FAC2602

Open Rubric
 LEARNING OUTCOME
You should be able to draft the statement of cash flows for a company in accordance
with International Financial Reporting Standards (IFRS).

OVERVIEW

10.1 INTRODUCTION ............................................................................................... 2

10.2 PURPOSE AND PRESENTATION OF A STATEMENT OF CASH FLOWS .... 2
10.3 ELEMENTS AND FRAMEWORK OF A STATEMENT OF CASH FLOWS ...... 3
10.4 EXERCISES ..................................................................................................... 18

SELF-ASSESSMENT.................................................................................................... 30

KEY CONCEPTS
• Preparation of a cash flow statement
• Cash and cash equivalents
• Non-cash items
• Direct method
• Indirect method
• Operating vs investing vs financing activities

ASSESSMENT CRITERIA
After studying this learning unit, you should be able to:
• draft a statement of cash flows, with accompanying notes, for a
company using the direct method in accordance with IFRS
• draft a statement of cash flows, with accompanying notes, for a
company using the indirect method in accordance with IFRS
• distinguish between cash and non-cash items

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10.1 INTRODUCTION

In Accounting I, we introduced you to company annual financial statements. You studied

aspects such as the statement of financial position and the statement of profit or loss
and other comprehensive income. In Accounting II, you will be studying the above
aspects in greater detail and will acquire knowledge of IFRS.

Although the sections of the Companies Act and the IFRS statements are very important
for your studies, we don’t expect you to read them all. However, in order to equip you
thoroughly, we will refer to them in the learning unit from time to time.

Cash flow information involves the meaningful presentation of the cash that the entity
generated and applied. We present this information to the readers of financial statements
in the form of a statement of cash flows.

A complete set of financial statements comprises the following:

• statement of financial position

• statement of profit or loss and other comprehensive income
• statements of changes in equity
• statement of cash flows, and
• notes to the financial statements

Users of financial statements are interested in the information on cash flow, which can
be derived from the statement of cash flows. As the name indicates, this statement has to
do with the cash flows in an enterprise, which implies that we omit all the items in the
annual financial statements that have nothing to do with the cash flow when we compile
the statement of cash flows.

10.2 PURPOSE AND PRESENTATION OF A STATEMENT OF CASH

FLOWS
The purpose of the statement of cash flows is to provide information to the various users
of financial statements. Each enterprise presents its cash flows from operations,
investment and financing in the way most suitable for its business.

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The following represents the logical presentation:

Net cash flow from operating activities

o cash receipts from customers
o cash paid to suppliers and employees
o investment income
o interest paid
o income tax paid
o dividends paid
o proceeds from the sale of financial assets at fair value through profit or loss: held
for trading
Net cash flow from investing activities
Net cash flow from financing activities
Net change in cash and cash equivalents

Operating activities are the principal income-producing activities of the enterprise as well
as other activities which are not investing or financing activities.

Investing activities include the acquisition and sale of non-current assets and other
investments not included in cash flow equivalents.

Financing activities are activities that result in changes in the size and composition of the
equity capital and borrowings to the enterprise.

10.3 ELEMENTS AND FRAMEWORK OF A STATEMENT OF CASH

FLOWS
The elements of a statement of cash flows are the following:

• operating activities
• investing activities
• financing activities

Operating activities
The amount of cash arising from operating activities is a key indicator of the extent to which
the operations of the entity have generated sufficient cash to repay loans, maintain the
operating capability of the entity, pay dividends and make new investments without
recourse to external financing.

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Cash flows from operating activities are derived primarily from the principal revenue-
producing activities of the entity. Therefore, they generally result from the transactions
and other events that determine profit or loss. The following are examples of cash flows
from operating activities:

• cash receipts from the sale of goods and the rendering of services
• cash payments to suppliers for goods and services
• cash payments to and on behalf of employees
• cash payments and refunds in respect of income taxes

Investing activities
It is important to disclose cash flows from investing activities because they represent the
extent to which payments have been made for resources intended to generate future
receipts and cash flows.

