Accounting

Preparing and Understanding The Statement of Cash Flows (IAS 7)

SEPARATE STATEMENTS OF CASH FLOWS

Applicable Standards

  • IAS 7: Statements of Cash Flow

Cash Flows from Operating Activities

Note

  • Cash Flows from Operating Activities have a sub-total for Cash Generated from Operations. This sub-total is followed by interest payments and income tax payments before arriving at Net cash from Operating Activities.
  • The Direct Method can be used to calculate each line item separately, usually as a balancing figure from information in the Balance Sheet and Income Statement (see examples below).
  • The Indirect Method
    • Start with Profit Before Tax (from Income Statement)
      • Reverse depreciation and amortization / impairment charges as they are non-cash
      • Reverse gains/losses on disposal of non-current assets as they should be shown in CFI
      • Reverse gains/losses on the FV of financial instruments carried at FV through P&L as they are non-cash.
      • Reverse gains/losses during step acquisitions (e.g. the gain/loss on derecognition of the associate which goes into P&L, or the gain/loss on the remeasurement of available-for-sale financial asset which goes into P&L) because they are non-cash.
      • Reverse interest expense (from Income Statement), and replace with cash interest paid after the Cash Generated from Operations line.
      • Reverse interest income (from Income Statement) as it should be shown in CFI
      • Reverse charge for pension expense (current service cost, past service cost, expected return on plan assets) as they are non-cash.
      • Adjust for changes in working capital (receivables, prepayments, inventory, payables, accruals except for accrued interest and accrued taxes) as they are sources/uses of cash.
      • Subtract cash contribution paid into pension plan asset.
    • Subtotal the above into Cash Generated from Operations
      • Less cash interest paid
      • Less cash tax paid
    • Equals: Net Cash from Operating Activities

Cash Receipts

  •  Trade Receivables (opening balance in Balance Sheet)
  • + Sales (in Income Statement)
  • – Cash Receipts (in Cash Flow Statement)
  • = Trade Receivables (closing balance in Balance Sheet)

Cash Paid to Suppliers

  • First calculate Purchases
    • Inventory (opening balance in Balance Sheet)
    • + Purchases (in ledger)
    • – Cost of Goods Sold
    • = Inventory (closing balance in Balance Sheet)
  • Now we can calculate Cash Paid to Suppliers
    • Trade Payables (opening balance in Balance Sheet)
    • + Purchases (in ledger)
    • – Cash Paid to Suppliers (in Cash Flow Statement)
    • = Trade Payables (closing balance in Balance Sheet)

Cash Paid for Wages and Salaries

  • Accrued Wages and Salaries (opening balance in Balance Sheet)
  • + Wages and Salaries Expense (in Income Statement)
  • – Cash Paid for Wages and Salaries (in Cash Flow Statement)
  • = Accrued Wages and Salaries (closing balance in Balance Sheet)

Cash Tax

  • Current Tax Liability (opening balance in Balance Sheet)
  • + Deferred Tax Liability (opening balance in Balance Sheet)
  • + Tax expense (in Income Statement)
  • – Cash Tax Paid (in Cash Flow Statement)
  • = Sum of (Current Tax Liability closing balance + Deferred Tax Liability closing balance)

Cash Flows from Investing Activities

Non-Current Assets Reconciliation Equations

  • Cost
    • Cost b/f
    • + Additions
    • + Revaluations [note that the revaluation gain/(loss) shown in the Statement of Comprehensive Income may be net of the increase in deferred tax liability due to the increase in carrying value (similar situation if it is a decrease). E.g. the gain shown may be $5M, but if the increase in deferred tax liability is $1M because of the revaluation, the revaluation gain was actually $6M.]
    • – Disposals (the Cost or Revalued amount)
    • = Cost c/f
  • Accumulated depreciation
    • Accumulated depreciation b/f
    • + Depreciation charge for year
    • – Depreciation removed due to disposals
    • = Depreciation c/f

Cash from Disposal of Non-Current Assets

  • Cost of disposed non-current asset
  • – Accumulated depreciation of disposed non-current asset
  • + Gain/(loss) on disposal
  • = Cash flow from disposal of non-current asset

Cash Investment in Intangible Assets (e.g. capitalized development costs)

  • Intangible assets (opening balance in Balance Sheet)
  • + Intangible assets added from acquisition of Subs
  • + Cash investment in intangible assets (in Cash Flow Statement)
  • – Impairment or Amortization (in Income Statement)
  • = Intangible assets (closing balance in Balance Sheet)

Cash Investment in Available-for-sale Financial Assets (carried at FV through OCI)

