Unit 4

Cash Flow Statement Analysis

The purpose of the cash flow statement is to report how an organization generated and
used its cash for a specified period. Knowing where the cash comes from is important in
projecting whether cash will be generated from those sources in the future. Knowing where the
cash goes is important in assessing the organization’s future cash needs. When presenting cash
flow statements, most companies combine cash and cash equivalents because short-term
investments classified as cash equivalents are used primarily as a substitute for cash.

Problem 4.1 Cash flow analysis from account information

Prepare a statement of cash flows from the following cash account information.

N$
Bank loan obtained 60 000
Cash expenses 8 920
Cash sales 31 610
Cash, beginning of year 68 920

Cash, end of year 93 620

Collections on accounts receivable 797 640
Ordinary shares issued 140 000
Cost of redeeming preference shares 25 000

Dividends paid 15 000

Employee wages and salaries paid 223 610
Income tax paid 14 920

Land purchased for cash 81 000

Payments to suppliers 513 600
Proceeds from sale of old truck 7 000

Repayments on mortgage 80 500

Truck purchased ($5000 still owing) 49 000

Because all the accounts information is

presented, we use the direct method

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Solution Problem 4.1
Cash flow statement for the year X (Direct method)
N$
Operating activities
Cash receipts ($31 610 + $797 640) 829 250
Cash disbursements ($8920 + $513 600 + $14 920 + $223 610) 761 050
Cash generated by operations 68 200
Investing activities
Noncurrent assets acquired ($81 000 + $49 000) (130 000)
Proceeds from disposal of noncurrent assets 7 000
Cash used in investing activities (123 000)
Financing activities
Bank loan obtained 60 000
Repayments on mortgage (80 500)
Ordinary shares issued 140 000
Paid to redeem preference shares (25 000)
Movement of cash
Dividends paid during the period (15 000)
Cash obtained from financing activities 79 500
Increase in cash for the year 24 700
Cash on hand at the beginning of the year 68 920
Cash on hand at the end of the year 93 620

Compare with the

closing cash balance

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Problem 4.2

Preparation of a statement of cash flow from accounts balances

The income statement and a comparative balance sheet for Borachio Ltd are as follows:

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The following additional information during the year was obtained from an examination of the
ledger:

1. A parcel of land with an original cost of N$ 60,000 was sold

2. All sales over the year are made on credit.

Required: the meaning of the direct method here is

that we need to dig down the transactions
a) Prepare a statement of cash flows (direct method) for the year ending 30 June 2017.
b) Prepare a statement of cash flows using a reconciliation method (indirect method) for the
year ending 30 June 2017.

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Solution 4.2
1.

BORACHIO LTD

Statement of cash flows for the year ended 30 June 2017

N$000

Cash flows from operating activities

Cash receipts from customers 1 492

Less: Cash paid to suppliers 1 059

Less: Cash paid for income taxes 67

Less: Cash paid for insurance 12

Less: Cash paid for other expenses 69

Add Less: Cash receipt from dividends 5

Less: Cash paid for interest 25

Total operating cash flows 265

Cash from investing activities

Cash paid for purchase of equipment –12

Cash paid for purchase of land –83

Cash received for disposal of land 42

Cash paid for investments –42

Total investing cash flows (95)

Cash from financing activities

Cash proceeds from issue of shares 70

Cash paid for redemption of bonds –150

Cash dividends paid –72

Total financing cash flows cash movement (152)

Net change in cash over period 18

Cash at beginning of financial period 144

Cash at end of financial period 162

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Working Notes:
i. Cash Collection from Sales/Receivables

N$
Opening Balance 128,000
Add: Current Receivables 1 520,000
Less: Current Bad Debt Provision 11,000
Less: Closing Balance 145,000
Cash Receipts 1 492,000

ii. Provision for Bad Debts

N$
Opening Balance 12,000
Add: Current Bad Debt Expenses 15,000
Less: Closing Balance 16,000
Current Provision for Bad Debt 11,000

iii. Suppliers Payments

N$
Opening Balance 51,000
Add: Credit Purchases 1,095,000
Less: Closing Balance 87,000
Current Cash Payments 1,059,000

iv. Inventory

N$
Opening Balance 190,000
Add: Purchases 1,095,000
Less: Cost of Goods Sold 1,110,000
Closing Balance 175,000

v. Interest Payable

N$
Opening Balance 9,000
Add: Interest Expense 25,000
Less: Closing 9,000
Cash Payment 25,000

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 vi. Income Tax Payable

N$
Opening Balance 23,000
Add: Interest Expense (Tax expense) 88,000
Less: Closing 44,000
Cash Payment 67,000

vii. Prepaid Insurance

N$
Opening Balance 6,000
Less: Insurance Expense 9,000
Less: Closing 9,000
Cash Payment 12,000

viii. Accrued Expenses

N$
Opening Balance 11,000
Add: Current Expenses 85,000
Less: Closing 27,000
Cash Payment 69,000

ix. Equipment

N$
Opening Balance 437,000
Add: Purchases 12,000
Closing Balance 449,000

x. Land a/c

N$
Opening Balance 149,000
Add: Purchased 83,000
Less: Disposal 60,000
Closing Balance 172,000

xi. Dividends a/c

N$
Opening Balance 12,000
Add: Current Dividends 76,000
Less: Closing Balance 16,000
Dividends Paid 72,000

xii. Retained Profits

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 N$
Opening Balance 280,000
Add: Current Profits 110,000
Less: Closing Balance 314,000
Current Dividends 76,000

2.

