cash flows    Part F  Preparing basic financial statements 

(b) Cash 

flow 

is 

more comprehensive than 'profit' which is dependent on accounting conventions and 

concepts.

(c)

Payables (long and short-term) are more interested in an enterprise'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) 

As described previously, the information needs of 

creditors and employees 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) 

They can in some respects 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 should 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 publication of variance statements which 

compare actual cash flows against the forecast. 

Question

Cash flow accounting 

Can you think of some possible disadvantages of cash flow accounting?

Answer

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. 

2.3 Criticisms of IAS 7 

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. 

You could be asked to consider the usefulness of a statement of cash flows as well as having to prepare 

one.

Exam focus 

point

---