Cash Flow

Bachelor of Accounting (Hons)
Financial Accounting II
Statement of cash
flows
MFRS 107
Bachelor of Accounting (Hons) UKAF1083 Financial Accounting II 1
1
Statement of cash flows
Teaching objectives
Students will learn the following:
 The advantages and disadvantages of the
statement of cash flows to users
 The meaning of cash equivalents
 The components of the statement of cash flows
 What to disclose in the SCF
 The two methods of preparing SCF
2
Statement of cash flows
Learning outcomes
At the end of the lecture, students should be able to:
 List the benefits and disadvantages of the SCF to users
 Define the term “cash equivalents”
 List and briefly explain the three components of the
SCF
 Identify the important items that must be disclosed in
the SCF
 Prepare the SCF under the direct method and indirect
method
 Compute the net profit before tax even though the
statement of comprehensive income is not provided in
the question
3
Statement of Cash flows
Discloses the inflow and outflow
of cash during a financial period
of a company
Identifies the activities that:
Generates cash, and
Uses cash
4
Forms part of the Financial
Statements in the Company’s
Annual Report
Required by:
TheCompanies Act 2016
MFRS 107 SCF
5
 Provides information:
 On sources of cash inflow
 On how cash is being used during a financial
year
 On effectiveness of Management’s ability to
manage cash
 On reasons a profitable company faces cash
flow problems
6
 Provides information (together with Statement of
Financial Position and Statement of Comprehensive
Income) to evaluate a company’s:
 Changes in net assets
 Financial structure (liquidity & solvency)
 Ability to adapt to changing circumstances and
opportunities
 Forecast cash flow provides information on possible
effects on future cash flows.
7
Statement of Cash flows -
disadvantages
 Provides historical information
 Analysis and interpretation based on past decisions
 Subject to mgmt window dressing
 Includes cash equivalents - which is difficult to
understand
 Its preparation can be complicating and presentation
not easily understood
8
cash & cash equivalents
 Cash include:
 Cash on hand, at bank, & demand deposits
 Cash equivalents are assets that are:
 Short term
 Highly liquid
 Readily convertible to cash (within 3 months)
 Include bank overdrafts because they are:
 Repayable on demand, and
 Form part of cash management
9
Cash & Cash Equivalents
Cash equivalents do
not include:
Investment in equity shares
Revolving credits
10
Components (MFRS 107)
Net Cash and cash equivalents
can be classified under:
Operating activities
Investing activities
Financing activities
11
Components (MFRS 107)
 Classification by activities may indicate:
 Effect of the 3 activities on company’s cash
resources
 Inter-dependency of one activity on the other
Eg: cash from operations used to finance investing
activities,
Eg: operating and investing activities dependent
on cash flow from financing activities
12
Operating activities
 Principal revenue generating activities
 Cash flow indicates level of sufficiency to:
 Sustain operations
 Meet obligations
 Contributes to investing activities
 Pay dividends and loan repayments
 Cash receipts/ inflow from:
 sales & services
 royalties, commissions, fees
 Tax refund
 Trading contracts, and other income
13
Operating activities
 Cash payments :
 For purchase and services
 To and on behalf of employees
 For taxes, interests, and dividends
 Dividends – on Redeemable Preference Shares
 For royalties, commissions, fees
14
Investing activities
 Activities involving acquisition & disposal of long term
assets PPE & Inv
 Assess the extent of expansion and implication on
future cash flow
 Cash receipts:
 On disposal of non-current and long term assets
(tangible & intangible)
 On sale of long term investments
 On sale of short term investments not qualified as
cash equivalent
 Investment income – dividends & interest income
15
 Cash payments:
 to acquire long term non-current assets
Property, plant, equipment (include
development expenses & construction cost)
(tangible & intangible)
 to acquire long-term investments
 advances made or repayments of advances
received (other than loans and advances of
financial institutions)
16
Financing activities Equity/NCL
 Activities that involve obtaining and repaying of
financial resources – from owners & providers of long-
term capital (with returns to providers - interest)
 Used in predicting claims on future cash flows
 Cash receipts from:
 share issues
 debentures issues
 Loans & other borrowings (short or long-term)
17
Financing activities
 Cash payments on:
 share buyback
 share redemptions
 debenture redemptions
 loan repayments
 finance lease (capital payment)
 Dividends – on Ordinary Shares and Preference
Share (non-redeemable)
18
Other disclosures
 Taxes paid
 paid on income are operating activity
 If relates to financing or investing activities – to
show under respective activities
 Interest paid or received
 can be shown as operating OR investing OR financing
activity
 Normally:
Interest paid: Operating
Interest received: Investing
19
Other disclosures
 Dividends paid
 are financing OR operating activity
Financing – on Ordinary and Preference Shares
Operating – on Redeemable Preference Shares
 Dividends received
 Can be shown as operating OR investing OR
financing activity
 Normally: Investing
 ALL must be shown separately
20
Presentation – operating activities
direct method
 Do not start from “profit before tax”indirect
method
 Cash flows from operations disclosed as gross
cash receipts and payments
 Main source of inflows are from customers
 Main outflows are to suppliers, employees, and
services
 Detailed info on above are required
 Use “incomplete record” approach to work out
certain cash items, such as cash sales, cash
purchases, etc.
21
direct method
 Direct, easy to comprehend
 Provides information not available under
“indirect” method
 No adjustments for non-cash items
 Must include statement reconciling net
profit/loss (from income statement) to cash
flows from operations
22
direct method : example 1
Statement of Comprehensive Income for the year ended 31 Dec 2X10
RM RM
Sales 200,000
Cost of goods sold:
Opening inventory 20,000
Purchases 80,000
100,000
Closing inventory (25,000) 75,000
Gross profit 125,000
Wages and salaries 40,000
Other expenses (includes deprn RM12,000) 50,000 (90,000)
Net profit 35,000
23
Statement of Financial Position extract

