IAS 7 Question 5

QUESTION 5: IAS 7 STATEMENTS OF CASH FLOWS

The financial statements of Ittehad Manufacturing Ltd for the year to 30 September 2015, together
with the comparative statement of financial position (balance sheet) for the year to 30 September
2014 are shown below:

$m
Sales revenue 3,820
Cost of sales (note 1) (2,620)
Gross profit for period 1,200
Operating expenses (note 1) (280)
920
Interest – Loan note (30)
Profit before tax 890
Taxation (270)
Net profit for the period 620

Statement of financial position as at 30 September:

2015 2014
$m $m
Non-current assets
Property, plant and equipment 1,890 1,830
Intangible assets (note 2) 670 300
2,560 2,130
Current assets
Inventory 1,420 940
Accounts receivable 990 680
Cash 70 nil
2,480 1,620
5,040 3,750
Equity
Ordinary shares of $ 1 each 750 500
Reserves
Share premium 350 100
Revaluation 190 nil
Retained earnings 1,860 1,600
3,150 2,200
Non-current liabilities (note 3) 610 240
Current liabilities (note 4) 1,280 1,310
5,040 3,750

Extract from statement of changes in equity

2015 2014
Retained earnings – brought forward 1,600 1,000
Profit for the year 620 800
Dividends (320) (200)
Bonus issue (50) -
Transfer from revaluation surplus 10 –
Retained earnings – carried forward 1,860 1,600

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IAS 7 Question 5

Notes to the financial statements:

(1) Cost of sales includes depreciation of property, plant and equipment of $ 320 million and a
loss on the sale of plant of $ 50 million.

(2) Intangible non-current assets:

2015 2014
$m $m
Deferred development expenditure 470 100
Goodwill 200 200
670 300

(3) Non-current liabilities:

10% loan note 300 100

Deferred tax 310 140
610 240

(4) Current liabilities:

Accounts payable 875 730

Bank overdraft nil 115
Accrued loan interest 15 5
Deferred income 260 300
Taxation 130 160
1,280 1,310

The following additional information is relevant:

(i) Intangible non-current assets:
The company successfully completed the development of a new product during the current
year, capitalizing a further $ 500 million before amortization charges for the period.
(ii) Property, plant and equipment/revaluation surplus:
 The company revalued its buildings by $ 200 million on 1 October 2014. The surplus
was credited to a revaluation surplus.
 New plant was acquired during the year at a cost of $ 250.
 $ 10 million has been transferred from the revaluation surplus to retained earnings
as a year-end adjustment in respect of the additional depreciation created by the
revaluation.
 The remaining movement on property, plant and equipment was due to the disposal
of obsolete plant.
(iii) Share issues:
On 1 October 2014 a bonus issue of 1 new share for every 10 held was made from retained
earnings. Ittehad Manufacturing Ltd made a further issue of ordinary shares for cash during
the year.

Required:
A statement of cash flows for Ittehad Manufacturing Ltd for the year to 30 September 2015
prepared in accordance with IAS 7 Statement of Cash Flows.

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IAS 7 Question 5

ANSWER – QUESTION 5: IAS 7 STATEMENTS OF CASH FLOWS

ITTEHAD MANUFACTURING LTD

Statement of cash flows
For the year ended 30 September 2015
Cash flows from operating activities: $m
Profit before tax 890
Adjustments for:
Depreciation of non-current assets W1 320 + W5 130 450
Loss on disposal W2 50
Finance costs 30
Operating profit before working capital changes 1,420
Increase in inventory (940 – 1,420) (480)
Increase in trade receivables (680 - 990) (310)
Decrease in deferred income (260 - 300) (40)
Increase in trade payables (875 - 730) 145
Cash generated from operations 735
Interest paid W6 (20)
Income tax paid W3 (130)
Net cash from operating activities 585

Cash flows from investing activities:

Purchase of property, plant and equipment W1 (250)
Capitalized development expenditures W5 (500)
Proceeds from sale of asset W2 20
Net cash used in investing activities (730)

Cash flows from financing activities:

Shares issued W4 450
Issue of loan notes (300 – 100) 200
Dividends paid (320)
Net cash from financing activities 330

Net increase in cash and cash equivalents 185

Cash and cash equivalents at beginning of period (115)
Cash and cash equivalents at end of period 70

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IAS 7 Question 5

Workings:
W1 – Property, plant & equipment
b/d 1,830 Accumulated Depreciation 320
Revaluation 200 Disposal β 70
Cash 250 c/d 1,890
2,280 2,280

W2 – Disposal A/C
PPE 70 Loss on Disposal 50
Cash β 20

70 70

W3 – Income Tax
Cash β 130 b/d Provision 160
c/d Provision 130 b/d Deferred tax 140
c/d Deferred tax 310 PL 270
570 570

W4 – Share Capital
b/d 500 + 100 600
Retained earnings (1 for 10) 50
C/d 750 + 350 1,100 Cash β 450
1,100 1,100

W5 – Deferred development expenditure

b/d 100 Accumulated Amortization β 130
Cash 500 c/d 470
600 600

W6 – Accrued loan interest

Cash β 20 b/d 5
C/d 15 PL 30
35 35

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