The following are examples of cash flows arising from investing activities:

• cash payments to acquire property, plant and equipment and other non-current
assets
• cash receipts from sales of property, plant and equipment and other non-current
assets

Financing activities
It is important to disclose cash flows arising from financing activities because they are
useful in predicting claims from providers of capital to the entity on future cash flows.

The following are examples of cash flows arising from financing activities:

• cash proceeds from issuing shares

• cash payments to owners to acquire or redeem the entity's shares
• cash proceeds from issuing debentures, loans, mortgage bonds and current or non-
current borrowings
• cash repayments for amounts borrowed

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We can represent a statement of cash flows schematically as follows:

STATEMENT OF CASH FLOWS

CASH FLOW FROM OPERATING ACTIVITIES

PLUS/MINUS

CASH FLOW FROM INVESTING ACTIVITIES

PLUS/MINUS

CASH FLOW FROM FINANCING ACTIVITIES

PLUS/MINUS

NET INCREASE / (DECREASE) IN CASH AND CASH EQUIVALENTS

We do not compile the statement of cash flows from separate transactions. To draft a
statement of cash flows for the year ended 31 December 20.8, we use the following:

• statement of profit or loss and other comprehensive income for the year ended 31
December 20.8
• statements of financial position as at 31 December 20.7 and 31 December 20.8
• additional information

Remember: Amounts that are not in brackets represent the inflow of cash, and
amounts in brackets represent the outflow of cash.

An enterprise should report cash flow from operating activities by means of either the
direct or the indirect method.

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If a company uses the direct method, it will disclose the principal categories of gross
cash proceeds and gross cash payments. On the other hand, if it uses the indirect
method, profit or loss is adjusted for the effect of non-cash transactions as well as any
deferrals or accruals of previous or future operating cash receipts or payments and
income or expenditure items which are related to investment or financing cash flow.

The only difference between the direct and indirect method lies in the presentation of the
section dealing with cash flow from operating activities. The sections dealing with investing
and financing activities remain in the same format, irrespective of the method used.

FRAMEWORK OF A STATEMENT OF CASH FLOWS IN ACCORDANCE WITH THE

DIRECT METHOD
R R
Cash flows from operating activities
Cash receipts from customers xxx
Cash paid to suppliers and employees (xxx)
Cash generated from operations xxx
Interest received xxx
Interest paid (xxx)
Dividends received xxx
Dividends paid (xxx)
Tax paid (xxx)
Proceeds from the sale of financial assets at fair value through profit or xxx
loss: held for trading (such as listed shares)
Net cash from/(used in) operating activities xxx
Cash flows from investing activities
Investment to maintain production capacity (xxx)
Replacement of non-current assets xxx
Investment to expand production capacity (xxx)
Additions to non-current assets xxx
Proceeds from the sale of property, plant and equipment xxx
Proceeds from the sale of investments (such as in equity shares or
xxx
loans)
Net cash from/(used in) investing activities (xxx)
Cash flows from financing activities
Proceeds from the issue of shares xxx
Proceeds from long-term borrowings/debentures xxx
Repayment of loans (xxx)
Redemption of redeemable preference shares (xxx)
Net cash from/(used in) financing activities xxx
Net increase in cash and cash equivalents xxx
Cash and cash equivalents at beginning of year xxx
Cash and cash equivalents at end of year xxx

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FRAMEWORK OF A STATEMENT OF CASH FLOWS IN ACCORDANCE WITH THE
INDIRECT METHOD

