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chapter 20
group cash flow statements

“Anyone who lives within their means


suffers from a lack of imagination”

tom clendon lecturer

Chapter 20 Group Cash Flow Statements – from “A student’s guide to group accounts” by Tom
Clendon as published by Kaplan.
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What’s new?

The second edition of my book “A student’s guide to group accounts” published by


Kaplan, has nineteen chapters that set out how to prepare the group statement of
financial position and how to prepare the group statement of total comprehensive
income.

This brand new chapter – which is only available on line - is all about the preparation
of the group cash flow statement.

In order to prepare a statement of group cash flows you will need know two things.

1. The format of the cash flow statement.


2. How to calculate a cash flow and where in the cash flow statement that cash
in or out flow is reported.

1. The format of the cash flow statement

In principle the format of the cash flow statement is quite simple as IAS7 Statement
of Cash Flows (IAS7) proscribes only three headings. These are Operating Activities,
Investing Activities and Financing Activities. The exact order of the items shown
underneath these three headings is not formally proscribed.

In preparing a statement of cash flows you are going to have remember the format
as it will not be given in the question. When preparing group cash flows we are only
given the opening and closing group statement of financial positions and the group
statement of total comprehensive income.

There are two alternative formats to the cash flow.

a) The direct method.


b) The indirect method

Chapter 20 Group Cash Flow Statements – from “A student’s guide to group accounts” by Tom
Clendon as published by Kaplan.
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a) The direct method format

Group cash flow format - Direct method


1. Operating Activities $ $

Cash received from customers X


Cash paid to and on behalf of staff (X)
Cash paid to suppliers (X)
Cash paid for other operating expenses (X)
Cash generated X
Interest paid (X)
Taxation paid (X)
Pension contribution paid to defined benefit scheme (X) X

2. Investing Activities

Payments to buy PPE / Intangibles / Investments (X)


Proceeds from sale of PPE / Intangibles / Investments X

Cash paid to buy investments in new subsidiary / associate / JV (X)


Cash / overdraft taken over in new subsidiary X / (X)

Sale proceeds from disposal of shares in subsidiary / associate /JV X


Cash / overdraft passed away on disposal of a subsidiary (X) / X

Dividends received from investments (inc. from associates and JV) X


Capital government grants received X (X)

3. Financing Activities

Proceeds from an equity share issue X


Dividends paid (X)
Dividends paid to the NCI (X)
Control to control cash proceeds when NCI increases X
Control to control cash paid when NCI decreases (X)

Proceeds from the issue of new debt / debentures / loan stock X


Repayment of debt / redemption of debentures / loan stock (X)
Capital element of repayment of lease obligations (X) X/(X)

Change in cash and cash equivalents X/(X)


Opening cash and cash equivalents X/(X)
Closing cash and cash equivalents X/(X)

Chapter 20 Group Cash Flow Statements – from “A student’s guide to group accounts” by Tom
Clendon as published by Kaplan.
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Explanation of the direct method

Unsurprisingly cash inflows are reported as positive numbers whilst cash out flows
are reported as negative numbers, and so in brackets. I make this point because
when I am marking scripts I know that too many candidates make this error. To
quote from a recent ACCA P2 examiner’s report “Consolidated statement of cash
flows questions - candidates often place the wrong sign on the correct figure. For
example, a deduction is made in the statement rather than an addition. If this is a
simple subtraction of two figures and the candidate puts the wrong sign on the
resultant figure then it is difficult to award marks.”

Operating Activities (direct method)

The cash flows reported in Operating Activities are the sort of cash flows that you
would expect, in that they relate to the day to day operating activities of the group.
Cash is received from customers and then paid to suppliers, staff and for other
expenses. It is all very logical. It is worth noting that included in Operating Activities
section is the taxation paid and interest paid.

At this stage I think it worth pointing out that the taxation paid will not be the same
figure as the taxation charged in the profit or loss. On the same basis the interest
paid may not be the same as the finance cost charged in the statement of profit or
loss. The basic reason for this is simple. The cash flow statement is reporting cash
flows. The amount of cash paid. Whereas the statement of profit or loss is reporting
the expense of the period which takes into account the accruals concept. For
example the tax charge to profit or loss will include an adjustment for deferred
taxation which is not a cash item.

