LECTURE NOTES: CASH FLOW STATEMENT

Introduction
This topic is aimed at equipping the learners with the knowledge that will enable them to prepare
cash flow statements according to the requirement of IAS 7 –“CASH FLOW STATEMENTS”
Learning outcomes
At the end of the lesson the learners should be able to:
1. Explain the meaning of cash flow statement
2. Explain purposes of cash flow statement
3. Prepare cash flow statement.
1 MEANING OF CASH FLOW AND CASH FLOW STATEMENT
A Cash Flow statement is a simple report that explains the various sources of cash and how the
business puts this cash into use. Cash flow statement is a primary final financial statement that
reports the movement of cash and cash equivalents that is inflows and outflows of the company
accounts during a particular financial year.
2. FORMS OF CASH
Cash comprises of cash in hand and demand deposits with banks.
Cash Equivalents are short-term, highly liquid investments that are readily convertible into known
amount of cash and which are subject to an insignificant risk of change in value. An investment
normally qualifies as cash equivalent only when it has a short maturity
i. Treasury bills,
ii. Commercial paper,
iii. Money market funds and
iv. Investments in preference shares and redeemable within three months can also be taken as
cash equivalents if there is no risk of the failure of the company.
3 OBJECTIVES OF CASH FLOW STATEMENT
The objectives of cash flow statement are:
i. To ascertain the sources from activities (i.e., operating/investing/financing activities) from which
cash and cash equivalents were generated by an enterprise.
ii. To ascertain the uses by activities (i.e., operating/investing/financing activities) for which cash
and cash equivalents were used by an enterprise.

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iii. To ascertain the net change in cash or cash equivalents indicating the difference between
sources and uses from or by the three activities between the dates of two Balance Sheets.
4. PURPOSES OF CASH FLOW STATEMENT
i. Forecast future cash flows
ii. Evaluate management decisions
iii. Determine the ability to pay dividends to stockholders’ and payments to creditors
iv. Show the relationship of net income to the business’s cash flows
5. IMPORTANCE OF CASH FLOW STATEMENT
i. To identify the sources from where cash inflows have arisen within a particular period and also
shows the various activities where in the cash was utilized.
ii. It is significant to management for proper cash planning and maintaining a proper matching
between cash inflows and outflows.
iii. Shows efficiency of a firm in generating cash inflows from its regular operations.
v. Reports the amount of cash used during the period in various long-term investing activities,
such as purchase of fixed assets.
v. Reports the amount of cash received during the period through various financing activities,
such as issue of shares, debentures and raising long-term loan.
6. COMPONENT OF CASH FLOW STATEMENT
It should prepared in accordance to the Revised Accounting Standard (IAS 7) on cash
flow statement. The standard requires that cash flow be classified and shown in the cash flow
statement under three heads, namely:
i. Cash Flow from Operating Activities
ii. Cash Flow from Investing Activities
iii. Cash Flow from Financing Activities.
CASH FLOW FROM OPERATING ACTIVITIES
Operating activities are accounting items which indicates the money a company brings in from
ongoing, regular business activities, such as manufacturing and selling goods or providing
a service. Cash flow from operating activities does not include long-term capital or investment
costs. It does include earnings before interest and taxes plus depreciation minus taxes.
These are both normal and core daily activities within a business that generate cash inflows and
outflows which includes:

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i) Cash received from customers
ii) Cash paid to suppliers of goods and services
iii) Cash paid to employees
CASH FLOW FROM INVESTING ACTIVITIES
Investing activities are items on the cash flow statement that reports the aggregate change in a
company's cash position resulting from any gains (or losses) from investments in the
financial markets and operating subsidiaries, and changes resulting from amounts spent on
investments in capital assets such as plant and equipment.
These involves activities like the acquisition and disposal of non-current assets such as; property,
plant and equipment, intangible assets, and long-term investments.
Examples of such cash flows include:
i) Proceeds on sale of non-current assets
ii) Cash used on acquisition of non-current assets
iii) Investment income received (not accrued)
CASH FLOW FROM FINANCING ACTIVITIES.
A category in a company’s cash flow statement that accounts for external activities that allow a
firm to raise capital and repay investors, such as issuing cash dividends, adding or changing loans
or issuing more stock. Cash flow from financing activities shows investors the company’s financial
strength. A company that frequently turns to new debt or equity for cash, for example, could have
problems if the capital markets become less liquid.

