IAS 7 STATEMENT OF CASHFLOWS

A statement of cash flows is a statement which shows how cash was generated and applied (used)
during the period under review. There are 2 methods of preparing a statement of cash flows which are
as follows:

Direct method

Cash flows from operating activities $ $

Cash received from customers’ xxx
Cash paid to suppliers and employees xxx
Cash generated from operations xxx
Finance cost paid xxx
Tax paid xxx xxx
Net cash inflow/ (outflow) from operating activities xxx
Cash flows from investing activities
Purchase of non-current assets xxx
Proceeds on disposal of non-current assets xxx
Investment income received xxx
Acquisition of investments xxx
Net cash inflow/ (outflow) from investing activities xxx
Cash flows from financing activities
Issue of shares xxx
Redemption of shares xxx
Issue of debentures/ Loan received xxx
Redemption of debentures/ Repayment of loan xxx
Dividends paid xxx
Net cash inflow/ (outflow) from financing activities xxx
Net increase/ (decrease) in cash and cash equivalents xxx
Add: Cash and Cash equivalents xxx
Cash and Cash equivalents xxx

Main points to remember when using the direct method

 Always start by preparing the control accounts to compute receipts from credit customers and
payments made to credit suppliers.
 Remember to include receipts from cash sales
 Cash paid to suppliers and employees comprises of all payments made to suppliers of goods, for
electricity, rent and rates, wages, etc

Indirect method

Cash flows from operating activities $ $

Profit before tax xxx
Adjustments for:
Depreciation on non-current assets xxx
Armotisation of intangible assets xxx

1 Compiled by T T Mudege (0773 038 651 / 0712 560 772)

Impairment loss on goodwill xxx
Increase in provision for bad debts xxx
Loss on disposal of non-current assets xxx
Profit on disposal of non-current assets xxx
Decrease in provision for bad debts xxx
Finance costs xxx
Investment income xxx
Operating profit before working capital changes xxx
Working capital adjustments:
Increase in inventory xxx
Decrease in gross trade receivables xxx
Increase in prepaid expenses xxx
Increase in trade payables xxx
Decrease in accrued expenses xxx
Cash generated from operations xxx
Finance cost paid xxx
Tax paid xxx xxx
Net cash inflow/ (outflow) from operating activities xxx
Cash flows from investing activities
Purchase of non-current assets xxx
Proceeds on disposal of non-current assets xxx
Investment income received xxx
Acquisition of investments xxx
Net cash inflow/ (outflow) from investing activities xxx
Cash flows from financing activities
Issue of shares xxx
Redemption of shares xxx
Issue of debentures/ Loan received xxx
Redemption of debentures/ Repayment of loan xxx
Dividends paid xxx
Net cash inflow/ (outflow) from financing activities xxx
Net increase/ (decrease) in cash and cash equivalents xxx
Add: Cash and Cash equivalents xxx
Cash and Cash equivalents xxx

Cash and cash equivalents comprise of:

1. Cash at bank
2. Cash in hand
3. Short term investments

Question 1
The following statements relate to a company whose shares are quoted on the ZSE.

INCOME STATEMENT FOR YEAR ENDED 31 DECEMBER 2015

$ $
Sales 3,588,000
Less: Cost of goods sold 2,357,120
1,230,880

2 Compiled by T T Mudege (0773 038 651 / 0712 560 772)

Add: Profit on sale of government bonds 2,800
Investment income 10,850
1,244,530
Operating expenses
Director’s fees 17,500
Interest on debentures 40,250
Bad debts 7,525
Patents written off 24,500
Increase in provision of bad debts 1,421
Depreciation of plant and machinery 56,329
Loss of sale of equipment 6,475
Other administration expenses 847,301 1,001,301
Net profit before tax 243,229
Taxation for the year (82,950)
Net profit after tax 160,279
Retained profits 62,006
222,285
Appropriations
Dividends 77,525
Transfer to general reserve 27,125
Transfer to equipment replacement reserve 55,678 160,328
61,957

BALANCE SHEET AS AT 31 DECEMBER

2014 2015
$ $
Capital employed
Ordinary share capital 770,000 770,000
General reserve 585,900 613,025
Equipment replacement reserve 150,647 206,325
Unappropriated profit c/d 62,006 61,957
Shareholders’ equity 1,568,553 1,651,307
Mortgage debentures (10 years) 406,000 388,500
1,974,553 2,039,807
Employment of capital
Plant and equipment at cost 463,960 585,634
Accumulated depreciation 159,285 304,675 180,831 404,803
Patents and trademarks (NBV) 742,000 717,500
Government bonds (3 years) 75,250 68,250
1,121,925 1,190,553
Currents Assets
Stock 941,766 1,016,435
Debtors 742,014 758,968
Prepaid expenses 18,949 8,449
Cash on hand 78,855 82,845
1,781,584 1,866,697
Current liabilities

3 Compiled by T T Mudege (0773 038 651 / 0712 560 772)

Creditors (439,460) (514,815)
Bank overdraft (316,771) (332,703)
Taxation (82,250) (82,250)
Proposed dividends (77,000) (77,525)
Accrued expenses (13,475) 852,628 (9,450) 849,254
1,974,553 2,039,807
Additional information
1) Some plant and equipment was sold during the year ended 31 December 2015 for $175 000.
2) The debtors figures are shown after providing for bad debts 2014 $34,361 and 2015 $35,782

Required:
Prepare a cash flow statement for the year ended 31 December 2015 based on IAS 7. Use the indirect
method. Supplementary workings must be shown.

