ACCA F3 (INT) Financial Accounting - 2010 - Study text - Emile Woolf Publishing
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Chapter 14: Statements of cash flows
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Example
The plant and equipment of PM Company at the beginning and the end of its
financial year were as follows:
Atcost
Accumulated
depreciation
Netbook
value
$ $ $
Beginningoftheyear 180,000 (30,000) 150,000
Endoftheyear 240,000 (50,000) 190,000
There were no disposals of plant and equipment during the year.
The cash paid for plant and equipment in the year (= purchases) may be calculated
in either of the following ways.
$ $
Atcostattheendoftheyear 240,000NBVattheendoftheyear 190,000
Atcostatthebeginningoftheyear 180,000NBVatthebeginningoftheyear 150,000
Purchases 60,000IncreaseinNBV 40,000
Depreciation(50,000–30,000) 20,000
Purchases 60,000
When there are disposals during the year
When there are disposals of non-current assets during the year, the purchases of
non-current assets may be calculated as follows:
$
Assets at cost at the end of the year A
Assets at cost at the beginning of the year B
(A – B)
Disposals during the year: original asset cost C
Purchases A – B + C
Example
The motor vehicles of PM Company at the beginning and the end of its financial
year were as follows:
Atcost
Accumulated
depreciation
Netbook
value
$ $ $
Beginningoftheyear 150,000 (105,000) 45,000
Endoftheyear 180,000(88,000) 92,000
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During the year a vehicle was disposed of for a gain of $3,000. The original cost of
this asset was $60,000.
The cash paid for plant and machinery in the year (= purchases) may be calculated
as follows.
$
Assetsatcostattheendoftheyear 180,000
Assetsatcostatthebeginningoftheyear 150,000
30,000
Disposalsduringtheyear:originalassetcost 60,000
Purchases 90,000
When there are revaluations during the year
When there are revaluations of non-current assets during the year, the purchases of
non-current assets should be calculated as follows.
Purchases of property, plant and equipment $
Property, plant and equipment:
At cost or valuation, at the end of the year A
At cost or valuation, at the beginning of the year B
A – B
Add: Cost/re-valued amount of assets disposed of in the year C
Subtract: Any asset revaluation during the year (D)
Purchases during the year (A – B) + C – D
Example
The statements of financial position of Grand Company at the beginning and end of
Year 1 include the following information:
Property,plantandequipment BeginningofYear1 EndofYear1
$ $
Atcost/re‐valuedamount 1,400,0001,900,000
Accumulateddepreciation 350,000 375,000
Carryingvalue 1,050,0001,525,000
During the year, some property was re-valued upwards by $200,000. An item of
equipment was disposed of during the year at a profit of $25,000. This equipment
had an original cost of $260,000 and accumulated depreciation of $240,000 at the
date of disposal.
Chapter 14: Statements of cash flows
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Purchases of property, plant and equipment during the year were as follows:
$
Atcost/re‐valuedamount,attheendoftheyear 1,900,000
Atcost/re‐valuedamount,atthebeginningoftheyear 1,400,000
500,000
Add:Costofassetsdisposedofintheyear 260,000
Subtract:Assetrevaluationduringtheyear (200,000)
Purchasesduringtheyear 560,000
6.2 Cash from disposals of non-current assets
A statement of cash flows should include the net cash received from any disposals
of non-current assets during the period.
This might have to be calculated from the gain or loss on disposal and the carrying
amount of the asset at the time of its disposal.
Disposal of property, plant and equipment
Property, plant and equipment: $
At cost (or re-valued amount at the time of disposal) A
Accumulated depreciation, at the time of disposal (B)
Net book value/carrying amount at the time of disposal (A – B)
Gain or (loss) on disposal C
Net disposal value (= assumed cash flow)
(A – B) + or – C
If there is a gain on disposal, the net cash from the disposal is more than the net
book value.
If there is a loss on disposal the net cash from the disposal is less than the net book
value.
Example
During an accounting period, an entity disposed of some equipment and made a
gain on disposal of $6,000. The equipment originally cost $70,000 and at the time of
its disposal, the accumulated depreciation on the equipment was $56,000.
What was the amount of cash obtained from the disposal of the asset?