Investing Activities

The cash flows reported in Operating Activities are cash flows that relate to non-
current assets. After all when we talk about investing in the business it means buying
these type of assets! So it is natural to include the cash spent buying or constructing
property plant and equipment and intangible assets as well as buying investments in
subsidiaries, associates and joint ventures as cash outflows in Investing Activities.
Of course if any of these non-current assets are sold for cash or generate a cash
return (e.g. dividends received) then these cash inflows are also reported in
Investing Activities.

Financing Activities

As you may know from your financial management studies there are two ways of
financing the long term capital of a business, debt and equity.

The financing activities therefore includes those cash flows with equity i.e. the
shareholders. These are primarily to do with the issue of shares for cash and the
payment of dividends but also include the cash flows when there are control to
control transactions that increase or decrease the NCI.

Chapter 20 Group Cash Flow Statements – from “A student’s guide to group accounts” by Tom
Clendon as published by Kaplan.
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The financing activities also include the cash flows with debt e.g. those who have
lent money to the business. These include the cash received following the issue of
debentures and the cash paid back to redeem those loans. Where lease obligations
are recognised as liabilities, so the loan repayments on lease obligations are also
reported as a cash out flow under financing activities.

Cash and cash equivalents.

The cash flow statement reconciles to the changes in cash and cash equivalents.
These comprise cash on hand and demand deposits, together with short-term, highly
liquid investments that are readily convertible to a known amount of cash, and that
are subject to an insignificant risk of changes in value.

IAS 7 does not define ‘short term’ but does state ‘an investment normally qualifies as
a cash equivalent only when it has a short maturity of, say, three months or less from
the date of acquisition’.

Consequently, equity or other investments which do not have a maturity date are
excluded from cash equivalents unless they are, in substance, cash equivalents.

This three-month time limit is somewhat arbitrary but is consistent with the concept
of insignificant risk of changes in value and a purpose of meeting short-term cash
commitments.

Chapter 20 Group Cash Flow Statements – from “A student’s guide to group accounts” by Tom
Clendon as published by Kaplan.
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b) The indirect format

The other cash flow statement format is known as the indirect method. This only
differs from the direct method in the initial part of the Operating Activities section.

Group cash flow format - Indirect method


1. Operating Activities

Profit before tax X


Less investment income (X)
Less income from associate / joint venture (X)
Plus finance cost X
Depreciation X
Less capital government grant released (X)
Amortisation X
Impairment loss (charged in profit or loss) e.g. goodwill X
Loss on disposal of assets (profit) X / (X)
Increase in provisions included in profit before tax (decrease) X / (X)
Foreign exchange loss (gain) at the individual company stage X / (X)
Current service cost / Past service cost / Settlement & curtailments X
Share based payments X
Change in working capital
Increase / decrease in inventory (X) / X
Increase / decrease in receivables and prepayments (X) / X
Increase / decrease in trade payables and accruals X / (X)

Cash generated X

Interest paid (X)


Taxation paid (X)
Pension contribution paid to defined benefit scheme (X) X

2. Investing Activities

Payments to buy PPE / Intangibles / Investments (X)


Proceeds from sale of PPE / Intangibles / Investments X

Cash paid to buy investments in new subsidiary / associate / JV (X)


Cash / overdraft taken over in new subsidiary X / (X)

Sale proceeds from disposal of shares in subsidiary / associate /JV X


Cash / overdraft passed away on disposal of a subsidiary (X) / X

Dividends received from investments (inc. from associates and JV) X


Capital government grants received X (X)

Chapter 20 Group Cash Flow Statements – from “A student’s guide to group accounts” by Tom
Clendon as published by Kaplan.
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3. Financing Activities

Proceeds from an equity share issue X


Dividends paid (X)
Dividends paid to the NCI (X)
Control to control cash proceeds when NCI increases X
Control to control cash paid when NCI decreases (X)

Proceeds from the issue of new debt / debentures / loan stock X


Repayment of debt / redemption of debentures / loan stock (X)
Capital element of repayment of lease obligations (X) X/(X)

Change in cash and cash equivalents X/(X)


Opening cash and cash equivalents X/(X)
Closing cash and cash equivalents X/(X)

Chapter 20 Group Cash Flow Statements – from “A student’s guide to group accounts” by Tom
Clendon as published by Kaplan.
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Explanation of the indirect method

In what initially seems a little bizarre for something called a cash flow statement, the
indirect method opens up, not with a cash at all but rather Profit Before Tax. The
Profit Before Tax is then reconciled to the cash generated by adjusting for non-cash
items. From interest paid the rest of the cash flow statement is the same.