opening closing
balance balance
RM RM
Trade receivables 30,000 40,000
Trade payables 15,000 19,000
Accrued expenses (utility) 2,000 1,000
Prepayment (rent)
Bachelor of Accounting (Hons) UKAF1083 Financial Accounting II
12,00024
10,000
24
Presentation – operating
activities direct method :
example 1
Trade receivables
Bal b/d 30,000 Cash 190,000
Sales 200,000 Bal c/d 40,000
230,000 230,000
25
Cost of goods sold
inventory b/d 20,000 SOCI 75,000
(Cost of sales)
Purchases 80,000 Inventory c/d 25,000
100,000 100,000
Trade payables
Cash 76,000 Bal b/d 15,000
Bal c/d 19,000 purchases 80,000
95,000 95,000
26
Other expenses
Prepayment 12,000 Accrual b/d 2,000
b/d
Depreciation 12,000 Inc. statement 50,000
Cash 37,000 Prepayment 10,000
c/d
Accrual c/d 1,000
62,000 62,000
27
Statement of Cash flows for the yr ended 31 Dec 2X10
Operating: RM
Cash received from customers 190,000
Cash paid to suppliers and employees (153,000)

(76+37)+ 40 wages
Cash generated from operations 37,000
28
indirect method : example 1
Statement of Cash flows for the year ended 31 Dec 2X10
Operating: Adjusting
RM
for non
Net profit before tax cash items 35,000
Adjustments for depreciation (non-cash) 12,000
Operating profit before working capital changes 47,000
Increase in inventory (↑) Refer to Cash -5,000
Increase in trade receivables (↑) current assets out -10,000
and current (-)
Increase in trade payables (↑) liability at cash 4,000
Decrease in accruals (↓) SOFP but not in -1,000
the BANK and (+)
decrease in prepayments (↓) TAX items 2,000
Cash
Bachelor ofgenerated from
Accounting (Hons) UKAF1083 operations
Financial Accounting II 29 37,000
29money
Visualise ur SOPL
 Sales 100
 COGS -10
 GP 90
 Gain on disposal 20 non cash item
 Depreciation (10)
 Bad debt (5)
 Net profit 35000