BORACHIO LTD
Reconciliation of Net Profit and Cash from Operations for year ended 30 June 2017
N$000 N$000
Net profit 110
Add: Depreciation expense 65
Loss on disposal of land 18 83

Adjustments for changes in operating assets and liabilities:

Increase in accounts receivable (17)
Increase in allowance for doubtful debt 4
Decrease in inventory 15
Increase in prepaid insurance (3)
Increase in accounts payable 36
Increase in accrued expenses 16
Increase in income tax payable 21 72

Cash from operations 265

Problem 4.3

Analysing and interpreting a statement of cash flows

Outline five most important things you can learn about Tabcorp Holdings Limited from the
following consolidated statement of cash flows for the year ended 30 June 2017.

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Tabcorp Holdings Limited, 2017 Consolidated Statement of Cash Flows.

Interpreting the Cash Flow - Solution 4.3

1. Net cash flow from operations is positive both years but has decreased in amount.
2. The decrease in cash flow from operations was due to the increase in cash payments to
suppliers, service providers and employees ($2,213.6m to $2,357.2m).
3. Cash flow from operations in both years is high enough to cover cash outflows of investing.
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 4. There was more investing in Plant Property & Equipment (PPE) in 2011, indicating the
optimism the managers have on the prospective business environment and growth.
5. Significant increase in share issue and borrowings, this point further justifies the
interpretation above.

Question 4.4 (Cash-flow Statement Analysis)

Ngubane and Nyandebvu Holdings Ltd have provided the following the statement of income
(profit and loss account) for the year 2016 and the statement of financial position at the end of
the year 2016

Income statement for the year ended, 2016

R (‘000)

Revenue 160,000

Cost of sales (71,500)

Gross profit 88,500

Investment income – interest received 2,500

Loss on disposal of equipment (4000)

Depreciation (19,500)

Administrative and selling expenses (6,500)

Operating profit before interest 61,000

Interest expense (3,000)

Profit after deducting interest 58,000

Taxation (19,500)

Profit after tax 38,500

Balance Sheets as at 31 December

2016 2015

R’ 000 R’ 000

Non-Current Assets

Property, plant and equipment 112,500 75,000

Accumulated depreciation (45,000) (30,000)

67,500 45,000

Investments 35,000 50,000

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Current Assets

Inventory (stock) 15,000 11,000

Trade receivables (debtors) 13,500 12,000

Cash and cash equivalents 24,000 4,000

52,500 27,000

Current Liabilities

Trade payables (10,500) (10,000)

Interest payable (4,500) (5,500)

Taxes payable (6,000) (4,500)

(21,000) (20,000)

31,500 7,000

Non-Current Liabilities

Long-term loans (10,000) (7,500)

Net assets 124,000 94,500

Capital and Reserves

Share capital 72,000 70,000

Share premium 13,000 11,500

Retained earnings 39,000 13,000

124,000 94,500

Further information

1) The dividend paid during 2016 was R12.5m. The retained earnings increased by
R38.5m profit of the period and decreased by the amount of R12.5m paid out as
dividend.
2) During the year 2016 the company acquired property, plant and equipment costing
R47m.
3) During the year 2016 the company sold for scrap property, plant and equipment that had
originally cost R9.5m and accumulated depreciation of R4.5m. The proceeds of the sale
were R1m.
4) Investments were sold during the year for cash proceeds of R15m. There were no
purchases of investments.

Required

Prepare a cash flow statement.

Solution

Ngubane and Nyandebvu Holdings Ltd,

Cashflow Statement
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 For the Period Ended 31st Dec., 2016

N$ N$
Cash Flow From Operations
Net Income after Tax 38,500,000
Add: depreciation 19,500,000
Loss on sale of Equipment 4,000,000 23,500,000
Add: Increase in Current Liabilities or Decrease in
Current Assets
Trade Payables 500,000
Taxes payable 1,500,000 2000,000
Less: Decrease in current liabilities or increase in
current assets
Inventory 4,000,000
Trade Receivables 1,500,000
Interest paid 1,000,000 (6,500,000)

Net Cash Flow from Operations 57,500,000

Cash Flow From Investing

Purchase of Property, Plant and Equipment (47,000,000)
Sale of Property, Plant and Equipment 1,000,000
Sale of Investments 15,000,000
Net Cash Flow From Investing (31,000,000)

Cash Flow From Financing

Issue of Shares 2,000,000
Share Premium 1,500,000
Long Term Loans 2,500,000
Dividends paid (12,500,000) (6,500,000)
Overall Net Cash Flows 20,000,000
Add: Opening Balance 4,000,000
Closing Balance 24,000,000

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