Answer
Disposalofequipment
$
Atcost 70,000
Accumulateddepreciation,atthetimeofdisposal (56,000)
Netbookvalue/carryingamountatthetimeofdisposal 14,000
Gainondisposal 6,000
Netdisposalvalue(=assumedcashflow) 20,000
This cash flow would be included in the cash flows from investing activities.
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Exercise 3
At 1 January Year 6, the property, plant and equipment in the statement of financial
position of NC Company amounted to $329,000 at cost or valuation. At the end of
the year, the property, plant and equipment was $381,000 at cost or valuation.
During the year, a non-current asset that cost $40,000 (and has not been re-valued)
was disposed of at a loss of $4,000. The accumulated depreciation on this asset at the
time of disposal was $21,000.
Another non-current asset was re-valued upwards during the year from $67,000
(cost) to $102,000.
Required
Calculate the following amounts, for inclusion in the cash flows from investing
activities section of the company’s statement of cash flows for Year 6:
the purchase of property, plant and equipment
proceeds from the sale of non-current assets.
Chapter 14: Statements of cash flows
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Cash flows from financing activities
Cash from new share issues
Cash from new loans/cash used to repay loans
Dividend payments to equity shareholders
7 Cash flows from financing activities
The third part of a statement of cash flows, after cash flows from investing activities,
is cash flows from financing activities.
This section of the statement of cash flows includes:
Cash received from issuing shares
Cash received from new loans or issues of bonds
Cash paid to repay a loan or redeem bonds
Usually, dividends paid to equity shareholders.
7.1 Cash from new share issues
The cash raised from new share issues can be established by comparing the equity
share capital and the share premium in the statements of financial position at the
beginning and the end of the year.
$
Share capital + Share premium at the end of the year A
Share capital + Share premium at the beginning of the year B
= Cash obtained from issuing new shares in the year (A – B)
Example
The statements of financial position of Entity PLM at 1 January and 31 December
included the following items:
1January
Year1
31December
Year1
$ $
Equitysharesof$1each 600,000 750,000
Sharepremium 800,000 1,100,000
The cash obtained from issuing shares during the year is calculated as follows.
$
Sharecapital+SharepremiumattheendofYear1 1,850,000
Sharecapital+SharepremiumatthebeginningofYear1 1,400,000
=CashobtainedfromissuingnewsharesinYear1 450,000
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7.2 Cash from new loans/cash used to repay loans
Cash from new loans or cash paid to redeem loans in the year can be calculated
simply by looking at the difference between the liabilities for loans and bonds at the
beginning and the end of the year.
An increase in loans or bonds means there has been an inflow of cash.
A reduction in loans or bonds means there has been a payment (outflow) of cash.
Remember to add any loans, loan notes or bonds repayable within one year (current
liability) to the loans, loan notes or bonds repayable after more than one year (non-
current liability) to get the total figure for loans, loan notes or bonds.
$
Loans at end of year (current and non-current liabilities) A
Loans at beginning of year (current and non-current liabilities) B
If A>B, cash inflow from loans in the year (A – B)
If B>A, cash outflow to repay loans in the year
Note: The same calculation can be applied to bonds or loan notes that the company
might have issued. Bonds and loan notes are long-term debt.
Example
The statements of financial position of Entity PLM at 1 January and 31 December
included the following items:
1JanuaryYear1 31DecemberYear1
$ $
Loansrepayablewithin12months 760,000 400,000
Loansrepayableafter12months 1,400,000 1,650,000
The cash flows relating to loans during the year are calculated as follows.
$
LoansoutstandingattheendofYear1 2,050,000
LoansoutstandingatthebeginningofYear1 2,160,000
=Netloanrepaymentsduringtheyear(=cashoutflow) 110,000
7.3 Dividend payments to equity shareholders
These should be the final dividend payment from the previous year and the interim
dividend payment for the current year. The dividend payments during the year are
shown in the statement of changes in equity (SOCIE). However, in an examination
question you might be expected to calculate dividend payments from figures for
retained earnings and the profit after tax for the year.