Presentation – operating activities indirect
method
 Starts with profit/loss before tax (re: SOCI)
 Note: income statement prepared on accrual basis, but cash flow
statement on actual cash flow
 If income statement is not available - work out net profit by comparing
retained earnings of last 2 years
 Adjustments required to profit before interest and tax:
 for non-cash expenses – depreciation, gain on disposal, provision for
doubtful debt
 Recognise cash in/out flows in increase/decrease in working capital
(exclude cash and cash equivalents)
 Working capital:
 Increase – more cash tied up : outflow
 Decrease – more cash release : inflow
31

31
Changes in cash & cash equivalents (CACE)
 Net changes in CACE refer to the difference

between opening balance and closing
balance of cash and cash equivalents, such
as cash at bank, cash on hand, bank
overdraft, and short-term deposits.
32
Preparing a Statement of cash flows: example 2
Statement of Comprehensive Income for the yr ended 31 Dec 2X10
Sales 220,000
Cost of sales 98,000
Selling and distribution costs -25,000
Administrative costs -15,000
Depreciation -2,000
Gain on disposal of plant 2,000 (40,000)
Net operating profit 82,000
Interest expense (6,000)
Investment income 1,000
Gain on disposal of investment 2,000
Profit before tax 79,000
Tax (22,000)
Profit after tax 57,000
33
2X10 2X09
Non-current assets:
Land 200,000 140,000
Plant and machinery 30,000 40,000
Accumulated depreciation (5,000) (6,000)
Motor vehicles 20,000 20,000
Accumulated depreciation (3,000) (2,000)
Investments 30,000 40,000
Current assets:
inventories 7,000 5,000
trade receivables 20,000 17,000
Bank 21,000 6,000
Bachelor of Accounting (Hons) UKAF1083 Financial Accounting II 320,000 260,000
34
34
Statement of Financial Position as at 2X10 2X09
31 DEC
Ordinary shares of RM1/- each 140,000 100,000
Retained profits 90,000 50,000
Long-term liabilities:
10% debentures 50,000 60,000
Bank loan 23,000 33,000
Current liabilities:
Accrued selling expenses 2,500 1,000
Tax payable 2,000 1,000
320,000 260,000
35
 Working for plant disposal
PLant Invest,ment
Cost 10 10
Accum (1) Nil
During the year dep (1) Nil
CA/ NBV 8 10
SP (CASH) 10 12
Gain 2 2

Preparing a Statement of cash flows:
Additional information
 RM10,000 of debentures converted to ordinary shares
on 1 Jan 2X10 Dr Debenture 10 Cr OSC
 Increase in issued share capital from:
 issue of shares for cash and
 conversion of debentures
 Sale of plant was for cash. There was no purchase of
plant and machinery during the year
 Land was purchased for cash
 Depreciation of RM2,000 comprised:
 RM1,000 each for plant and motor vehicles
Required: Prepare SCF under direct and indirect methods
37
Cash receipts and payments
Trade receivable
Bal b/d 17,000 Cash 217,000
Sales 220,000 Bal c/d 20,000
237,000 237,000
Cost of sales
Opening inventory 5,000 Cost of sales 98,000
Purchases 100,000 Closing inventory 7,000
105,000 105,000
Trade payables
Cash 102,500 Bal b/d 15,000
Bal c/d 12,500 Purchases 100,000
115,000 115,000
38
Cash receipts and payments
Accrued selling expenses
Cash 23,500 Bal b/d 1,000
Bal c/d 2,500 Income statement 25,000
26,000 26,000
Tax payable
Cash 21,000 Bal b/d 1,000
23,000 23,000
39
Plant and machinery
Bal b/d 40,000 Disposal 10,000
Bal c/d 30,000
40,000 40,000
Accumulated depreciation
disposal 2,000 Bal b/d 6,000
7,000 7,000
Disposal
Plant and mach 10,000 Accum. Depreciation 2,000
Income statement 2,000 Cash 10,000
(gain)
12,000 12,000
40
Preparing a statement of cash flows :
Example 2 indirect method
Statement of cash flows for the yr ended 31 Dec 2X10

