Corporate Reporting 545

School of Accounting Dr Ling Mei Cong

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Topic 7 Group Cash Flow Statement

Pre-reading Kaplan Ch 6

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Definitions
Cash consists of cash in hand and deposits repayable upon demand, less overdrafts. This includes cash held in a foreign currency. Cash equivalents are short term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value. Cash flows are inflows and outflows of cash and cash equivalents.

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Classification of cash flows

IAS 7 Statement of Cash Flow does not prescribe a format for the cash flow statement. It requires it is split into three sections: Cash flows from operating activities Cash flows from investing activities

Cash flows from financing activities

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Methods preparing cash flow statement

There are two methods of calculating the cash from operating activities:
Direct method
Indirect method

IAS 7 permits either method.

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Proforma
Proforma statement of cash flows per IAS 7 $ Operating activities Profit before tax Add: interest payable Less: Income from associate Adjust for noncash items dealt with in arriving at operating profit: Add: depreciation Add: loss on impairment Add: loss on disposal of noncurrent assets Add: increase in provisions $ X X (x) Investing activities Payments to purchase NCA Receipts from NCA disposals Cash paid to acquire subsidiary (net of cash balances acquired) Cash proceeds from subsidiary disposal (net of cash balances disposed) Dividend received from associate Interest received X (X) X (X) X X

X X X X X (X) (X) (X) (X) (X) X

Changes in working capital: Increase in inventory Increase in receivables Decrease in payables Cash generated Interest paid Taxation paid Net cash generated from operating activities

Net cash flow from investing activities Financing activities Proceeds from share issue Proceeds from loan or debenture issue Cash repayment of loans or debentures Finance lease repayments Equity dividend paid Dividend paid to NCI
Net cash flow from financing activities X Change in cash and equivalents for the year Cash and equivalents brought forward Cash and equivalents carried forward

X(X)
X X (X) (X) (X) (X) X(X) X(X) X(X) X(X)

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Dividends paid to non-controlling interest

Dividends paid to non-controlling interest should be disclosed separately in the statement of cash flows.

To calculate the amount paid, reconcile the noncontrolling interest in the statement of financial position from the opening to the closing balance.

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Example
20X0 $ 440 20X1 $ 840

Non-controlling interest

The group income statement reported a non-controlling interest of $500. Required: How much was the cash dividend paid to the non-controlling interest?

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Answer
Non-controlling interest $ Cash dividend paid (bal fig) 100 Bal b/f Balance c/f 840 Income statement 940 $ 440 500 940

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Dividends from associates

Dividends
Only dividends received represent a cash inflow When reconciling group net cash inflow to group reported profit, the movement between opening and closing receivables must exclude dividends receivable from the associate Dividends received from associate should be included as a separate item in the group statement of cash flow

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Acquisitions and disposals

If the subsidiary joins or leaves a group during a financial year, the cash flows of the group should include the cash flows of that subsidiary for the same period Cash payments to acquire subsidiaries and receipts from disposals of subsidiaries must be reported separately in the statement of cash flows under investing activities.

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Example
The extracts of a companys statement of financial position is shown below: 20X8 20X7 $ $ Inventory 74,666 53,019

During the year, a subsidiary was acquired. At the date of acquisition, the subsidiary had an inventory balance of $9,384. Calculate the movement on inventory for the statement of cash flows.
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Answer
At the beginning of the year, the inventory balance of $53,019 does not include the inventory of the subsidiary. At the end of the year, the inventory balance of $74,666 does include the inventory of the newly acquired subsidiary.

The movement on inventory is: (974,666 9,384) 53,019 =$12,263 increase. This is shown as a negative cash flow.
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Foreign currency transactions

If the foreign currency has been settled in the year the cash flows will reflect the reporting currency cash receipt or payment, and thus no problem arises. An unsettled foreign currency transaction will give rise to exchange for which there is no cash flow effect in current year.

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Example
20X0 $ 2,500 20X1 $ 1,000

Loan

The loan is denominated in an overseas currency, and a loss of $200 has been recorded on the retranslation. Required: How much cash was paid?

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Answer
Loan Cash paid Bal c/f

$ 1,700 Bal b/f 1,000 Exchange loss 2,700

$ 2,500 200 2,700

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Comprehensive example
Textbook, test your understanding 1

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Usefulness of statement of cash flows

It may assist users of financial statements in making judgements on the amount, timing and degree of certainty of future cash flows. It gives an indication of the relationship between profitability and cash generating ability, and thus of the quality of the profit earned.

Historical cash flow information could be useful to check the accuracy of past assessments.
A statement of cash flow in conjunction with a statement of financial position provides information on liquidity, solvency and adaptability. Cash flow cannot easily be manipulated and is not affected by judgement or by accounting policies.

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Limitations of the statement of cash flows

Statements of cash flows are based on historical information and therefore do not provide complete information for assessing future cash flows. There is some scope for manipulation of cash flows. Cash flow is necessary for survival in the short term, but in order to survive in the long term a business must be profitable.

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