IAS 7 Question 4

QUESTION 4: IAS 7 STATEMENTS OF CASH FLOWS

The summarized financial statements of Bin Qasim Motors Limited for the year to 30 September
2015, together with a comparative balance sheet, are:

Statement of profit or loss

$000
Sales revenue 7,482
Cost of sales (4,284)
Gross profit 3,198
Operating expenses (1,479)
Interest payable (260)
Investment income 120
Profit before tax 1,579
Income tax (520)
Profit for the period 1,059

Statement of financial position as at 30 September

2015 2014
Non-current assets $000 $000
Property, plant and equipment 2,344 1,908
Investment 690 nil
3,034 1,908
Current assets
Inventory 1,046 785
Trade accounts receivable 935 824
Short term treasury bills 120 50
Bank nil 122
2,101 1,781
5,135 3,689
Equity
Share capital 1,400 1,000
Reserves:
Share premium 460 60
Retained earnings
At beginning of the year 192 147
Net profit for period 1,059 65
Dividends (180) (20)
At end of the year 1,071 192
2,931 1,252
Revaluation surplus 90 40
Non-current liabilities
Deferred tax 439 400
Deferred income 275 200
10% Convertible loan stock nil 400
714 1,000
Current liabilities
Trade accounts payable 644 760
Accrued interest 40 25
Provision for negligence claim nil 120
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IAS 7 Question 4

Provision for income tax 480 367

Deferred income 100 125
Overdraft 136 nil
1,400 1,397
Total equity and liabilities 5,135 3,689

The following information is relevant:

(i) Non-current assets
Property, plant and equipment is analyzed as follows: $000
30 September 2015 30 September 2014
Cost/ Dep. NBV Cost/ Dep. NBV
Valuation Valuation
Land and buildings 2,000 760 1,240 1,800 680 1,120
Plant 1,568 464 1,104 1,220 432 788
3,568 1,224 2,344 3,020 1,112 1,908
On 1 October 2014 Bin Qasim Motors Limited recorded an increase in the value of its land
of $ 150,000.
During the year an item of plant that had cost $ 500,000 and had accumulated depreciation
of $ 244,000 was sold at a loss (included in cost of sales) of $ 86,000 on its carrying value.
(ii) Deferred income
Bin Qasim Motors Limited sells servicing contracts on certain types of machinery.
Payments are received in advance for a service which Bin Qasim Motors Limited must
provide over a number of following years. Income that relates to these contracts is deferred
and recognised in P&L as the period of service passes.
A credit of $ 125,000 for the current year’s recognition of deferred income has been
included revenue in this period.
(iii) Share capital and loan stocks
The increase in the share capital during the year was due to the following events:
1. On 1 January 2015 there was a bonus issue (out of the revaluation surplus) of one
bonus share for every 10 shares held.
2. On 1 April 2015 the 10% convertible loan stock holders exercised their right to
convert to ordinary shares. The terms of conversion were 25 ordinary shares of $ 1
each for each $ 100 of 10% convertible loan stock.
3. The remaining increase in the ordinary shares was due to a stock market placement
of shares for cash on 12 August 2015.
(iv) Provision for negligence claim
In June 2015 Bin Qasim Motors Limited made an out of court settlement of a negligence
claim brought about by a former employee. The dispute had been in progress for two years
and Bin Qasim Motors Limited had made provisions for the potential liability in each of the
two previous years. The unprovided amount of the claim at the time of settlement was $
30,000 and this was charged to operating expenses.

Required:
Prepare a statement of cash flows for Bin Qasim Motors Limited for the year to 30 September
2015 in accordance with IAS 7 Statement of Cash Flows

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IAS 7 Question 4

ANSWER – QUESTION 4: IAS 7 STATEMENTS OF CASH FLOWS

BIN QASIM MOTORS LIMITED

Statement of cash flows
For the year ended 30 September 2015
Cash flows from operating activities: $ 000
Profit before tax 1,579
Adjustments for:
Depreciation of non-current assets W4 80 + W5 276 356
Loss on disposal W3 86
Recognition of deferred income (125)
Investment income (120)
Negligence claim previously provided (120)
Finance costs 260
Operating profit before working capital changes 1,916
Increase in inventory (785 – 1,046) (261)
Increase in trade receivables (824 - 935) (111)
Decrease in trade payables (644 - 760) (116)
Cash generated from operations 1,428
Interest paid W7 (245)
Income tax paid W8 (368)
Net cash from operating activities 815

Cash flows from investing activities:

Purchase of property, plant and equipment (W1 50 + W2 848) (898)
Acquisition of long term investment (690)
Purchase of treasury bills (50 – 120) (70)
Receipts on services contracts W6 175
Investment income received 120
Proceeds from sale of asset W3 170
Net cash used in investing activities (1,193)

Cash flows from financing activities:

Shares issued W9 300
Dividends paid (180)
Net cash from financing activities 120

Net decrease in cash and cash equivalents (258)

Cash and cash equivalents at beginning of period 122
Cash and cash equivalents at end of period (136)

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IAS 7 Question 4

Workings

W1 – Land & Building

b/d 1,800
Revaluation 150
Cash β 50 c/d 2,000
2,000 2,000

W2 – Plant
b/d 1,220 Disposal 500
Cash β 848 c/d 1,568
2,068 2,068

W3 – Disposal A/C
Plant 500 Acc. Depreciation – Plant 244
Cash β 170
Loss on Disposal 86
500 500

W4 – Accumulated depreciation - Land & Building

b/d 680
c/d 760 Depreciation 80
760 760

W5 – Accumulated depreciation – Plant

Disposal 244 b/d 432
c/d 464 Depreciation 276
708 708

W6 – Deferred Income
Sales Revenue 125 b/d Current 125
c/d Current 100 b/d Non Current 200
c/d Non Current 275 Cash β 175
500 500

W7 – Accrued Interest
Cash β 245 b/d 25
c/d 40 Interest expense 260
500 500

W8 – Provision for Income Tax

Cash β 368 b/d Provision 367
c/d Provision 480 b/d Deferred tax 400
c/d Deferred tax 439 PL 520
1,287 1,287

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IAS 7 Question 4

W9 – Share Capital + share premium

b/d 1,000 + 60 1,060
Revaluation reserve (1 for 10) 100
10% convertible loan stock 400
C/d 1,400 + 460 1,860 Cash β 300
1,860 1,860

W10 – Revaluation Reserve

Share capital (bonus issue) 100 b/d 40
C/d 90 Land 150
190 190

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