CHAPTER 13

STATEMENT OF CASH FLOWS

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LEARNING OBJECTIVES
1. Calculate the cash flows from activities;
2. Prepare and present a statement of cash
flows (or extracts) from the accounting
records and trial balance in a format which
satisfies the information requirements of the
entity.

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TOPIC LIST
13.1. Statement of cash flows (IAS 7) (FRS102
s7)
13.2. Format of the SCF
13.3. Preparing a SCF

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13.1. SCF (IAS 7)
 Objective: Provide to users of financial statement
about an entity’s ability to generate cash and cash
equivalents, as well as indicating the cash needs of
the entity.
 Scope: A cash flow statement should be presented as
an integral part of an entity’s financial statement.
All entities are required by the standard to produce a
cash flow statement.

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13.2. FORMAT OF THE SCF
 SCF summarises all movements of cash into and out of the
business. The cash flows are classified:
 Operating activities: These are primarily derived from the
principal revenue-producing activities of the entity and other
activities that are not investing or financing activities.
 Investing activities: CFs derived from acquisition and disposal of
NCAs and other investments not included in cash equivalents.
 Financing activities: activities that result in changes in the size
and composition of the equity capital and borrowings.
 Total CFs for each heading are totalled to give the net
inflow/outflow of cash and cash equivalents for the period.
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13.2. FORMAT OF THE SCF
13.2.1. Cash flows from operating activities
 Cash flows from operating activities can consist of:
 cash receipts from sale of goods/rendering of services
 cash receipts from royalties, fees, commissions, and other
revenue
 cash pmts to suppliers for goods and services
 cash pmts to and on behalf of employees
 CFs from interest paid and income taxes paid are also
dealt with here

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2. FORMAT OF THE SCF
13.2.1. Cash flows from operating activities
 IAS 7 allows two possible layouts for cash generated
from operations
the indirect method
the direct method
 In practical terms the indirect method is likely to be
easier and less time consuming to prepare and is
more likely to be examined.

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13.2. FORMAT OF THE SCF
13.2.2. Direct method
 Cash generated from operations would be analysed as
follows and shown as a note to SCF:
Gross operating CFs for the year ended …
£
Cash received from customers X
Cash payments to suppliers (X)
Cash payments to/on behalf of employees (X)
Cash generated from operations X
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13.2. FORMAT OF THE SCF
13.2.3. Indirect method
 Using the indirect method, cash generated from
operations is calculated by performing a
reconciliation between:
PBT as reported in SPL
Cash generated from operations
 This reconciliation is produced as (S/M):

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13.2. FORMAT OF THE SCF
13.2.3. Indirect method
£
Profit/(loss) before tax X/(X)
Finance cost X
Investment income (X)
Depreciation charge X
Amortisation charge X
Impairment loss X
Loss/(Profit) on disposal of NCA X/(X)
(Increase)/Decrease in inventories (X)/X
(Increase)/Decrease in trade and other receivables (X)/X

(Increase)/Decrease in prepayments (X)/X

Increase/(Decrease) in trade and other payables X/(X)
Increase/(Decrease) in accruals X/(X)
Increase/(Decrease) in provision X/(X)
Cash generated from operations X
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13.2. FORMAT OF THE SCF
13.2.4. Explanation
CFs from operating activities also include pmts/refunds of
income tax unless they can be specifically identified with
investing or financing activities. Corporation tax
payments relate to profits from operations and so they
are a cash flow from operating activities.