Cash flows from operating activities R R

Profit before tax xxx
Adjustments for:
Depreciation xxx
Loss on sale of non-current assets xxx
Profit on sale of non-current assets (xxx)
Investment income (xxx)
Interest expense xxx
xxx
Changes in working capital xxx
Decrease/(Increase) in inventory xxx
Decrease/(Increase) in trade and other receivables xxx
(Decrease)/Increase in trade and other payables (xxx)
Cash generated from operations xxx
Interest received xxx
Interest paid (xxx)
Dividends received xxx
Dividends paid (xxx)
Tax paid (xxx)
Proceeds from the sale of financial assets at fair value through xxx
profit or loss: held for trading (such as listed shares)
Net cash from/(used in) operating activities xxx
Cash flows from investing activities
Investment to maintain production capacity (xxx)
Replacement of non-current assets xxx
Investment to expand production capacity (xxx)
Additions to non-current assets xxx
Proceeds from the sale of property, plant and equipment xxx
Proceeds from the sale of investments (such as in equity shares xxx
or loans)
Net cash from/(used in) investing activities (xxx)
Cash flows from financing activities
Proceeds from the issue of shares xxx
Proceeds from long-term borrowings/debentures xxx
Repayment of loans (xxx)
Redemption of redeemable preference shares (xxx)
Net cash from/(used in) financing activities xxx
Net increase in cash and cash equivalents xxx
Cash and cash equivalents at beginning of period xxx
Cash and cash equivalents at end of period xxx

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We will use the following example throughout the learning unit to illustrate certain aspects
of cash flow information:

The following balances appear in the books of Ross Ltd for the financial year ended 30
June:

20.6 20.5
R R
Land and buildings 350 000 340 000
Plant and machinery 105 000 124 000
Motor vehicles 108 900 67 300
Financial assets at amortised cost - 25 200
Inventory 67 000 50 000
Trade and other receivables 37 400 50 000
Prepaid expenses 500 2 600
Bank 2 000 -
670 800 659 100

Share capital (280 000/250 000 shares) 292 000 258 200
Long-term borrowings - 80 000
Revaluation surplus – land 15 000 -
Retained earnings 188 700 220 000
10% R200 debentures 40 000 -
Tax payable 23 300 46 600
Ordinary dividends payable 16 800 -
Accumulated depreciation
- Plant and machinery 27 000 18 000
- Motor vehicles 27 200 10 000
Trade and other payables 38 800 26 000
Accrued interest 2 000 -
Bank overdraft - 300
670 800 659 100

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ROSS LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR
THE YEAR ENDED 30 JUNE 20.6

R
Revenue 500 000
Cost of sales (250 000)
Gross profit 250 000
Other income (3 000 + 2 000) 5 000
Administrative expenses (78 200 + 63 600) (141 800)
Selling expenses (87 400)
Other costs (8 000)
Finance cost (7 300)
Profit before tax 10 500
Income tax expense -
PROFIT FOR THE YEAR 10 500
Other comprehensive income for the year -
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 10 500

Additional information
1. The long-term borrowing bears interest at 12% per annum, payable in arrears, and
was repaid on 31 December 20.5. Interest did not qualify for capitalisation.

2. In December 20.5, a piece of land that cost R15 000 was sold for its carrying amount
and replaced with another piece of land. On 30 June 20.6, the remaining land was
revalued. These were the only transactions in respect of land and buildings for the
current financial year.

3. During the current financial year, a machine with a carrying amount of R51 000 was
sold at a loss of R8 000 and replaced with a new machine which cost R62 000. The
total depreciation on plant and machinery for the current financial year amounted to
R39 000.

4. A motor vehicle with a cost price of R14 400 on which depreciation of R7 400 had
already been written off was traded in for R9 000 on a new vehicle that cost R35 000.

5. No other machines or motor vehicles were sold during the year, but one additional
motor vehicle was purchased.

6. The provision for tax for the current financial year was R15 000. This includes an
under-provision of R5 100 for the 20.5 tax year.
7. New shares were issued on 30 April 20.6.

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8. On 31 December 20.5, an interim ordinary dividend of 4c per share was declared and
paid.
9. Ordinary dividends of 6c per share were declared on 30 June 20.6.
10. The financial assets were sold at amortised cost on 1 July 20.5. These shares were
purchased without the intention of short-term profit taking as part of the business
model.
11. During the year, dividends to the value of R3 000 were received.