In the reconciliation of Profit Before Tax to cash generated (“the reconciliation”) non-
cash expenses charged against profit before tax are added back. Take for example
depreciation as the classic non-cash expense. This has clearly reduced profit but
has not resulted in a cash outflow. So when we are trying to reconcile profit to the
cash generated it is necessary to add back depreciation. Other non-cash expenses
that have been charged in arriving in profit are also added back for example losses
on disposal on non-current assets, finance costs and increases in provisions.

On the same basis items of income which boost profit but are not cash flows are
deducted in the reconciliation. Examples of income that are deducted include profit
on the disposal of non-current assets or decreases in provisions.

Also included in the reconciliation part of the indirect method operating activities are
the changes in working capital. For example if the business buys inventory then this
transaction on its own has no impact on profit but can result in a reduction in cash
thus an increase in inventory year on year is “bad” for cash flow and the difference is
a negative in the reconciliation. On the same logic receiving cash from a receivable
also has no impact on the profit but is “good” for cash as it results in a cash inflow
and so for any decrease in receivables year on year the difference is a positive in the
reconciliation. Finally paying a trade creditor has no impact on profit but results in a
reduction in cash so any decrease in trade payables year on year is “bad” for cash
and the difference is a negative in the reconciliation.

Chapter 20 Group Cash Flow Statements – from “A student’s guide to group accounts” by Tom
Clendon as published by Kaplan.
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2. How to calculate a cash flow and where in the cash flow statement that cash
in or out flow is reported

Now that we have looked at the format of cash flows we can now turn our attention
as to how to calculate cash flows. Basically cash flows are derived as missing
figures. Ascertaining cash flows at its simplest do not deserve a complicated
working.

For example if the finance cost charged in profit is $100 but at the year-end there is
an accrual for interest owing of $5 then it seems natural to conclude that the interest
actually paid and an operating cash outflow is only $95 (being $100 - $5) as all of the
expense has been paid.

Where the cash flow needs a proper working because it is not just involving two
figures then it is necessary to reconcile the opening balance of an item to its closing
balance showing all the reasons why the item has either increased or decreased. In
this process of making the opening and closing balances reconcile the cash flow will
be revealed as the missing / balancing figure.

To quote from a recent ACCA P2 examiner’s report - “Consolidated statement of


cash flows questions - It is important as always to show all workings. For example,
very few candidates correctly calculated the income taxes paid figure but there were
several marks for this calculation, which were often awarded in the workings in the
scripts. Many of the figures in the statement do not need workings but where they
do, it is important to show them.”

Chapter 20 Group Cash Flow Statements – from “A student’s guide to group accounts” by Tom
Clendon as published by Kaplan.
10

Cash Flow Exercise to show the basic technique


Calculate the cash flows given the following extracts from statements of financial
position drawn up at the year ended 31 December 20X0 and 20X1.

20X1 20X0
Non-Current Assets $ $
Property Plant & Equipment (PPE) 300 100

During the year depreciation charged was $20, a revaluation surplus of $60 was
recorded, PPE with a CV of $15 were disposed of and PPE acquired subject to
finance leases had a CV of $30.

Required: How much cash was spent on PPE in the period?

Answer to cash flow exercise


Well we know that the cash spent on PPE will be an outflow and an investing activity.
The working showing the reconciliation is as follows.

PPE Explanation
Opening balance 100 From the opening s of fp
Depreciation (20) Depreciation reduces the carrying value
Surplus 60 The revaluation gain increases carrying value
Disposal (15) The carrying value of the asset being sold reduces
Finance lease 30 A new finance lease means there is more PPE
155
Cash - balancing figure 145
Closing balance 300 From the closing s of fp

The explanations are provide for your benefit and it would be unnecessary to include
in an examination answer.

Incidentally in terms of exam technique never show your workings like this

100-20+60-15+30-300 = 145

This row format of numbers does not lend itself to any form of reference or
annotation as to the source of the numbers so is difficult to mark.

The working can be shown as a T account. T accounts are perhaps a little old
fashioned and can lead to errors unless you are already very proficient with double
entry. This working is shown as a T account in the double entry section.

Chapter 20 Group Cash Flow Statements – from “A student’s guide to group accounts” by Tom
Clendon as published by Kaplan.
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Group cash flow issues


Let me take you through four cash flow issues that specific to group accounts.