Chapter 14: Statements of cash flows
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If there have been no transfers to the retained earnings reserve from the revaluation
reserve in the year, the equity dividend payments can be calculated as follows:
$
Retained earnings reserve at the beginning of the year A
Profit for the year after tax B
Increase in the retained earnings reserve A + B
Retained earnings reserve at the end of the year (C)
Equity dividend payments (A + B) – C
Example
From the following information, calculate the cash flows from investing activities
for Penron Company in Year 1.
BeginningofYear1EndofYear1
$ $
Sharecapital(ordinaryshares) 400,000500,000
Sharepremium 275,000615,000
Retainedearnings 390,000570,000
1,065,0001,685,000
Loansrepayableaftermorethan12months 600,000520,000
Loansrepayablewithin12monthsorless 80,00055,000
The company made a profit of $420,000 for the year after taxation.
Required
Calculate for year 1, for inclusion in the statement of cash flows:
(a) the cash from issuing new shares
(b) the cash flows received or paid for loans
(c) the payment of dividend to ordinary shareholders.
Answer
Workings
Proceedsfromnewissueofshares
$
Sharecapitalandsharepremium:
Attheendoftheyear(500,000+615,000) 1,115,000
Atthebeginningoftheyear(400,000+275,000) 675,000
Proceedsfromnewissueofsharesduringtheyear 440,000
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Repaymentofloans
$
Loansrepayable:
Attheendoftheyear(520,000+55,000) 575,000
Atthebeginningoftheyear(600,000+80,000) 680,000
Repaymentofloansduringtheyear 105,000
Paymentofdividends
$
Retainedearningsatthebeginningoftheyear 390,000
Profitaftertaxationfortheyear 420,000
810,000
Retainedearningsattheendoftheyear 570,000
Dividendspaidduringtheyear 240,000
Cash flows from financing activities can now be presented as follows.
Cashflowsfromfinancingactivities
$ $
Proceedsfromissueofshares 440,000
Repaymentofloans (105,000)
Dividendspaidtoshareholders (240,000)
Netcashfromfinancingactivities95,000
Practice multiple choice questions
1 A draft statement of cash flows contains the following calculation of net cash inflow
from operating activities.
$m
Operating profit 18
Depreciation 4
Decrease in inventories (3)
Increase in trade and other receivables (5)
Reduction in trade payables 2
Net cash flow from operating activities 16
Which of the following corrections need to be made to the calculation?
1 Depreciation should be deducted, not added
2 Decrease in inventories should be added, not deducted
3 Increase in receivables should be added, not deducted
4 Reduction in payables should be deducted, not added
Chapter 14: Statements of cash flows
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A 1 and 3
B 2 and 4
C 3 and 4
D 1 and 2
(2 marks)
2 A limited liability company sold a building at a loss.
How will this transaction be treated in the company’s statement of cash flows?
Proceeds of sale Profit on sale
A Cash inflow under
Financing activities
Added to profit in
calculating cash flow from
operating activities
B Cash inflow under
Investing activities
Deducted from profit in
calculating cash flow from
operating activities
C Cash inflow under
Investing activities
Added to profit in
calculating cash flow from
operating activities
D Cash inflow under
Financing activities
Deducted from profit in
calculating cash flow from
operating activities
(2 marks)
3 Which of the following items might appear as items in the statement of cash flows of a
company?
1 Tax paid
2 Revaluation of non-current assets
3 Bonus issue of shares
4 Rights issue of shares
A 1 and 2
B 2 and 4
C 2 and 3
D 1 and 4
(2 marks)
4 The following items are included in the statement of financial position of a company as
at 1 January and 31 December in the same year. The company’s financial year ends on
31 December.
Sharecapital Sharepremium Non‐current
liabilities:loans
Current
liabilities:loans
$ $ $ $
At1January 300,000 100,000 60,000 15,000
At31Dec 500,000 300,000 40,000 20,000
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From this information, what cash flows would be included in ‘cash flows from
financing activities’ in the company’s statement of cash flows for the year?
A Cash inflow of $200,000 for issue of share capital and cash outflow of $20,000 for
repayment of loans
B Cash inflow of $400,000 for issue of share capital and cash outflow of $20,000 for
repayment of loans
C Cash inflow of $200,000 for issue of share capital and cash outflow of $15,000 for
repayment of loans
D Cash inflow of $400,000 for issue of share capital and cash outflow of $15,000 for
repayment of loans
(2 marks)