Cash flows from operating activities (using the direct method)

Cash receipts from customers

Please note: This amount is determined by reconstructing the trade and other receivables
account.

Cash receipts from customers

Trade and other receivables

R R
Balance b/d 50 000 Bank* 512 600
Sales 500 000 Balance c/d 37 400
550 000 550 000
* Balancing figure

Cash paid to suppliers and employees

We calculate this amount by comparing the figures for inventory and trade and other
payables as given in the two statements of financial position. If inventory increased from
one year to the next, the effect on cash flow would be negative, as it implies more cash
flowed out to purchase inventory. If the figure of trade and other payables increased from
one year to the next, this means that less cash flowed out to pay creditors and the figure
would then be positive in respect of cash flow. All purchases of inventory and expenses
which were paid for in cash are also included in the calculation.

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 Cash paid to suppliers and employees
R R
Balances b/d Balance b/d
Inventory 50 000 Trade and other payables 26 000
Prepaid 2 600 Cost of sales 250 000
expenses
Bank* 417 700 Administrative
Balance c/d expenses 78 200
Trade and other payables 38 800 Selling expenses 87 400
Balances c/d
Inventory 67 000
Prepaid expenses 500
509 100 509 100
* Balancing figure

Depreciation to the value of R63 600 does not give rise to a cash flow.

Plant and machinery 39 000 (given)

Vehicles 24 600 [27 200 − (10 000 − 7 400)]
63 600

Cash generated from operations

We obtain this amount by subtracting the cash paid to suppliers and employees from
cash receipts from customers.

Interest paid, dividends received and paid and normal tax paid
The company normally makes all payments to the South African Revenue Service
(SARS) and to suppliers of funds from cash generated by operating activities. We should
therefore disclose interest paid as well as tax and dividends paid during a year separately
from cash generated by operating activities.

Dividends paid R
Unpaid amount at beginning of period (statement of financial position 20.5)
Amount debited against income* (total dividends declared for 20.6) 26 800
Unpaid amount at end of period (statement of financial position 20.6) (16 800)
10 000
*Ordinary dividends
- Interim (250 000 x 4c) 10 000
- Final (280 000 x 6c) 16 800
26 800

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Tax paid R
Unpaid amount at beginning of period (statement of financial position 20.5) 46 600
Amount debited against income (additional information 6) 15 000
Unpaid amount at end of period (statement of financial position 20.6) (23 300)
38 300

We can now complete the section described as cash flows from operating activities using
the direct method:

Cash flows from operating activities (according to the direct method)

ROSS LTD

STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 20.6

R R
Cash flows from operating activities
Cash receipts from customers 512 600
Cash paid to suppliers and employees (417 700)
Cash generated from operations 94 900
Interest paid (7 300 − 2 000) (5 300)
Dividends received 3 000
Dividends paid (10 000)
Tax paid (38 300)
Net cash from operating activities 44 300

Cash flows from operating activities (using the indirect method)

When we prepare the statement of cash flows using the indirect method, we must ignore
the calculations for cash received from customers and cash payments to suppliers and
employees. We now calculate cash generated by operations by adjusting profit or loss for
the effect of non-cash transactions, any deferrals or accruals of previous or future
operating cash receipts or payments and income or expenditure items related to
investment or financing cash flow. The calculations for interest, dividends and tax remain
unaltered, irrespective of the method used.

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Cash flows from operating activities (using the indirect method)

ROSS LTD
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 20.6

R R
Cash flows from operating activities
Profit before tax 10 500
Adjustments for:
Depreciation 63 600
Profit on sale of non-current asset (2 000)
Loss on sale of non-current asset 8 000
Interest expense 7 300
Investment income (3 000)
84 400
Changes in working capital 10 500
Increase in inventory (50 000 − 67 000) (17 000)
Decrease in trade and other receivables (50 000 − 37 400) 12 600
Decrease in prepaid expenses (2 600 − 500) 2 100
Increase in trade and other payables (38 800 − 26 000) 12 800

94 900
Cash generated from operations
Interest paid (7 300 − 2 000) (5 300)
Dividends received 3 000
Dividends paid (10 000)
Tax paid (38 300)
Net cash from operating activities 44 300

Cash flows from investing activities

Cash flows related to investing activities may include both the inflow and the outflow of
cash. The outflow of cash includes the purchase of assets and investments, whereas the
inflow of cash includes items such as proceeds from the sale of non-current assets.