Operating: RM RM
Adjustment for: depreciation 2,000
Gain on disposal of PPE -2,000
Gain on disposal of investments -2,000
Investment income (investing) -1,000
Interest expense (show separately) 6,000
Operating income before working 82,000
capital changes
41
Preparing a statement of cash flows : Example 2
indirect method
Statement of cash flows for the yr ended 31 Dec 2X10
Operating: RM RM
Operating income before working 82,000
capital changes
Increase in inventory -2,000
Increase in receivables -3,000
Decrease in payables -2,500
Increase in accruals 1,500
Interest paid -6,000
Tax paid -21,000
Net cash flow from operating activities 49,00042

Indirect method
Statement of cash flows ftye 31 Dec 2X10
Investing: RM RM
Purchase of land and building -60,000
Proceeds from disposal of plant 10,000
Proceeds from disposal of 12,000
investment
Investment income received 1,000
Net cash outflow from investing -37,000
activities
43
Indirect method
Financing: RM RM
Proceeds from share issues 30,000
Loan repayment -10,000
Dividends paid -17,000
Net cash flow from financing 3,000
activities
Change in CACE total of 3 act 15,000
Opening CACE –last year bank bal 6,000
Closing CACE
21,000
44
OSC
bd 100
Debenture 10
cd 140 Bank/ Cash 30
140 110
RE
Dividend 17 bd 50
paid
PAT 57
cd 90
90 117
Direct method
Statement of cash flows fty ended 31 Dec 2X10
Operating: RM RM
Cash receipts from customers 217,000
Cash paid to suppliers & -141,000
employees 102.5+23.5+15(admin)
Interest paid -6,000
Tax paid 1+22-2 -21,000
Net cash flow from operating 49,000
activities
46
Direct method

Investing: RM RM
Purchase of land and building -60,000
Proceeds from disposal of plant 10,000
Proceeds from disposal of 12,000
investment (inc gain RM2,000)
Investment income received 1,000
Net cash outflow from investing -37,000
activities
47
Direct method
Financing: RM RM
Proceeds from share issues 30,000
Loan repayment -10,000
Dividends paid -17,000
Net cash flow from financing 3,000
activities
Change in CACE 15,000
Opening CACE 6,000
Closing CACE
21,000
48
Fully Worked Example
 For your reading pleasure…….

Statement of cash flows: Example 4 – Lazar Q4.1
Morgan Bhd – list of balances Yr 6 RM’000 Yr 5 RM’000

Bank 60,250 28,000
AR 220,000 125,000
AP 112,600 118,000
Inventories 55,000 83,000
Accrued expenses 19,000 12,000
Land 75,000 45,000
Building (cost) 136,000 112,000
Acc Depreciation – building 28,000 24,000
Plant – cost 114,000 100,000
Acc depreciation – Plant 64,000 64,000
15% preference share 100,000 100,000
Ord shares 220,000 120,000
Share premium 30,000 0
Retained profit 63,650 54,000
Tax payable 3,000 1,000
50
Asset revaluation reserve 20,000 0
Cash flow statement: Example 4 – Lazar Q4.1
Statement of Comprehensive Income ftye Yr 6 Yr 5

RM’000 RM’000
Sales 500,000
Cost of sales 300,000
Operating expenses 115,600
Directors’ remuneration 27,000
Depreciation – plant 8,000
Depreciation – building 4,000
Loss on sale of plant 5,000 159,600
Tax 10,000
Profit after tax 30,400
Other comprehensive income:

Gain on revaluation (land)
20,000
Total comprehensive income 50,400
51
Statement of cash flows: Example 4 – Lazar
Q4.1 Additional notes
 Land:
 Carrying value of RM45,000,000 was revalued to
RM65,000,000.#
 No disposal during year
 Plant costing RM33,000,000 sold during the year
 No building sold during year
 Dividends paid:
 Preference dividend RM9,750
 Ordinary dividend RM11,000
52
Workings
Accounts receivable
Bal b/d 125 Cash 405
Income statement 500 Bal c/d 220
--- ---
Cost of sales
Inventory b/d 83 Income statement 300
Purchases 272 Inventory c/d 55
--- ---
Accounts payable
Cash 277.4 Bal b/d 118
Bal c/d 112.6 Purchases 272
--- ---
Workings
Accrued expense
Cash 135.6 Bal b/d 12
Bal c/d 19 Income statement 142.6
115.6+27
--- ---
Plant
Bal b/d 100 disposal 33
Cash 47 Bal c/d 114
--- ---
Accumulated depreciation
Disposal 8 Bal b/d 64
Bal c/d 64 Income statement 8
Workings
Disposal - plant
plant 33 Accumulated depreciation 8
Income statement 5
Cash (proceeds) 20
--- ---

Suggested solution
Statement of cash flows ftye RM’000 RM’000

Cash received from customers (125+500-220) 405
Cash paid to suppliers [118+(300+55-83)-112.6] (277.4)
Cash paid – others (12+115.6+27-19) (135.6)
Cash generated from operations (8)
Income tax paid (1+10-3) (8)
Net cash flow from operating activities (16)
Investing:
Purchase land (10)
Purchase building (24)
Purchase plant (47)
Proceeds from disposal of plant 20
Net Cash flow from investing activities (61)
Financing:
Ord share issue 130
Dividends paid (20.75)
Net Cash flow from financing activities 109.25
Change in CACE
Bachelor of Accounting (Hons) UKAF1083 Financial Accounting II 56 32.25
Opening CACE 28.00
56
Closing CACE 60.25
Statement of cash flows: Example 5 – Lazar Q4.2
Veronika Bhd Statement of fin 31/12 Yr 7 RM’000 1/1 Yr 7 RM’000
position
Freehold land 147,000 125,000
Plant at cost 151,000 120,000
F & F at cost 29,000 24,000
Inventories 52,000 37,000
Cash at bank 16,000 0
Trade receivables 44,000 43,000
439,000 349,000
Ord shares 150,000 100,000
Share premium 35,000 15,000
Revaluation reserve 20,000 0
Accumulated profit 85,000 43,000
6% debentures 30,000 70,000
Bank OD 0 29,000
Tax payable 2,000 0
Acc Depreciation: Plant
54,000 57
45,000
F&F 15,000 13,000 57
Additional notes
 Land:
 Costing RM35,000,000 sold for RM40,000,000
 Plant costing RM9,000,000 sold for RM6,000,000
(acc dep at RM4,000,000)
 F & F costing RM6,000,000 sold for RM2,000,000
(Write-down value at RM4,000,000)
 On 1/7/yr7, part of 6% debenture redeemed at
premium of RM2,000,000 (written off in income
statement)
 Dividends of RM8,000,000 was paid
 Tax expense charged to income statement was
RM18,000,000
58
Statement of cash flows ftye 31.12.yr 7
Operating: RM’000 RM’000
Profit before tax (42+8(div)+18(tax)) 68
Adjustments:
Depreciation (13+4) 17
Gain on land disposals plant disposals (6)
Loss on FF disposal 2
Premium on debenture redemption 2
15
Working capital changes
Inventories – increases (15)
Trade receivables – increases (1)
Trade payables - increases 14
81
Add: Debenture interest paid (2.1+0.9) 3
84
Less: Interest paid (3)
Tax paid (16)
Net cash inflow from operating activities 65
59
Statement of cash flows ftye 31.12.yr 7
RM’000 RM’000
Cash flow from Operating activities 65
Investing:
Purchase land (37)
Purchase plant (40)
Purchase F & F (11)
Sold land 40
Sold plant 6
Sold F & F 2
Net Cash flow from investing activities (40)
Cash flow from financing activities:
Ord share issues 70
6% debenture redemption (40+2) (42)
Dividends paid (8)
Net cash flow from financing activities 20
Net increase in cash & CE 45
CACE at the beginning of the year (29)
60
CACE at the end of the year 16

