Acca f3 Financial Accounting (int) Study Text

Part F  Preparing basic financial statements 

  23:  Statements of cash flows

393

1.13 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 (which is based on a group and therefore 

beyond the scope of your syllabus). 

1.13.1  Direct method 

STATEMENT OF CASH FLOWS (DIRECT METHOD) 

YEAR ENDED 20X7 

$m

$m

Cash flows from operating activities

Cash receipts from customers

30,330

Cash paid to suppliers and employees

 (27,600)

Cash generated from operations

2,730

Interest paid

 (270)

Income taxes paid

   (900)

Net cash from operating activities

1,560

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

Dividends paid*

 (1,290)

Net cash used in financing activities

 (790)

Net increase in cash and cash equivalents

290

Cash and cash equivalents at beginning of period (Note)

120

Cash and cash equivalents at end of period (Note)

410

* This could also be shown as an operating cash flow 

1.13.2  Indirect method 

STATEMENT OF CASH FLOWS (INDIRECT METHOD) 

YEAR ENDED 20X7 

$m

$m

Cash flows from operating activities

Net profit before taxation

3,570

Adjustments for:

  Depreciation

450

  Investment income

(500)

  Interest expense

  400

Operating profit before working capital changes

3,920

  Increase in trade and other receivables

(500)

  Decrease in inventories

1,050

  Decrease in trade payables

(1,740)

Cash generated from operations

2,730

Interest paid

(270)

Income taxes paid

 (900)

Net cash from operating activities

1,560

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394

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

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

Dividends paid*

(1,290)

Net cash used in financing activities

(790)

Net increase in cash and cash equivalents

290

Cash and cash equivalents at beginning of period (Note)

120

Cash and cash equivalents at end of period (Note)

410

* This could also be shown as an operating cash flow 

 

 

The following note is required to both versions of the statement. 

Note: Cash and cash equivalents 

Cash and cash equivalents consist of cash on hand and balances with banks, and investments in money 

market instruments. Cash and cash equivalents included in the statement of cash flows comprise the 

following statement of financial position amounts. 

20X7

20X6

$m

$m

Cash on hand and balances with banks

40

25

Short-term investments

370

95

Cash and cash equivalents

410

120

The company has undrawn borrowing facilities of $2,000 of which only $700 may be used for future 

expansion.

2 Preparing a statement of cash flows 

You need to be aware of the 

format  of the statement as laid out in IAS 7. Setting out the format is the first 

step. Then follow the 

step-by-step preparation procedure.

In essence, preparing a statement of cash flows is very straightforward. You should therefore simply learn 

the format and apply the steps noted in the example below.

Note that the following items are treated in a way that might seem confusing, but the treatment is logical if 

you

think in terms of cash.

(a)

Increase in inventory is treated as negative (in brackets). This is because it represents a cash 

outflow; cash is being spent on inventory. 

(b) An 

increase in receivables would be treated as negative for the same reasons; more receivables 

means less cash. 

(c) 

By contrast an 

increase in payables is positive because cash is being retained and not used to 

settle accounts payable. There is therefore more of it. 

FAST FORWARD

Exam focus 

point

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Part F  Preparing basic financial statements 

  23:  Statements of cash flows

395

2.1 Example: Preparation of a statement of cash flows 

Colby Co's income statement for the year ended 31 December 20X2 and statements of financial position at 

31 December 20X1 and 31 December 20X2 were as follows. 

COLBY CO 

INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 20X2 

 $'000

 $'000

Sales

 720

Raw materials consumed

 70

Staff costs

 94

Depreciation

 118

Loss on disposal of non-current asset

  18

 (300)

 420 

Interest payable

(28)

Profit before tax

 392

Taxation

(124)

Profit for the period

 268

COLBY CO 

STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER

20X2

20X1

$'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 

Capital and reserves

  Share capital

360

340

  Share premium

36

24

  Retained earnings

 716

514

1,112

   878

Non-current liabilities 

  Non-current loans

 200

500

Current liabilities

  Trade payables

12

6

  Taxation

 102

 86

   114

     92

1,426

1,470

During the year, the company paid $90,000 for a new piece of machinery. 

Dividends paid during 20X2 totalled $66,000. 

Required

Prepare a statement of cash flows for Colby Co for the year ended 31 December 20X2 in accordance with 

the requirements of IAS 7, using the indirect method. 

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