FINANCIAL ACCOUNTING 3 DPA30053

5.0 STATEMENT OF CASH FLOWS

Learning outcomes;

1. Understand the nature of cash and cash equivalent

1.1 Clarify the nature of cash
1.2 Explain the nature of cash equivalent
2. Construct the Statement of Cash Flow
2.1 Describe cash inflow and cash outflow for operating, investing and financing
activities
2.2 Prepare Statement of Cash Flo by using direct and indirect method

5.1 INTRODUCTION

Cash is the ‘life blood’ of a business entity. A business may have profits but may not be
able to settle its debts, or even pay dividends as it may have cash flow problems.
Therefore, a cash flow statement is an important financial statement and all entities are
expected to prepare a statement of cash flows as part of a complete set of financial
statements.

MFRS 107 Statement of Cash Flows issued by the Malaysian Accounting

Standards board (MASB) requires all entities to present the statement of cash flows as
an integral part of their financial statements.

The statement of cash flows is one of the five financial statements required by GAAP.
The statement of cash flows answers one question the other four financial statements
do not: how did the company generate, and spend its cash?

The usefulness of the statement of cash are as follows:-

i. The statement of cash flows is more easily understood than a statement of profit
and loss and other comprehensive income as the profit or loss for the year is
derived using the accrual principles

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ii. Since the statement reports cash receipts, cash payments and the net change in
cash, the creditors will be able to assess the ability of the company to pay them

iii. As the survival of a business entity depends on its ability to generate cash, the
statement of cash flows will draw the attention of management and external
users of financial statements to this crucial asset

iv. Information derived from the statement of cash flows is more useful and relevant
for decision making than the statement of profit or loss as non-cash items are
excluded

v. Stakeholders will be able to assess the stewardship function of managers

Drawbacks of the statement of cash flows:-

i. It provides historical information. Analysis and interpretation will be based on past

decisions and there could be ‘window dressing’ of the statement by the
management to present the company in the best possible light.

ii. It deals with not just cash but also cash equivalents and the term cash equivalent
may not be a term that is familiar to users of financial statements.

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5.2 Definitions

The following terms are used in the standard.

Cash
Cash comprises cash on hand and demand deposits

Cash equivalents
Cash equivalents are short-term, highly liquid investments that can readily be converted
into cash and are held for meeting short-term commitments. They have short-term
maturity of three months or less from the date of acquisition. Investment in equity shares
does not qualify as cash equivalent. Overdrafts are repayable on demand are cash
equivalents.

Operating activities
Operating activities are the principal revenue-generating activities of an entity.
Examples of cash flows from operating activities are cash received from customers and
cash paid for goods and services including payments to employees.

Investing activities
Investing activities encompass acquisition and disposal of non-current assets and short-
term investments that do not qualify as cash equivalents. Examples of cash flows from
investing activities are cash paid to acquire and cash received from disposal of non-
current assets such as property, plant and equipment and investments.

Financing activities
Financing activities are activities that involve the increase and decrease of contributed
equity and borrowings. Examples of cash flows from financing activities are cash
received or cash paid on issue of shares and on redemption or share buy-back, and
payment of capital portion on the finance lease liability.

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Non cash Investing and Financing Activities

Businesses sometime engage in transactions not affecting cash. For example, a business
can purchase equipment by issuing a long-term note payable to the vendor. In this
case, cash is not affected, and this transaction would not be reported in the body of
the statement of cash flows. This transaction, referred to as a non cash investing and
financing activity, would instead be disclosed either at the bottom of the statement of
cash flows or in a note to the financial statements.

5.3 Presentation of cash flow statements

Direct Method

Direct method identifies cash inflows by sources of operating cash and cash
outflows by uses. It is summarized in a schedule of changes from accrual basis to
cash basis income statement. The difference between total cash inflows and
total cash outflows is to net cash flow from operating activities.

(a) Cash inflow (Cash receipts from customers)

Cash received from sales and trade receivables

= Sales + Opening trade receivable – Closing trade receivable

(b) Cash outflow (Cash paid to supplier and employees)

i. Cash paid to suppliers

Purchases = Cost of sales – Closing inventory – Opening inventory

Cash paid to purchases and supplier of goods

= Purchases + Opening trade payable – Closing trade payable

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ii. Cash paid for operating expense such as salaries and wages.

