Statement of cash flows
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KAPLAN PUBLISHING
This year
Last year
$
$
Share capital
200,000
200,000
Reserves
141,640
–––––––
–––––––
341,640
200,000
Current liabilities
318,890
219,204
–––––––
–––––––
660,530
419,204
–––––––
–––––––
Extracts from the statement of profit or loss for the year are:
$
$
Sales revenue
1,589,447
Cost of sales:
Purchases (no inventory)
1,105,830
Wages and salaries
145,900
––––––– (1,251,730)
Administration:
Operating costs
96,077
Salaries
100,000
–––––––
(196,077)
–––––––
Operating profit and retained
profit for the year
141,640
–––––––
Additional information
1
Current liabilities consist of
This year
Last year
$
$
Re non-current assets
46,000
Trade and other payables
258,240
210,564
Wages accrued
14,650
8,640
Chapter 19
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2
Purchase invoices relating to the acquisition of non-current assets
totalling $80,000 have been posted to the payables ledger during
the year
Calculate the net cash flow from operating activities using the direct
method.
Solution
$
Operating activities
Cash received from customers (W1)
1,509,287
Cash payments to suppliers (W2)
(1,154,231)
Cash paid to and on behalf of employees (W3)
(239,890)
–––––––––
Net cash inflow from operating activities
115,166
Workings
(W1)
Receivables’ ledger control account
$
$
Balance b/f
265,840 Cash receipts (ß)
1,509,287
Sales revenue
1,589,447 Balance c/f
346,000
––––––––
––––––––
1,855,287
1,855,287
––––––––
––––––––
(W2)
Payables’ ledger control account
(excluding non-current asset purchases)
$
$
Cash paid (ß)
1,154,231 Balance b/f
210,564
Balance c/f
258,240 Purchases
– Cost of sales
1,105,830
– Operating costs
96,077
––––––––
––––––––
1,412,471
1,412,471
––––––––
––––––––
Statement of cash flows
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KAPLAN PUBLISHING
Tutorial note
: Information relating to non-current assets is not included in
the payables’ ledger control account above in order to compute cash paid
to suppliers of operating costs.
(W3)
Wages and salaries control
$
$
Net wages paid (ß)
239,890 Balance b/f
8,640
Balance c/f
14,650 Cost of sales
145,900
Administration
100,000
–––––––
–––––––
254,540
254,540
–––––––
–––––––
Test your understanding 1
The following information relates to Flute, an entity.
Statement of financial position for the year ended 30 September –
extracts
20X8 20X7
$
$
Trade receivables
31,250
35,633
Trade payables
14,195
13,750
Accrued wages expense
1,015
835
Interest payable
350
300
Income tax payable
1,250
1,075
––––––– –––––––
extracts
20X8
$
Sales
427,915
Purchases
165,000
Wages
52,750
Interest expense
325
Income tax charge
1,515
–––––––
Note:
At 30 September 20X8, Flute had agreed to, but not yet accounted
for, a contra between trade receivables and trade payables amounting to
$230.
from operating activities extract of the statement of cash flows of
Flute for the year ended 30 September 20X8.
Chapter 19
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Indirect method
The indirect method of presenting cash flows from operating activities relies
upon information that is disclosed in the financial statements, or can be
calculated from information disclosed in the financial statements. The starting
point is normally profit before tax, which is then adjusted to remove any non-
cash items or accruals-based figures included in the statement of profit or loss.
The following are examples of adjustments that are normally required when
preparing cash flows from operating activities using the indirect method:
•
Depreciation – added back to profit before tax because it is a noncash
expense
•
Loss on disposal of non-current assets – the loss is a non-cash expense
and is added back to profit before tax: the cash proceeds on disposal will
be classified as an investing activity cash inflow. Note that a gain on
disposal is deducted from profit before tax
•
Interest payable expense – added back to profit before tax because it is
not part of cash generated from operations (the cash payment is deducted
elsewhere in the statement of cash flows – refer to the proforma
statement)
•
Increase/decrease in inventory – inventory represents purchases made in
one accounting period, but which will be charged against profit in another
accounting period. An increase in inventory is deducted from profit before
tax as it represents a cash outflow to pay for the additional inventory. A
decrease in inventory is added to profit before tax as it represents a cash
inflow from disposing of inventory
•
Increase/decrease in trade receivables – trade receivables represent
revenue recognised in profit or loss in one accounting period, whilst the
cash will be received in the following accounting period. A decrease in
receivables is added to profit before tax as it represents a cash inflow as
more cash has been collected from receivables. An increase in trade
receivables is therefore deducted from profit before tax
•
Increase/decrease in trade payables – trade payables represent
purchases made in one accounting period which will be paid for in the
following accounting period. An increase in trade payables means that the
business entity has had the use or benefit of goods and services provided,
but not yet paid for them. As such, it preserves cash resources within the
business and is added back to profit before tax. A decrease in trade
payables indicates that more payables have been paid off, and will
therefore be deducted from profit before tax as a cash outflow.
In order to prepare a statement of cash flows, information from the current and
prior year statement of financial position together with the current year
statement of profit or loss is used.
The following financial statements provide the source data for the requirements
of Test your understanding questions 2–7 inclusive within this chapter.