Regarding the amount of assets purchased, we distinguish between the amount for
replacement and that for addition to assets. Replacement refers to the maintenance of
operations, and additions refer to the expansion of operations.

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Assets purchased
When the increase in the balance of the accumulated depreciation accounts in the two
statements of financial position is equal to the depreciation in the statement of profit or
loss and other comprehensive income, the company did not sell or write off any assets
during the year. We can then account for any increase in the asset account (at cost price)
directly as purchases of assets.

Revaluation of property
Companies often revalue property, and when this happens during a particular financial
year, we treat it as follows: the value of the property increased because of the revaluation
and because there was in fact no flow of cash, we can ignore it when drafting the
statement of cash flows. The increase in the revaluation surplus represents the increase
in the value of the property.

Purchase and sale of assets

If an enterprise has purchased or sold assets during the year, it is recommended that
you reconstruct the ledger accounts concerned.

Land
R R
Balance b/d 340 000 Proceeds on sale 15 000
Revaluation# 15 000 Balance c/d 350 000
Replacement* 10 000
365 000 365 000
Balance b/d 350 000
# Increase in balance of surplus on revaluation account
* Balancing figure

Motor vehicles at cost price

R R
Balance b/d 67 300 Cost of trade-in 14 400
Replacement (given) 35 000 Balance c/d 108 900
Addition* 21 000
123 300 123 300
Balance b/d 108 900

* Balancing figure

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 Accumulated depreciation: motor vehicles
R R
Accumulated depreciation Balance b/d 10 000
on trade-in 7 400 Depreciation* 24 600
Balance c/d 27 200
34 600 34 600
Balance b/d 27 200

* Balancing figure

Realisation account: motor vehicles

R R
Cost price of trade-in 14 400 Accumulated depreciation 7 400
Profit on trade-in on trade-in
[(14 400 - 7 400) - 9 000] 2 000 Proceeds 9 000
16 400 16 400

Plant and machinery at carrying amount

R R
Balance b/d 106 000 Carrying amount 51 000
-sold
Replacement (given) 62 000 Depreciation 39 000
Balance c/d 78 000
168 000 168 000
Balance b/d 78 000

Realisation account: plant and machinery

R R
Carrying amount sold 51 000 Proceeds on sale 43 000
(51 000 - 8 000)
Loss on sale 8 000
51 000 51 000

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Financial assets
When trading in shares is part of the business model of the company and there is an
intention of short-term profit taking, typically listed shares held for trading, the increase or
decrease in cash would be part of the operating activities. In this example, however, the
shares were purchased without the intention of short-term profit taking as part of the
business model. The shares not held for trading will be disclosed in the cash flows from
investing activities section.

We are now able to complete the section described as cash flows from investing
activities.

Cash flows from investing activities (both methods)

R R
Investment to maintain production capacity (107 000)
Replacement of land 10 000
Replacement of motor vehicle 35 000
Replacement of machine 62 000
Investment to expand production capacity (21 000)
Addition to motor vehicles 21 000
Proceeds from the sale of financial assets at amortised cost 25 200
Proceeds of sale of land 15 000
Proceeds on sale of motor vehicle 9 000
Proceeds on sale of machine 43 000
Net cash used in investing activities (35 800)
Cash flows from financing activities (both methods)

An enterprise must report on the main classes of gross cash receipts and gross cash
payments that resulted from financing activities separately.

We usually derive the effecting of new borrowings, the redemption of existing borrowings
and the issue of shares from the given statements of financial position.