Expenses Account
RM RM
Balance b/d (prepayment) XX Balance c/d (accrual) XX
Cash XX Statement of
Comprehensive income XX
Balance c/d (accrual) XX Balance c/d (prepayment) XX
XX XX

[Name]
Statement of Cash Flows {Time Period]]

Cash flows from operating activities

Cash receipts from customers xxx
Cash paid to supplier and employees (xxx)
Cash generated from operation xxx
Cash paid for interest (xxx)
Cash paid for taxes (xxx)
Net cash flow from operating activities xxx
Cash flows from investing activities

Purchase of Property, Plant and Equipment (xxx)

Proceeds from the disposal of plant xxx
Purchase of equity investment (xxx)
Interest received xxx
Dividend received xxx
Other xxx
Net cash flow investing activities xxx
Cash flows from financing activities

Proceeds from the issue of share capital xxx

Proceeds from long term borrowings xxx
Redemption of preference shares (xxx)
Repayment of long term borrowings (xxx)

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Cash paid for dividends (xxx)

Other xxx
Net cash flow from financing activities xxx
Net increase/decrease in cash and cash equivalents xxx
Cash and cash equivalents at the beginning of the period xxx
Cash and cash equivalents at the end of the period xxx

Indirect Method
Cash flows from operating activities
Net profit before taxation xxx
Adjustment for:
Depreciation xxx
Foreign exchange loss xxx
Investment income (xxx)
Interest income xxx
Gain on disposal of property, plant and equipment (xxx)
Loss on disposal of investment xxx
Bad debt written off xxx
Amortisation of intangibles xxx
Operating profit before working capital changes xxx
Decrease in receivables xxx
Increase in inventories (xxx)
Increase in trade payables xxx
Cash generated from operations xxx

MFRS 107 encourages entities to report the cash flow from operating activities using the
direct method. The direct method may provide information that otherwise may not be
available if the indirect method is used.

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Interest and dividends

Interest paid and received and dividends paid and received are disclosed as
operating, investing and financing activities. Each should be classified consistently.
Interest paid can be shown either as an operating activity or as a financing activity.
Interest and dividend received can be shown either as an operating or investing
activity. Dividends paid are part of a financing activity.

Taxes
Taxes paid on the entity’s income are paid of operating activity

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Exercise
Complete the following classification table.

Statement of Cash Flows Section Direction

Transaction or Event Financin Not
Operating Investing Included Inflow Outflow
g
Collected debts from a customer
who made a large credit
purchase in a prior year
Paid a creditor for inventory
purchased last year
Purchase a motor vehicle for cash
Sold an unused van at a loss
Paid a dividend to ordinary
shareholders
Declared a final dividend to be
paid early next year
On 31st December, made a large
credit sale of goods
At year end, paid rent in advance
for the next six months
Made an entry in the accounting
records to record unpaid wages
at the year
Received a dividend from an
investment in DATs 5A shares
Issued shares for cash to invest in
new buildings and for research
Recorded annual depreciation
expense
Declared and paid an interim
dividend half-way through the
year
Equipment with an original cost
RM30,000 was sold for RM15,000.
Accumulated depreciation up to
disposal date was RM11,000
Purchase of office supplies for
cash
Purchase of building for cash
Cash purchase of preference
shares in another company
A new truck was acquired in
direct exchange for a surplus
block of land

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DISCUSSION QUESTION

QUESTION 1

The Golfer’s Paradise Center has collated the following information for you as at 31
December 2012.

Sales RM 114,700
Cost of Goods Sold RM 71,300
Expenses (including RM4,030 depreciation ) RM 24,800
Net profit RM 18,600

Opening Balance Closing Balance

RM RM
Trade Debtors 15,500 12,400
Inventory 21,700 27,900
Trade Creditors 12,400 21,700
Prepaid expenses 6,200 4,650
Accrued salaries 15,500 16,430

Using the indirect method, calculate the net cash flow from operating activities.

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QUESTION 2

Summary balance sheets for Cheesecake Shoppe are provided below:-

30 June 2007 30 June 2006

RM RM
Cash 57,600 38,400
Debtors 15,360 23,040
Inventory 61,440 84,480
Machinery and equipment 46,080 34,560
180,480 180,480

Creditors 26,880 11,520

Wages payable 30,720 49,920
Non current liabilities 34,560 46,080
Share capital 38,400 38,400
Retained profits 49,920 34,560
180,480 180,480

The following information has been extracted from Cheesecake Shoppe’s profit and
loss account for the year ended 30 June 2007:

Sales RM 691,200
Cost of Sales RM 364,800
Wages expenses RM 134,400

(a) Calculate the cash received from customers during the year ended 30 June 2007
(b) Calculate the cash payment to suppliers during the year ended 30 June 2007
(c) How much cash was paid to employees for wages during the year ended 30
June 2007
(d) What amount of net increase or decrease in cash held during the year ended 30
June 2007 would be reported in Cheesecake Shoppe’ s Statement of Cash
Flows?