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 13.2. FORMAT OF THE SCF
13.2.4. Explanation
(a) Depreciation is not a cash expense
(b) By the same logic, a gain/loss on a disposal of NCA (arising
through underprovision of depreciation)
(c) An increase in inventory means less cash
(d) An increase in receivables means receivables have not paid as
much, therefore less cash.
(e) If we pay off payables, causing the figure to decrease, again we
have less cash.
Note: In your exam you should use parentheses to denote a negative
number eg, –1,250 should be written as (1,250).
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13.2. FORMAT OF THE SCF
13.2.5. Payments of interest and income tax
 Adjustments in SCFs to 'cash generated from operations' to
arrive at 'net cash from operating activities' consist of
pmts of interest and income tax (a similar method can be
used). Specifically, the information available might be:
 opening balance (opening SFP)
 SPL (the amount of the item, as reported)
 closing balance (closing SFP)
 The cash flow is a balancing figure obtained from these
three figures. A T account can be used as a working.
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13.2. FORMAT OF THE SCF
13.2.5. Payments of interest and income tax
 Example for calculation of interest paid
 Calculation of payments of income tax in the year (Note:
taxation payment refers to payments of income tax, not to
payments of sales tax (VAT) or tax paid by employees –
WHY?).
 The opening and closing SFP will show a liability for income
tax. The income tax charge for the year is shown in the
SPL. The figure for income taxes paid during the year is
derived as a balancing figure.
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13.2. FORMAT OF THE SCF
13.2.6. Investing activities
Cash flows from investing activities are calculated
separately in the SCFs in order to identify the extent to
which expenditures have been made on resources
intended to generate future income and cash flows.
These are the acquisition and disposal of long-term
assets and other investments not included in cash
equivalents.

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13.2. FORMAT OF THE SCF
13.2.6. Investing activities
Cash flows from investing activities:
 cash payments to acquire PPE, intangibles and other
NCA, incl. those relating to capitalised development costs
and self-constructed property, plant and equipment
 cash receipts from sales of PPE, intangibles, other NCAs
 cash payments to acquire equity or debt of other entities
 cash receipts from sales of equity or debt of other entities
 interest received
 dividends received
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13.2. FORMAT OF THE SCF
13.2.7. Cash receipts from sales of PPE
Property, plant and equipment – disposal account
13.2.8. Cash payments for purchase of PPE
Property, plant and equipment – cost account
13.2.9. Interest and dividends received
Interest/dividends received account

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 13.2. FORMAT OF THE SCF
13.2.10 Cash flows from financing activities
 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.
 Examples of CFs which might arise
Proceeds from issue of shares
Movement in borrowings
Dividends paid
Net cash from/used in financing activities
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13.2. FORMAT OF THE SCF
13.2.11. Cash received from issuing shares
Share capital and premium T account
13.2.12. Cash from raising a loan
All loans in SFP should be taken into consideration (?)
13.2.12.1. Repayment of NC interest-bearing borrowings
13.2.12.2. Dividends paid (Dividends payable T account)
One of two ways:
Financing cash flow
Cash flows from operating activities
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13.2. FORMAT OF THE SCF
13.2.13. Example: Direct method
13.2.14. Example: Indirect method

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13.3. PREPARING A SCF
Think in terms of cash:
(a) Increase in inventory is treated as negative (in
brackets) - 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) An increase in payables is positive because cash is
being retained and not used to pay off payables.
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13.3. PREPARING A SCF
Step 1
Set out the pro-forma SCF (In the assessment this will
be provided for you).
Step 2
Complete the CFs from operating activities as far as
possible. When preparing the SCF from the SFP, you will
usually have to calculate items such as depreciation,
profit or loss on sale of NCA and profit for the year

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13.3. PREPARING A SCF
Step 3
Calculate the figures for tax paid, purchase or sale of
NCA, issue of shares and repayment of loans if these
are not already given to you (as they may be). Note that
you may not be given the tax charge in the statement of
profit or loss. You will then have to assume that the tax
paid in the year is last year's year-end provision and
calculate the charge as the balancing figure.

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13.3. PREPARING A SCF
Step 4
If you are not given the profit figure, open up a working
for the SPL. Using the opening and closing Retained
Earnings balances, the taxation charge and dividends
paid you will be able to calculate profit for the year as the
balancing figure to put in the statement.

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13.3. PREPARING A SCF
Step 5
You will now be able to complete the statement by
slotting in the figures given or calculated.
Step 6
Check that the net increase in cash and cash equivalents
that you have calculated plus the cash and cash
equivalents at the beginning of the period totals to the
cash and cash equivalents at the end of the period.

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QUESTIONS
Define ‘Cash and cash equivalents’ in SCF?

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End of Chapter 13
Thank you!

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