2 .6 2 .5 Change
R R R
10% R200 debentures 40 000 - 40 000
Long-term borrowings - 80 000 80 000
Share capital (280 000/250 000 shares) 292 000 258 200 33 800

The share capital increased by R33 800. Therefore, the total amount received upon issue
of the shares was R33 800.

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We can now complete the section that deals with cash flows from financing activities.

Cash flows from financing activities (both methods)

R R
Proceeds from debentures issued 40 000
Payment on redemption of long-term borrowings (80 000)
Proceeds on issue of shares 33 800
Net cash used in financing activities (6 200)

Net change in cash and cash equivalents

The net effect of the first three sections of the statement of cash flows produced the net
change.

R
Net cash from operating activities 44 300
Net cash used in investing activities (35 800)
Net cash used in financing activities (6 200)
Net increase in cash and cash equivalents 2 300
Cash and cash equivalents at beginning of year (300)
Cash and cash equivalents at end of year 2 000

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10.4 EXERCISES

QUESTION 1

20 .3 20.2
R R
Debits
Property 1 750 000 1 400 000
Motor vehicles 436 000 410 000
Machinery 385 000 370 000
Inventory 178 000 154 000
Trade and other receivables 214 000 220 000
Cash in bank 2 000 76 000
Financial assets at fair value through profit or loss - 40 000
2 965 000 2 670 000
Credits
Share capital (400 000/300 000 shares) 440 000 330 000
Revaluation surplus 220 000 10 000
Retained earnings 981 000 870 000
Long-term borrowings: interest free 900 000 1 100 000
Accumulated depreciation – Motor vehicles 76 000 54 000
– Machinery 141 000 120 000
Trade and other payables 139 000 142 000
Tax payable 44 000 28 000
Dividends payables (ordinary) 24 000 16 000
2 965 000 2 670 000

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Additional information

1. The following information was obtained from the statement of profit or loss and
other comprehensive income of A Ltd for the year ended 31 October 20.3:

R
Revenue 750 000
Cost of sales (300 000)
Gross profit 450 000
Other income 4 000
Administrative and selling expenses (88 000 + 48 000 + 72 000) (208 000)
Other expenses (26 000)
Profit before tax 220 000
Income tax expense (85 000)
PROFIT FOR THE YEAR 135 000
Other comprehensive income for the year
– Revaluation surplus 210 000
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 345 000

2. Extract from the statement of changes in equity for the year ended 31 October 20.3

Revaluation Retained Total

surplus earnings
R R R
Profit for the year 135 000 155 000
Dividends declared (24 000) (24 000)
Revaluation surplus 210 000 210 000

3. On 31 October 20.3, A Ltd purchased a new motor car for R54 000 and sold an old
vehicle at its carrying amount.

4. A Ltd traded in a machine with a carrying amount of R60 000 on which R51 000 had
already been written off in depreciation for R54 000 and replaced it with a new
machine.

5. Depreciation for the current year R

Vehicles 48 000
Machinery 72 000

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6. A Ltd sold the investment for R24 000 on 28 February 20.3, at a profit of R4 000.
There was also a fair value adjustment during the current year. Trading in shares is
part of the business model of A Ltd.

REQUIRED
Draft the statement of cash flows of A Ltd for the year ended 31
October 20.3 in accordance with the requirements of IFRS using the
direct method. Ignore comparative figures, but show the following
calculations:

1. Cash receipts from clients

2. Cash paid to suppliers and employees
3. Normal tax paid
4. Dividends paid

20
 QUESTION 2

The following information was derived from the books of B Ltd:

TRIAL BALANCE AT 28 FEBRUARY

20.5 20.4
R R

Land at valuation 244 500 200 000

Machinery at cost price 14 800 52 300
Financial assets at amortised cost - 2 400
Inventory 15 000 19 000
Trade and other receivables 18 000 15 400
Bank 8 000 14 000
300 300 303 100

