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