1. Dividends paid to the NCI.

In a group cash flow statement intercompany cash flows are not reported. The whole
basis of preparing group accounts is to show the group as if it were a single entity.
Thus any dividends paid by the subsidiary that are received by the parent are neither
a cash out flow or inflow of the group. However the dividend that the subsidiary pays
out to the NCI is a cash out flow and is reported in Financing Activities as it is a cash
transaction with equity. If the group statement of changes in equity is not given in the
question then the dividends paid to the NCI can be ascertained as a balancing figure
of the NCI.

Cash Flow Exercise – dividend paid to the NCI


Calculate the cash flow given the following extracts from statements of financial
position drawn up at the year ended 31 December 20X0 and 20X1.

20X1 20X0
Equity $ $
Non-controlling interest 840 440

In the group statement of comprehensive income, the total comprehensive income


attributable to the NCI was $500. During the year the parent acquired more shares in
the subsidiary and this changed the NCI by $60.

Required: How much was the cash dividend paid to the non-controlling
interest?

Answer dividend paid to the NCI

The dividend paid to the NCI is cash out flow and a financing activity.
The working is as follows.

NCI Explanation
Opening balance 440 From the opening s of fp
Profit attributable to the NCI 500 Profit increases equity / NCI
Reduction in the NCI (60) Parent buys out the NCI (control to control)
880
Cash - balancing figure 40
Closing balance 840 From the closing s of fp

Chapter 20 Group Cash Flow Statements – from “A student’s guide to group accounts” by Tom
Clendon as published by Kaplan.
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2 Dividends received from equity accounted investments (Associates and


Joint Ventures)

The application of equity accounting means that in the group statement of


comprehensive income and the group statement of financial position the share of
profit has been recognised. In the group statement of cash flows we want to have
reported the cash flow received as a return on such investments! The cash that the
group will receive will be in the form of dividends. This is a cash inflow and as return
on an investment will be reported in investing activities.

The dividend received from the associate (or joint venture) will be ascertained as a
balancing figure when reconciling the opening and closing balances of the carrying
value of the equity accounted investment in the group accounts.

Cash Flow Exercise – dividend received from an associate

Calculate the cash flow given the following extracts from statements of financial
position drawn up at the year ended 31 December 20X0 and 20X1.

20X1 20X0
Non-Current Asset $ $
Investment in associate undertaking 500 200

The group statement of profit or loss reported “Income from Associate Undertakings’
of $750.

Required: How much was the cash dividend received by the group?
Cash in and an investing activity.

Answer – dividend received from an associate

The dividend received from an associate is a cash inflow and an investing activity.
The working is as follows.

Investment in the associate Explanation


Opening balance 200 From the opening s of fp
Plus the % of profit 750 Profit increases the asset
950
Cash - balancing figure 450
Closing balance 500 From the opening s of fp

Chapter 20 Group Cash Flow Statements – from “A student’s guide to group accounts” by Tom
Clendon as published by Kaplan.
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3 Acquisition or disposal of a subsidiary.

When a parent buys shares in an entity such that the parent gains control then a
subsidiary has been acquired and the cash element of the consideration paid is a
cash outflow and reported in investing activities. In addition the cash and cash
equivalents held by the new subsidiary that has been taken over will flow into the
group and also be reported in investing activities.

When a parent sells part or all of an investment that results in control being lost this
means the parent has disposed of an investment and the cash element of the
consideration received, a cash inflow and reported in investing activities. In addition
the cash and cash equivalents held by the old subsidiary will flow out of the group
and also be reported in investing activities.

However there is an all pervading complication when there has been an acquisition
of a subsidiary as the business combination will mean that the group has more
goodwill, more NCI, and more of each asset and each liability. This means that when
we are reconciling any opening or closing balance to ascertain the cash flow as the
balancing figure we will have to add the impact of the acquisition of the subsidiary on
that item.

Now the same all pervading complication also arises when there has been a
disposal of a subsidiary as the disposal results in the group having less goodwill,
NCI, assets and liabilities. This means that when we are reconciling any opening or
closing balance to ascertain the cash flow as the balancing figure we will have to
deduct the impact of the disposal of the subsidiary on that item.