Format for cash flow statement (using direct cash flow method)
Cash flows from Operating activities Sh Sh
Cash receipts from customers X
Cash paid to suppliers and employees (X)
Cash generated from operations X
Interest paid/received (X)
Income taxes paid (X)
Net cash flow from operating activities X
Cash flows from investing activities
Purchase of property plant and equipment (X)

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Proceeds on disposal of equipment X_
Net cash flow from investing activities X
Cash flows from financing activities
Proceeds from issuance of share capital X
Redemption and purchase of share capital (X)
Proceeds from long- term borrowings X
Repayments on long-term borrowings (X)
Payments on finance lease obligations (X)
Dividends paid (X)
Net cash flow from financing activities X_
Net change in cash and cash equivalents X
Cash and cash equivalents b/f X_
Cash and cash equivalents c/f XX

Format for cash flow statements (using indirect cash flow method)
Cash flows from Operating activities Sh Sh
Net profit before tax X
Adjustment for items not involving movement of cash
Depreciation X
Profit and losses on fixed asset disposals X_
X
Adjustment for working capital items
(Increase)/Decrease in stocks X
(Increase)/Decrease in debtors X
(Decrease)/Increase in creditors X.
Cash generated from operations X
Tax paid (X)
Net cash inflow from operating activities X
Cash flows from Investing Activities
Purchase of property plant and equipment (X)
Proceeds on disposal of equipment X_

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Net cash flow from investing activities X
Cash flows from Financing Activities
Proceeds from issuance of share capital X
Redemptions and purchase of share capital (X)
Proceeds from long-term borrowings X
Repayments on long-term borrowings (X)
Payments on finance lease obligations (X)
Dividends paid (X)
Net cash flow from financing activities X_
Net change in cash and cash equivalents X
Cash and cash equivalents b/f X_
Cash and cash equivalents c/f XX

Question 1
Zora Co’s income statement for the year ended 31 December 2021 and statements of financial
position at 31 December 2020 and 31 December 2021 were as follows.
ZORA CO
INCOME STAEMENT FOR THE YEAR ENDED 31 DECEMBER 2021
sh’000 sh’000
Sales 720
Raw materials consumed 70
Staff costs 94
Depreciation 118
Loss on disposal of non-current asset 18
(300)
Profit before interest and taxes 420
Interest payable (28)
Profit before tax 392
Taxation (124)
Profit for the period 268

ZORA CO
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER
2021 2020
sh’000 sh’000 sh’000 sh’000
Assets
Property, plant and equipment
Cost 1,596 1,560
Depreciation 318 224

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 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 sh90,000 for a new piece of machinery.

Dividends paid during 2021 totalled sh66,000.

Required
Prepare a statement of cash flows for Zora Co for the year ended 31 December 2021 in
accordance with the requirements of IAS 7, using the indirect method. (12 Marks)

Question 2
Set out below are the financial statements of Shabnum Co. You are the financial controller, faced
with the task of implementing IAS 7 Statement of cash flows.
SHABNUM CO
INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2021
sh’000
Revenue 2,553
Cost of sales (1,814)
Gross profit 739
Distribution costs (125)
Administrative expenses (264)
350
Interest received 25

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 Interest paid (75)
Profit before taxation 300
Taxation (140)
Profit for the period 160

SHABNUM CO
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER
2021 2020
sh’000 sh’000
Assets
Non-current assets
Property, plant and equipment 380 305
Intangible assets 250 200
Investments - 25
Current assets
Inventories 150 102
Receivables 390 315
Short-term investments 50 -
Cash in hand 2 1
Total assets 1,222 948

2021 2020
sh’000 sh’000
Equity and liabilities
Equity
Share capital (sh1 ordinary shares) 200 150
Share premium account 160 150
Revaluation reserve 100 91
Retained earnings 260 180
Non-current liabilities
Loan 170 50
Current liabilities
Trade payables 127 119
Bank overdraft 85 98
Taxation 120 110
Total equity and liabilities 1,222 948

The following information is available.

(a) The proceeds of the sale of non-current asset investments amounted to sh30,000.
(b) Fixtures and fittings, with an original cost of sh85,000 and a net book value of
sh45,000, were sold for sh32,000 during the year.
(c) The following information relates to property, plant and equipment

31.12.2021 31.12.2020
sh’000 sh’000
Cost 720 595

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 Accumulated depreciation 340 290
Net book value 380 305

(d) 50,000 %1 ordinary shares were issued during the year at a premium of 20c per share.

(e) Dividends totaling sh80,000 were paid during the year.

Required

Prepare a statement of cash flows for the year to 31 December 2021 using the format laid
out in IAS 7.