I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

PART F: PREPARING BASIC FINANCIAL STATEMENTS 

 

388

 

1.13.1 Direct method 

STATEMENT OF CASH FLOWS (DIRECT METHOD) 

YEAR ENDED 20X7 

 

 

$m    

 

$m    

Cash flows from operating activities 

 

 

Cash receipts from customers 

 

30,330 

 

Cash paid to suppliers and employees 

  

(27,600) 

 

Cash generated from operations 

 

2,730 

 

Interest paid 

 

 (270) 

 

Income taxes paid 

 

     (900) 

 

Net cash from operating activities 

 

 

1,560 

Cash flows from investing activities 

 

 

Purchase of property, plant and equipment  

 

 (900) 

 

Proceeds from sale of equipment 

 

20 

 

Interest received 

 

200 

 

Dividends received 

      200 

 

Net cash used in investing activities 

 

 

 (480) 

Cash flows from financing activities 

 

 

Proceeds from issuance of share capital 

 

250 

 

Proceeds from long-term borrowings 

 

250 

 

Dividends paid* 

 

 (1,290) 

 

Net cash used in financing activities 

 

 

 (790) 

Net increase in cash and cash equivalents 

 

 

290 

Cash and cash equivalents at beginning of period  

 

  120 

Cash and cash equivalents at end of period  

 

  410 

* This could also be shown as an operating cash flow. 

1.13.2 Indirect method 

STATEMENT OF CASH FLOWS (INDIRECT METHOD) 

YEAR ENDED 20X7 

 

 

$m 

 

$m 

 

Cash flows from operating activities 

 

 

 

Net profit before taxation 

 3,570 

 

 

Adjustments for: 

 

 

 

  Depreciation 

 450 

 

 

  Investment income 

 (500) 

 

 

  Interest expense 

     400 

 

 

Operating profit before working capital changes 

 3,920 

 

 

  Increase in trade and other receivables 

 (500) 

 

 

  Decrease in inventories 

 1,050 

 

 

  Decrease in trade payables 

 (1,740) 

 

 

Cash generated from operations 

 2,730 

 

 

Interest paid 

 (270) 

 

 

Income taxes paid 

    (900) 

 

 

Net cash from operating activities 

 

 

1,560 

 

Cash flows from investing activities 

 

 

 

Purchase of property, plant and equipment 

 (900) 

 

 

Proceeds from sale of equipment  

 20 

 

 

Interest received 

 200 

 

 

Dividends received 

     200 

 

 

 

 

 

Net cash used in investing activities 

 

 

(480) 

 

 

 

 

Cash flows from financing activities 

 

 

 

Proceeds from issuance of share capital 

 250 

 

 

Proceeds from long-term borrowings 

 250 

 

 

Dividends paid* 

 (1,290) 

 

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CHAPTER 22  

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  STATEMENTS OF CASH FLOWS 

 

389 

 

 

$m 

 

$m 

 

 

 

 

Net cash used in financing activities 

 

 (790) 

 

Net increase in cash and cash equivalents 

 

 290 

 

Cash and cash equivalents at beginning of period (Note) 

 

  120 

 

Cash and cash equivalents at end of period (Note) 

 

  410 

 

 

 

 

* This could also be shown as an operating cash flow. 

 

 

The following note is required to both versions of the statement. 

Note. Cash and cash equivalents 

Cash and cash equivalents consist of cash on hand and balances with banks, and investments in money 

market instruments. Cash and cash equivalents included in the statement of cash flows comprise the 

following statement of financial position amounts. 

 

20X7 

20X6 

 

 

$m 

 

$m 

Cash on hand and balances with banks 

 

40 

 

25 

Short-term investments 

 

370 

  95 

Cash and cash equivalents 

 

410 

 

120 

The company has undrawn borrowing facilities of $2,000, of which only $700 may be used for future 

expansion. 

 

2

   Preparing a statement of cash flows 

You need to be aware of the format of the statement as laid out in IAS 7. Setting out the format is the 

first step. Then follow the step by step preparation procedure.  

 

Note that the following items are treated in a way that might seem confusing, but the treatment is logical 

if you think in terms of cash. 

(a) 

Increase in inventory is treated as negative (in brackets). This is because it represents a cash 

outflow; cash is being spent on inventory. 

(b) An 

increase in receivables would be treated as negative for the same reasons; more receivables 

means less cash. 

(c) 

By contrast, an increase in payables is positive because cash is being retained and not used to 

settle accounts payable. There is therefore more of it. 

 EXAM FOCUS POINT 

In essence, preparing a statement of cash flows is very straightforward. You should learn the format (the 

ACCA examining team emphasised the need to learn the format in a recent ACCA Conference) and 

apply the steps noted in the example below. Although you may not have to prepare a full statement of 

cash flows in your exam, the ACCA examining team has highlighted the importance of practising full 

questions so that you fully understand the underlying principles. 

The ACCA examining team has advised students to think of the cash effect of transactions. Students 

also need to be aware of what goes where, a common error being to confuse investing and financing 

cash flows. 

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