Cash Flow

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Bachelor of Accounting (Hons)

Bachelor of Accounting (Hons) UKAF1083 Financial Accounting II 1

Bachelor of Accounting (Hons) UKAF1083 Financial Accounting II 2

Bachelor of Accounting (Hons) UKAF1083 Financial Accounting II 4

Bachelor of Accounting (Hons) UKAF1083 Financial Accounting II 5

Bachelor of Accounting (Hons) UKAF1083 Financial Accounting II 6

Bachelor of Accounting (Hons) UKAF1083 Financial Accounting II 7

Bachelor of Accounting (Hons) UKAF1083 Financial Accounting II 8

Bachelor of Accounting (Hons) UKAF1083 Financial Accounting II 9

Bachelor of Accounting (Hons) UKAF1083 Financial Accounting II 10

Bachelor of Accounting (Hons) UKAF1083 Financial Accounting II 11

Bachelor of Accounting (Hons) UKAF1083 Financial Accounting II 12

Bachelor of Accounting (Hons) UKAF1083 Financial Accounting II 13

Bachelor of Accounting (Hons) UKAF1083 Financial Accounting II 14

Bachelor of Accounting (Hons) UKAF1083 Financial Accounting II 15

Bachelor of Accounting (Hons) UKAF1083 Financial Accounting II 16

Bachelor of Accounting (Hons) UKAF1083 Financial Accounting II 17

Bachelor of Accounting (Hons) UKAF1083 Financial Accounting II 18

Bachelor of Accounting (Hons) UKAF1083 Financial Accounting II 19

Bachelor of Accounting (Hons) UKAF1083 Financial Accounting II 20

Bachelor of Accounting (Hons) UKAF1083 Financial Accounting II 21

Bachelor of Accounting (Hons) UKAF1083 Financial Accounting II 22

Statement of Financial Position extract

Sales 200,000 Bal c/d 40,000

Bachelor of Accounting (Hons) UKAF1083 Financial Accounting II 25

Bachelor of Accounting (Hons) UKAF1083 Financial Accounting II 26

Bachelor of Accounting (Hons) UKAF1083 Financial Accounting II 27

Statement of Cash flows for the yr ended 31 Dec 2X10

Cash received from customers 190,000

Cash paid to suppliers and employees (153,000)

Cash generated from operations 37,000

Bachelor of Accounting (Hons) UKAF1083 Financial Accounting II 28

Bachelor of Accounting (Hons) UKAF1083 Financial Accounting II 30

Bachelor of Accounting (Hons) UKAF1083 Financial Accounting II

 Net changes in CACE refer to the difference

Bachelor of Accounting (Hons) UKAF1083 Financial Accounting II 32

Bachelor of Accounting (Hons) UKAF1083 Financial Accounting II 35

Accum (1) Nil

During the year dep (1) Nil

Bachelor of Accounting (Hons) UKAF1083 Financial Accounting II 36

Bachelor of Accounting (Hons) UKAF1083 Financial Accounting II 37

Bachelor of Accounting (Hons) UKAF1083 Financial Accounting II 38

Cash 23,500 Bal b/d 1,000

Bal c/d 2,500 Income statement 25,000

Cash 21,000 Bal b/d 1,000

Bal c/d 2,000 Income statement 22,000

Bachelor of Accounting (Hons) UKAF1083 Financial Accounting II 39

Statement of cash flows for the yr ended 31 Dec 2X10

Net cash flow from operating activities 49,00042

Bachelor of Accounting (Hons) UKAF1083 Financial Accounting II 43

Statement of cash flows ftye 31 Dec 2X10

 For your reading pleasure…….

Bachelor of Accounting (Hons) UKAF1083 Financial Accounting II 49

Morgan Bhd – list of balances Yr 6 RM’000 Yr 5 RM’000

Statement of Comprehensive Income ftye Yr 6 Yr 5

Other comprehensive income:

Bachelor of Accounting (Hons) UKAF1083 Financial Accounting II 55

Statement of cash flows ftye RM’000 RM’000

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