,
Cash Flow Exercise – including the impact of an acquisition and disposal of a
subsidiary in the period

Calculate the cash flow given the following extracts from statements of financial
position drawn up at the year ended 31 December 20X0 and 20X1.
20X1 20X0
Non-Current Assets $ $
Property Plant & Equipment 600 450

During the year depreciation charged was $200, and the group acquired one
subsidiary with PPE of $300, and disposed of another with PPE of $10.

Required: How much cash was spent on PPE in the period?

Chapter 20 Group Cash Flow Statements – from “A student’s guide to group accounts” by Tom
Clendon as published by Kaplan.
14

Answer Cash Flow Exercise – including the impact of an acquisition and


disposal of a subsidiary in the period

The payment to buy PPE is a cash outflow and an investing activity.


The working is as follows.

PPE
Opening balance 450 From the opening s of fp
Depreciation (200) Depreciation reduces the asset
PPE acquired in the new sub 300 The new sub results in more PPE
PPE lost on disposal of sub (10) The disposal of the sub results in less PPE
540
Cash - balancing figure 60
Closing balance 600 From the closing s of fp

Chapter 20 Group Cash Flow Statements – from “A student’s guide to group accounts” by Tom
Clendon as published by Kaplan.
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4 Foreign exchange differences

Now I hope you saying to yourself – hang on but foreign exchange differences are
not cash flows! Well you are correct! Foreign exchange differences, whether they
arise at the individual or group stage, are like depreciation in that they are not cash
flows themselves but are necessary to be included in reconciliations when we are
ascertaining cash flows.

You know how when the group acquires a subsidiary during the accounting period it
means that in the group statement of comprehensive income there is the need to
make adjustments all over the place for time apportioning, well it is like that in a
group cash flow where there is an overseas subsidiary! Here a lot of exchange
differences are thrown up, not only on assets and liabilities but also on goodwill and
NCI, so whenever any of these are being reconciled to ascertain the cash flow as a
balancing figure their exchange difference will also have to be taken into account.
Foreign exchange gains increase assets but decrease liabilities. Foreign exchange
losses decrease assets and increase liabilities.

When the indirect method for operating activities is used and there has been a
foreign exchange loss (gain) at the individual company stage correctly recognised in
profit or loss then this has to added back (deducted) just like depreciation as they are
both non-cash expenses.

Cash Flow Exercise – including the impact of a foreign exchange difference

Calculate the cash flow given the following extracts from statements of financial
position drawn up at the year ended 31 December 20X0 and 20X1.

20X1 20X0
$ $
Non-current liability 1,000 3,500
Loan

The loan is denominated in a foreign currency, and a loss of $500 has been
recorded on the retranslation.

Required: How much cash was spent repaying the loan?

Answer to Cash Flow Exercise – including the impact of a foreign exchange


difference

Loan Explanation
Opening balance 3,500 From the opening s of fp
Foreign currency exchange loss 500 The loss will increase the liability
4,000
Cash - balancing figure 3,000
Closing balance 1,000 From the closing s of fp

Chapter 20 Group Cash Flow Statements – from “A student’s guide to group accounts” by Tom
Clendon as published by Kaplan.
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Mind Map

Format

Indirect Direct
method
Operating method
(reconciliation Activities
PBT)

NCA NCA
payments to
Investing sale
buy (out) Activities proceeds
or returns
(in)

Debt Equity
borrow (in) or
Financing Dividends
repay (out) Activities paid (out)
proceeds
from
share
issue (in)
control to
control
(in or out)

Cash and cash


equivalents

Chapter 20 Group Cash Flow Statements – from “A student’s guide to group accounts” by Tom
Clendon as published by Kaplan.
17

Double entry
All the reconciliation workings to ascertain cash flow as a balancing figure can of
course be explained in double entry terms – indeed they are really old fashioned T
accounts just turned into a vertical column. I guess if you really love double entry you
would realised that a long time ago. Let us re-examine the original exercise.

Cash Flow Exercise to show the technique


Calculate the cash flows given the following extracts from statements of financial
position drawn up at the year ended 31 December 20X0 and 20X1.

20X1 20X0
Non-Current Assets $ $
Property Plant & Equipment (PPE) 300 100

During the year depreciation charged was $20, a revaluation surplus of $60 was
recorded, PPE with a CV of $15 were disposed of and PPE acquired subject to
finance leases had a CV of $30.

Required: How much cash was spent on PPE in the period?