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QUESTION 3

POP’S PIZZA Limited have supplied you with the following summary information,
extracted from their accounting records:

1/1/2010 31/12/2010 2010

RM RM RM
Trade debtors 100,160 68,860
Trade creditors 147,110 169,020
Accrued expenses 53,210 34,430
Income tax payable 12,520 18,780
Prepaid expenses 6,260 9,390
Inventory 269,180 231,620
Sales 1,095,500
Cost of sales 751,200
Depreciation expenses 62,600
Income tax expenses 103,290
Operating expenses 219,100

Using information above, compute the following cash flow statement items:-

a) Cash payments for operating expenses

b) Cash received from customers
c) Cash payments for income tax
d) Cash payments to creditors for purchases
e) Net cash flows from operating activities.

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QUESTION 4

Below is the list of balances for RUBINA Berhad:

DECEMBER 31
2013 2012
RM RM
CURRENT ASSETS
Cash and cash equivalents 19,000 3,000
Accounts Receivables 22,000 23,000
Inventories 34,000 31,000
Prepaid expenses 1,000 3,000

CURRENT LIABILITIES
Notes payable (for inventory purchases) 11,000 7,000
Accounts payable 24,000 19,000
Accrued liabilities 7,000 9,000
Income tax payable 10,000 10,000

The following is the transactions during the year ended 31 December 2013

Purchase of equipment RM 98,000

Payments of cash dividend RM 18,000
Net income RM 26,000
Issuance of ordinary shares to retire bond payable RM 13,000
Purchase of long term investment RM 8,000
Issuance of long term note payable to purchase patent RM 37,000
Depreciation expense RM 7,000
Issuance of long term note payable to borrow cash RM 7,000
Sale of building RM 74,000
Issuance of ordinary shares for cash RM 19,000
Amortization expense RM 3,000
Purchase of treasury stock RM 5,000
Loss on sale of building RM 2,000

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You are required to prepare a Statement of Cash Flow for the year ended 31
December 2013 for RUBINA Berhad, using the indirect method. In a separate schedule,
report RUBINA’s non cash investing and financing activities.

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QUESTION 5

The following Financial Statement relates to Chantek berhad.

31 December 2015 31 December 2014
RM RM
Freehold Land 160,000 120,000
Plant and Machinery (cost) 68,700 55,000
Fixture and Fitting (cost) 32,000 28,000
Inventories 26,000 20,000
Cash at bank 15,000 0
Trade Receivables 45,800 40,000
347,500 263,000

Ordinary shares 120,000 100,000

Share premium 24,000 12,000
Revaluation reserve (land) 40,000 0
Retained profit 59,000 50,000
5% Debenture 30,000 20,000
Bank Overdraft 0 12,000
Trade payables 25,000 33,000
Tax payable 5,000 0
Accumulated
depreciation: 32,000 26,000
Plant and Machinery 12,500 10,000
Fixture and fittings
347,500 263,000

Statement of Comprehensive income for the year ended 31 December 2015:-

Turnover RM 200,000
Cost of sales (RM 120,000)
Gross profit RM 80,000
Gain from disposal of land RM 30,000
Loss from disposal plant and machinery (RM 2,000)
Expenses:
Depreciation (RM 10,500)
Administrative expenses (RM 45,000)
Sales and distribution expenses (RM 31,500)
Net profit before tax RM 21,000
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Taxation (RM 6,000)

Net profit after tax RM15,000

Additional information:

1. Freehold land at the cost of RM 70,000 was sold for RM100,000

2. Plant and machinery which cost RM12,000 with accumulated depreciation of

RM2,000 was sold for RM8,000

3. Dividend of RM6,000 has been paid.

You are required to :-

a) List 3 main activities in Statement of Cash Flow

b) Prepare Statement of Cash Flow for the year ended 31 December 2015 (indirect
method)

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QUESTION 6

The following Financial Statement relates to Kencana Budi Berhad is as follows:-

31 December 2014 31 December 2013
RM RM
Freehold Land 160,000 120,000
Plant and Machinery (cost) 68,700 55,000
Fixture and Fitting (cost) 32,000 28,000
Inventories 26,000 20,000
Cash at bank 15,000 0
Trade Receivables 45,800 40,000
347,500 263,000

Ordinary shares 120,000 100,000

Share premium 24,000 12,000
Revaluation reserve (land) 40,000 0
Retained profit 59,000 50,000
5% Debenture 30,000 20,000
Bank Overdraft 0 12,000
Trade payables 25,000 33,000
Tax payable 5,000 0
Accumulated
depreciation: 32,000 26,000
Plant and Machinery 12,500 10,000
Fixture and fittings
347,500 263,000
Additional information:

1. Freehold land at the cost of RM 70,000 was sold for RM100,000

2. Plant and machinery which cost RM12,000 with accumulated depreciation of

RM3,400 was sold for RM7,500

3. Dividend of RM5,000 has been paid.

4. Tax expenses charged for the year was RM12,000

You are required to prepare Statement of Cash Flow for Kencana Budi for the year
ended 31 December 2014.

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