Share capital – 100 000 shares 100 000 100 000

Interest-free long-term borrowings 40 000 50 000
Revaluation surplus 59 500 15 000
Retained earnings 65 000 107 000
Dividends payable 20 000 10 000
Accumulated depreciation – machinery 3 400 4 800
Allowance for credit losses 1 000 1 200
Trade and other payables 7 400 11 300
Tax payable 4 000 3 800
300 300 303 100

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Additional information

1. The following information was derived from the statement of profit or loss and other
comprehensive income of B Ltd for the year ended 28 February 20.5:

R
Revenue 179 500
Cost of sales (76 200)
Gross profit 103 300
Other income (1 000 + 200) 1 200
Administrative and selling expenses (48 000 + 42 600) (90 600)
Other expenses (400)
Profit before tax 13 500
Income tax expense (5 500)
PROFIT FOR THE YEAR 8 000
Other comprehensive income for the year
– Revaluation surplus 44 500
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 52 500

2. Extract from the statement of changes in equity for the year ended 28 February 20.5

Revalua- Retained
tion earnings Total
surplus R
R R R
Balance at 1 March 20.4 15 000 107 000 122 000
Changes in equity for 20.5
Total comprehensive income for the year
Profit for the year 8 000 8 000
Other comprehensive income for the year 44 500 44 500
Dividend paid: ordinary (50 000) (50 000)
Balance at 28 February 20.5 59 500 65 000 124 500

3. B Ltd grew rapidly during the year, and unless otherwise indicated, they purchased all
assets for the purposes of expanding the enterprise. The following transactions
occurred during the year ended 28 February 20.5:

3.1 B Ltd purchased new machinery to the value of R8 000 during the year to
replace the obsolete machinery. The cost price of the old machinery was
R45 500, and B Ltd resold it for R2 500. The accumulated depreciation on the
machinery that was sold was R44 000.

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3.2 The company sold its financial assets at 1 March 20.4 for R2 000. These assets
were not held with the intention of short-term profit taking as part of the business
model.

REQUIRED
Draft the statement of cash flows for B Ltd for the financial year ended
28 February 20.5 in compliance with the requirements of IFRS using
the indirect method. Ignore comparative figures, but show the following
calculations:

1. Normal tax paid

2. Dividends paid

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SOLUTION

QUESTION 1

A LTD
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 OCTOBER 20.3

R R
Cash flows from operating activities
Cash receipts from customers (C1) 756 000
Cash paid to suppliers and employees (C2) (415 000)
Cash generated from operations 341 000
Dividends paid (C3) (16 000)
Tax paid (C4) (69 000)
Proceeds from the sale of financial assets at fair value 24 000
through profit or loss: held for trading
Net cash from operating activities 280 000
Cash flows from investing activities
Investment to maintain production capacity (180 000)
Replacement of machinery (C5) (126 000)
Replacement of motor vehicle (C5) (54 000)
Investment to expand production capacity (140 000)
Additions to property (C5) (140 000)
Proceeds from sale of motor vehicles (28 000 – 26 000) 2 000
Proceeds from sale of machinery (60 000 – 6 000) 54 000
Net cash used in investing activities (264 000)
Cash flows from financing activities
Proceeds from issue of shares (440 000 – 330 000) 110 000
Repayment of long-term borrowings (1 100 000 – 900 000) (200 000)
Net cash used in financing activities (90 000)
Net decrease in cash and cash equivalents (74 000)
Cash and cash equivalents at the beginning of the year 76 000
Cash and cash equivalents at the end of the year 2 000

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Calculations
C1. Cash receipts from customers
Trade and other receivables
R R
Balance b/d 220 000 Bank* 756 000
Sales 750 000 Balance c/d 214 000
970 000 970 000

* Balancing figure

C2. Cash paid to suppliers and employees

Cash paid to suppliers and employees
R R
Balance (inventory) b/d 154 000 Balance (trade and b/d
Bank* 415 000 other payables) 142 000
Balance (trade and other Cost of sales 300 000
payables) c/d 139 000 Administrative and
selling expenses 88 000
Balance (inventory) c/d 178 000
708 000 708 000
* Balancing figure