PPE (carrying value) account

$ $
Opening balance 100 Depreciation 20
Revaluation surplus 60 Disposal 15
Finance lease 30
Cash – balancing figure 145 Closing balance 300
335 335

The opening balance of $100 is a debit because PPE is an asset and assets are
debit balances

Depreciation is an expense that is charged to profit (debit) and reduces the carrying
value of the asset (credit).

The revaluation surplus is a gain that is recognised in equity and other


comprehensive income (credit) and increases the asset (debit).

The disposal reduces the carrying value of the asset (credit) and is transferred to a
disposal account (debit).

New finance leases represent new assets (debit) and new liabilities (credit).

The closing balance is a credit as it has to be a debit when is brought down to be the
opening balance of next year.

Chapter 20 Group Cash Flow Statements – from “A student’s guide to group accounts” by Tom
Clendon as published by Kaplan.
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Technical corner

Usefulness of cash flow statements

On the one hand you need to know how to prepare a group cash flow statement but
let us also consider how useful they are.

A statement of cash flows provides information that is not available from statements
of financial position and statements of comprehensive income.

Cash flow statements can be the basis of a business valuation. Analysts and other
users of financial information often, formally or informally, develop models to assess
and compare the present value of the future cash flow of entities.

Cash flow statements can give an indication of the relationship between profitability
and cash generating ability, and thus of the quality of the profit earned. A business
that year on year reports a profit but never generates cash is said to how low quality
profits. The profit may be generated through the manipulation of estimates and
polices.

Cash flow is free from judgement of value and the subjective allocation of the
accruals concept. It cannot easily be manipulated and is not affected by accounting
policies. It is reliable.

A statement of cash flow in conjunction with a statement of financial position


provides information on liquidity, solvency and adaptability. The statement of
financial position is often used to obtain information on liquidity, but the information is
incomplete for this purpose as the statement of financial position is drawn up at a
particular point in time.

Limitations of the statement of cash flows

Of course nothing is perfect and we can also consider the limitations of cash flow
statements.

Statements of cash flows are based on historical information and therefore do not
provide complete information for assessing future cash flows. Users are much more
interested in future cash flows.

There is some scope for manipulation of cash flows. For example, a business may
delay paying suppliers until after the year-end, or it may structure transactions so
that the cash balance is favourably affected e.g. a sale and lease back, or a raising
finance by issuing zero coupon bonds which are redeemable at a large premium.

Deliberate manipulation is possible e.g. assets may be sold and then immediately
repurchased or proceeds from raising funds or selling PPE classifies in operating
activities. The application of the substance over form principle and an understanding
of the format should alert users of the financial statements to the true nature of such
arrangements.

Chapter 20 Group Cash Flow Statements – from “A student’s guide to group accounts” by Tom
Clendon as published by Kaplan.
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Group Cash flow 1

The balances on the group current and deferred tax liabilities were $20m & $40m at
the start of the accounting period and $30m & $25m at the end of the period. During
the year the group had a tax charge in the statement of profit or loss of $60m (which
included $5m relating to an associate) and a tax charge of $15m in the other
comprehensive income. During the year the group sold a subsidiary which had a tax
liability at the date of disposal of $10m.

Required - Calculate how much tax was paid in the year (cash outflow -
operating activities)

Chapter 20 Group Cash Flow Statements – from “A student’s guide to group accounts” by Tom
Clendon as published by Kaplan.
20

Group Cash flow 2

At the start of the accounting period the group had PPE of $400m and at the year-
end $900m. During the period depreciation of $100m was charged, an impairment
loss of $50m recognised, an item sold for $200m on which a profit of $120m was
recognised in profit or loss and new leases of $15m were entered into. During the
year the group sold a subsidiary which had PPE of $30m. At the year-end there was
an outstanding current liability of $5m in respect of PPE supplied on credit.

Required - Calculate how much was spent on PPE. (cash out flow - investing
activities)

Chapter 20 Group Cash Flow Statements – from “A student’s guide to group accounts” by Tom
Clendon as published by Kaplan.
21

Group Cash flow 3

Equity Retained Other NCI Total


shares earnings reserves
$m $m $m $m $m
Opening balance 100 200 50 60 410
Issue of shares 200 200
New subsidiary acquired 5 5
Total Comprehensive Income 80 15 12 107
Gain realised on disposal 8 (8) Nil
Dividends paid (20) (5) (25)
___ ___ ___ ___ ___
Closing balance 300 268 57 72 697

During the year shares with a fair value of $40m were issued in a share for share
exchange on the acquisition of a new subsidiary with a fair value of the NCI at
acquisition of $5m.
During the year PPE with a carrying value of $30m with a revaluation surplus of $8m
was sold and a profit of $5m was correctly included in the statement of profit or loss.