Question 2
The following are the financial statements of X Ltd for the years ended 31 March 2008

INCOME STATEMENT FOR YEAR ENDED 31 MARCH

2007 2008
$ $
Turnover 4,320,000 4,752,000
Net operating profit for the year 921,600 1,080,000
Dividends received 9,600 24,000
Profit on sale on machinery 28,800 230,400
960,000 1,334,400
Less: Disclosable expenses
Audit fees (38,400) (48,000)
Depreciation – Machinery (96,000) (115,000)
Vehicles (76,800) (67,200)
Finance charges (38,400) (48,000)
Loss on sale of vehicles - (19,200)
Net profit before tax 710,400 1,036,800
Company tax (345,600) (441,600)
Net profit after tax 364,800 595,200

STATEMENT OF CHANGES IN EQUITY FOR YEAR ENDED 31 MARCH 2008

Retained profits
2007 2008
$ $
Balance b/f 364,800 422,400
Net profit after tax 364,800 595,200
729,600 1,017,600
Transfer to general reserve (48,000) (48,000)
Transfer to capital redemption reserve - (240,000)
Preference dividends paid (48,000) (48,000)
Ordinary dividends - paid (153,600) (96,000)
Proposed (57,600) (115,200)

4 Compiled by T T Mudege (0773 038 651 / 0712 560 772)

Balance c/f 422,400 470,400

BALANCE SHEET AS AT 30 MARCH

2007 2008
$ $
Assets
Tangible Non-current assets 1,286,400 1,497,600
Listed investments (long-term) 48,000 96,000
1,334,400 1,593,600
Current assets
Stock 528,000 624,000
Debtors 422,400 470,400
Bank - 38,400
2,284,800 2,726,400
Equity and liabilities
Issued ordinary share capital 288,000 720,000
Share premium 48,000 144,000
Capital redemption reserve - 240,000
6% $1 Redeemable preference shares 480,000 240,000
816,000 1,344,000
Distributable reserves
General reserve 96,000 144,000
Retained profits 422,400 470,400
1,334,400 1,958,400
Mortgage debentures 384,000 288,000

Current Liabilities
Creditors 345,600 326,400
Bank overdraft 28,800 -
Company tax 134,400 38,400
Shareholders for dividend 57,600 115,200
2,284,800 2,726,400

Additional information
1) Tangible Non-current assets
2007
Cost Acc Dpn NBV
$ $ $
Land and Buildings 652,800 - 652,800
Machinery 748,800 307,200 441,600
Vehicles 307,200 115,200 192,000
1,708,800 422,400 1,286,400

2008
Cost Acc Depn NBV
$ $ $
Land and Buildings 748,888 - 748,800
Machinery 854,400 374,400 480,000

5 Compiled by T T Mudege (0773 038 651 / 0712 560 772)

Vehicles 441,600 172,800 268,800
2,044,800 547,200 1,497,600
2) The following assets were bought during the year-ended 31 March 2008 to replace obsolete
machinery and vehicles:
$
Machinery 316,800
Vehicles 172,800
3) Additions to buildings amounted to $96,000
4) Some preference shares were redeemed at a premium of 10%. The net increase in share
premium account arose from the issue of ordinary shares at a premium.

Required
Draw up the cash flow statement of X Ltd for the year ended 31 March 2008, using the indirect method.
Show all workings.

Question 3
The balance sheets at the end of the last two years for Singh plc are shown below:
31 May 1997 31 May 1998
$ $ $ Fixed assets $ $ $
62,700 48,975 Goodwill 35,250
120,000 120,000 premises 300,000 - 300,000
356,078 118,778 237,300 plant and machinery 397,500 115,350 282,150
135,000 11,850 123,150 office equipment 147,000 33,750 113,250
673,778 130,628 844,500 149,100
187,890 investments 229,125
717,315 959,775
Current assets
101,722 stock 133,335
81,172 debtors 90,398
3,150 less provision for bad 3,563
78,022 bank 13,815
179,744 233,985
Current liabilities
59,805 creditors 74,730
43,125 corporation tax 74,730
27,240 ordinary share
Dividend 39,000
8,130 accruals 3,480
33,944 bank overdraft -
172,244 164,460
7,500 69,525
724,815 1,29,300
Long-term liability
75,000 12% bank loan 94,350
649,815 934,950
Issued share capital
375,000 $1 ordinary shares 637,500
240,000 $1 6% redeemable preference shares 19-7-9 112,500

6 Compiled by T T Mudege (0773 038 651 / 0712 560 772)

 615,000 750,000
Reserves
Share premium 49,500
Capital redemption reserve 45,000
18,000 general reserve 57,000
16,815 profit and loss 33,450
34,815 184,950
649,815 934,950

During the year ended 31 May 1998, an interim ordinary dividend of $23,250 was paid. Some of the
redeemable preference shares, which had been issued at par, were redeemed at a premium of 2%.
Preference dividend was also paid but only on the preference shares still in issue.
Plant and machinery costing $63,000, book value $27,000, was sold for $30,750, and new plant and
machinery was purchased for $104,422.
There was a revaluation of the premises and a subsequent bonus issue of $1 ordinary shares to the
value of the revaluation reserve.
The increase in the bank loan was made on 1 June 1997.

Required
A cash flow statement for the year ended 31 May 1998 for Singh plc.

7 Compiled by T T Mudege (0773 038 651 / 0712 560 772)