C3. Dividends paid

Unpaid amounts at the beginning of the period 16 000
Amounts debited to income 24 000
Unpaid amounts at the end of the period (24 000)
16 000

C4. Tax paid

Unpaid amounts at the beginning of the year 28 000
Amounts debited to income 85 000
Unpaid amounts at the end of the year (44 000)
69 000

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C5. Ledger accounts
Property
R R
Balance b/d 1 400 000 Balance c/d 1 750 000
Revaluation 210 000
Purchases 140 000
1 750 000 1 750 000

Motor vehicles at cost

R R
Balance b/d 410 000 Sales* 28 000
New purchases 54 000 Balance c/d 436 000
464 000 464 000
* Balancing figure

Accumulated depreciation – motor vehicles

R R
Sales* c/d 26 000 Balance b/d 54 000
Balance 76 000 Depreciation 48 000
102 000 102 000

* Balancing figure

Machinery at cost
R R
Balance b/d 370 000 Sales (60 000 + 51 000) 111 000
New purchases* 126 000 Balance c/d 385 000
496 000 496 000

* Balancing figure

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 Accumulated depreciation – machinery
R R
Sales 51 000 Balance b/d 120 000
Balance c/d 141 000 Depreciation 72 000
192 000 192 000

Financial assets at fair value through profit or loss

R R
Balance b/d 40 000 Sold (24 000 – 4 000) 20 000
Impairment loss * 20 000
Balance b/d -
40 000 40 000
* Balancing figure

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QUESTION 2

B LTD
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 28 FEBRUARY 20.5

R R
Cash flows from operating activities
Profit before tax 13 500
Adjustments for:
Depreciation (C4) 42 600
Decrease in allowance for credit losses (200)
Profit on sale of non-current assets (1 000)
Loss on sale of financial assets at amortised cost 400
55 300
Changes in working capital (2 500)
Decrease in inventory (15 000 − 19 000) 4 000
Increase in trade and other receivables (18 000 – 15 400) (2 600)
Decrease in trade and other payables (7 400 – 11 300) (3 900)
Cash generated from operations 52 800
Dividends paid (C1) (40 000)
Tax paid (C2) (5 300)
Net cash from operating activities 7 500
Cash flows from investing activities
Investment to maintain production capacity (8 000)
Replacement of machinery (C3) (8 000)
Proceeds from sale of non-current assets 2 500
Proceeds from sale of financial assets at amortised cost 2 000
Net cash used in investing activities (3 500)
Cash flows from financing activities
Redemption of long-term borrowings (50 000 – 40 000) (10 000)
Net cash used in financing activities (10 000)
Net decrease in cash and cash equivalents (6 000)
Cash and cash equivalents at the beginning of the year 14 000
Cash and cash equivalents at the end of the year 8 000

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Calculations
C1. Dividends paid
Unpaid amounts at the beginning of the year 10 000
Amount debited to income 50 000
Unpaid amounts at the end of the year (20 000)
40 000

C2. Tax paid

Unpaid amounts at the beginning of the year 3 800
Amount debited to income 5 500
Unpaid amounts at the end of the year (4 000)
5 300

C3.
Machinery
R R
Balance b/d 52 300 Sales 45 500
New purchases* 8 000 Balance c/d 14 800
60 300 60 300

* Balancing figure

C4.
Accumulated depreciation – machinery
R R
Sales 44 000 Balance b/d 4 800
Balance c/d 3 400 Depreciation current year* 42 600
47 400 47 400

* Balancing figure

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SELF-ASSESSMENT
After studying this learning unit, are you able to:
• draft a statement of cash flows, with accompanying notes, for a
company using the direct method in accordance with IFRS?
• draft a statement of cash flows, with accompanying notes, for a
company using the indirect method in accordance with IFRS?
• distinguish between cash and non-cash items?

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