Required - How many cash flows can you spot !!

Chapter 20 Group Cash Flow Statements – from “A student’s guide to group accounts” by Tom
Clendon as published by Kaplan.
22

Question Weller

Set out below is a summary of the accounts of Weller for the year ended 31
December 20X7.

Consolidated statement of total comprehensive income for the year ended 31


December 20X7.

$000
Revenue 44,754
Cost of sales and other expenses (39,613)
Income from associates 30
Finance cost (note 3) (305)
Profit before tax 4,866
Income tax (2,038)
Profit for the period 2,828

Other comprehensive income: items that may be reclassified to


profit or loss in future periods
Group exchange difference on retranslation of foreign subsidiary 302
(note 5)
----------
Total comprehensive income 3,130
----------

Profit for the year attributable to:


Attributable to owners of the parent 2,805
Attributable to Non-controlling interests 23
-----------
Profit for the period 2,828
-----------

Attributable to owners of the parent 3,107


Attributable to Non-controlling interests 23
-------
Total comprehensive income 3,130
-------

Chapter 20 Group Cash Flow Statements – from “A student’s guide to group accounts” by Tom
Clendon as published by Kaplan.
23

Statement of Changes in Group Equity

Shares OCE Retained Earnings NCI Total


$000 $000 $000 $000 $000
Opening balance 7,000 805 6,359 17 14,181
Comprehensive income 302 2,805 23 3,130
Dividends paid (445) (20) (465)
Acquisition of a subsidiary 150 150
-------- ------- ---------- ----- ---------
Closing balance 7,000 1,107 8,719 170 16,996

Consolidated statements of financial position at 31 December

20X7 20X6
Note $000 $000 $000 $000
Non-current assets
Intangible asset goodwill (4&5) 500 85
Tangible assets – PPE (1) 11,157 8,900
Investment in associate 300 280
11,957 9,265
Current assets
Inventories 9,749 7,624
Receivables 5,354 4,420
Investments (30 day bonds) 1,543 741
Cash at bank and in hand 1,013 17,659 394 13,179
----------- ---------- ---------- ----------
29,616 22,444
---------- ----------
Equity and liabilities
Equity share capital 7,000 7,000
OCE 1,107 805
Retained earnings 8,719 6,359
NCI 170 17
----------- ----------
Total equity 16,996 14,181
Non-current liabilities:
Loans (4) 2,102 1,682
Provision for deferred tax 555 689
Pension deficit (3) 735 246

Current liabilities (2) 9,228 5,646


---------- ----------
29,616 22,444

Chapter 20 Group Cash Flow Statements – from “A student’s guide to group accounts” by Tom
Clendon as published by Kaplan.
24

Notes to the accounts

(1) During the period depreciation of $907,000 was charged, There was a
disposal of an item of plant for proceeds of $854,000. At the date of the
disposal the plant had a carrying value of $305,000.

(2) Current liabilities


20X7 20X6
$000 $000
Bank overdraft 1,228 91
Trade payables 4,278 2,989
Tax 3,722 2,566
9,228 5,646

(3) The company has a defined benefit pension fund that it operates on behalf of
its employees. The reconciliation of the pension fund deficit is as follows.

$000
At 31 December 20X6 246
Net finance cost 29
Current service cost 560
Cash contribution (100)
Re-measurement gain/loss Nil
At 31 December 20X7 735

(4) During the year, the company acquired 82% of the issued equity capital of
Hannah for a cash consideration of $1,268,000. The non-controlling interest
is valued using the proportion of net assets method.
$000
PPE 208
Inventories 612
Trade receivables 500
Cash in hand 232
Trade payables (407)
Debenture loans (312)
833

Chapter 20 Group Cash Flow Statements – from “A student’s guide to group accounts” by Tom
Clendon as published by Kaplan.
25

(5) Group exchange gains

Exchange gains on translating the financial statements of a wholly-owned


subsidiary have been taken to equity and comprise differences on the
retranslation of the following:
$000
Goodwill 9
Non-current assets – PPE 100
Inventories 116
Trade receivables 286
Trade payables (209)
302

Required:

Prepare the statement of cash flows for the Weller group for the year ended 31
December 20X7 using the indirect method.

Chapter 20 Group Cash Flow Statements – from “A student’s guide to group accounts” by Tom
Clendon as published by Kaplan.
26

Group Cash flow - Answers

Group cash flow 1 - tax paid

Opening balances of tax liabilities (20 +40) 60 Cr


Plus profit or loss charge (excluding the associate) (60-5) 55
Plus the OCI tax charge 15
Less the tax liability disposal (10)
120
Tax paid Balancing figure 65
Closing balances (30 +25) 55

Group cash flow 2 - buying plant

Opening balance PPE 400 Dr


Less depreciation & impairment loss (100 + 50) (150)
Less carrying value of disposal (200 - 120) (80)
Plus new leases 15
Less the disposal (30)
155
Cash paid to buy new PPE Balancing figure 740
Closing balance net of the liability (900 - 5) 895

Group cash flow 3 - Spotting the cash flows


Investing activities
Proceeds of sale of PPE (30 + 5) 35

Financing activities
Proceeds share issue (200 - 40) 160
Dividends paid (20)
Dividends paid to NCI (5)

Chapter 20 Group Cash Flow Statements – from “A student’s guide to group accounts” by Tom
Clendon as published by Kaplan.
27

Answer Weller - Group cash flow Weller

Operating activities $000 $000


Profit before tax 4,866
Add back finance costs 305
Less income from associate (30)
Depreciation 907
Less profit on disposal (854 – 305) (549)
(W1) Impairment loss on goodwill 179
Current service costs 560

Changes in working capital


(W2) Increase inventory (1,397)
Increase receivables (148)
Increase payables 673
-----------
Cash generated 5,366
Pension contribution paid (100)
Interest paid (305 – pension unwinding 29) (276)
(W3) Taxation paid (1,016) 3,974
------------
Investing Activities

Proceeds disposal NCA 854


Acquisition of subsidiary (1,268)
Cash taken over new subsidiary 232
(W4) Payment to buy NCA (3,161)
(W5) Dividends received from associate 10 (3,333)
-----------

Financing Activities
Dividends paid (445)
Dividends paid to NCI (20)
(W6) New loans 108
-----------
(357)
----------
Thus increase in cash and cash equivalents 284

Opening cash and cash equivalents 1,044


(394 + 741 – 91)
----------
Closing cash and cash equivalents 1,328
(1,013 + 1,543 – 1,228)
----------

Chapter 20 Group Cash Flow Statements – from “A student’s guide to group accounts” by Tom
Clendon as published by Kaplan.
28

Workings

(W1) Goodwill

Opening balance 85
Acquire subsidiary 585
Exchange gain 9
Impairment loss - balancing figure (179)
---------
c/bal 500
---------

FV of P investment 1,268
NCI as a proportion of NA (18% x 833) 150
FV NA (833)
--------
Goodwill on the acquisition 585
--------

(W2) Working capital changes

Inventory Receivables Payables


Opening balance 7,624 4,420 2,989
Acq subsidiary 612 500 407
Exchange difference 116 286 209

Increase - balancing figures 1,397 148 673


------------- ------------- -----------
Closing balance 9,749 5,354 4,278
------------- ------------- ----------

(W3) Taxation paid

Liability
Opening balance CL 2,566
Opening balance NCL - deferred tax 689
Tax charge 2,038
Thus cash paid balancing figure (1,016)
-------------
Closing balances (3,722 + 555) 4,277
------------

Chapter 20 Group Cash Flow Statements – from “A student’s guide to group accounts” by Tom
Clendon as published by Kaplan.
29

(W4) Non-current assets

o/bal 8,900
Disposal (305)
Depreciation (907)
Acq subsidiary 208
Exchange gain 100
7,996
Cash paid - balancing figure 3,161
-------------
c/bal 11,157
--------------

(W5) Investment in associate

o/bal 280
Income from associate 30
---------
310
Cash received - balancing figure (10)
----------
c/bal 300
----------

(W6) Loans – new

o/bal 1,682
Acq subsidiary 312
----------
1,994
Cash received - balancing figure 108
-----------
c/bal 2,102
-----------

Chapter 20 Group Cash Flow Statements – from “A student’s guide to group accounts” by Tom
Clendon as published by Kaplan.