  • Available-for-sale financial assets (opening balance in Balance Sheet)
  • – Disposals
  • + Gain/(losses) on remeasurement to FV [note that the gain/(loss) shown in the Statement of Comprehensive Income may be net of the increase in deferred tax liability due to the increase in carrying value (similar situation if it is a decrease). E.g. the gain shown may be $5M, but if the increase in deferred tax liability is $1M because of the increase in FV, the remeasurement gain was actually $6M.]
  • + Purchase of available-for-sale investments (in Cash Flow Statement)
  • = Available-for-sale financial assets (closing balance in Balance Sheet)

Interest received

  • Interest receivable (opening balance in Balance Sheet)
  • + Interest income (in Income Statement)
  • – Interest received (in Cash Flow Statement)
  • = Interest receivable (closing balance in Balance Sheet)

Government Grants

  • Recognised as deferred income and is credited to Cost of Sales in the income statement over the period the grant relates to (which will lower Cost of Sales and increase Profits).
  • The figure in the income statement would need to be reversed in the CFO when using the indirect method, and the actual cash received included here.
  • Captured in the Balance Sheet under Liabilities
  • Reconciliation equation
    • Current Government Grant (opening balance in Balance Sheet)
    • + Non-current Government Grant (opening balance in Balance Sheet)
    • – Amortization of Government Grants (in Income Statement)
    • + Cash received for new Government Grants (in Cash Flow Statement)
    • = Sum of (Current Government Grant closing balance + Non-current Government Grant closing balance)

Cash Flows from Financing Activities

Cash Paid on Finance Leases

  • Recognised as Liabilities in Balance Sheet
  • Reconciliation equation
    • Current Finance Leases (opening balance in Balance Sheet)
    • + Non-current Finance Leases (opening balance in Balance Sheet)
    • + New Finance Leases acquired
    • – Cash Paid on Finance Leases (in Cash Flow Statement)
    • = Sum of (Current Finance Leases closing balance + Non-current Finance leases closing balance)

Cash from Shares Issued

  • Share Capital + Share Premium (closing balance in Balance Sheet)
  • – (Share capital + Share Premium (opening balance in Balance Sheet))
  • = Cash from new shares issued

Cash from Loans

  • Current Loans + Non-current Loans (closing balance in Balance Sheet)
  • – (Current Loans + Non-current Loans (opening balance in Balance Sheet))
  • = Cash inflow / (Cash outflow) from new loans or repayment of loans

Dividends Paid

  • Retained Earnings b/f
  • + Profits (from Statement of Comprehensive Income)
  • – Dividends Paid (in Cash Flow Statement)
  • = Retained Earnings c/f

CONSOLIDATED STATEMENTS OF CASH FLOWS

Additional Items

  • Cash Flows from Operating
    • Share of profit of associates and joint ventures
      • Reversed because it is non-cash and included in P&L’s Profit before tax.
      • Actual dividends received will be included in CFI.
    • Foreign exchange gain/loss
      • Reversed because it is non-cash and included in P&L’s Profit before tax.
  • Cash Flows from Investing
    • Acquisition of subsidiary, net of cash acquired
    • Proceeds from sale of subsidiary, net of cash
    • Acquisition of associate
    • Dividends received from associates
  • Cash Flows from Financing
    • Dividends paid to non-controlling interests (i.e. dividends paid by the Sub to NCI)
    • Cash inflow from rights offering by Sub. Note that the cash inflow should only include cash taken in by the group from entities outside the group. When the Parent subscribes to the Sub’s rights offering, the cash only flows within the group, hence it does not show up within the cash flow statement.

Dividends received from Associates (CFI) and Acquisition of Associates (CFI)

  • Investment in associate (opening balance in Balance Sheet)
  • + Share of profits from associate (in Income Statement)
  • – Dividends received from associate (in Cash Flows from Investing)
  • + Acquisition of new associate(s) (in Cash Flows from Investing)
  • = Investment in associate (closing balance in Balance Sheet)

Dividends paid to Non-Controlling Interests (CFF)

  • NCI (opening balance in Balance Sheet)
  • + Profit (after-tax) attributable to NCI (in Income Statement)
  • + NCI added on acquisition of new subsidiary (if any)
  • – NCI removed on disposal of any subsidiary
  • – Dividends paid to NCI (in Cash Flows from Financing)
  • = NCI (closing balancing in Balance Sheet)

Note on Foreign Exchange Gains/Losses

  • If there are any foreign exchange translations, there will be foreign exchange gains/losses embedded in the NCI and Parent’s Reserves balances. These are non-cash and needs to be removed to correctly calculate the dividends paid.
  • The foreign exchange gains/losses on the Equity side is captured and matched within the Investment in Associate and Investment in Sub asset line items.

Acquisition of a Subsidiary (CFI)

  • Cash element in purchase consideration for the Sub
  • – Total cash and cash equivalents in the Sub
  • = Acquisition of a Subsidiary, net of cash acquired (in Cash Flows from Investing)
  • Note that even though your purchase consideration is for less than 100% of the company, the total cash in the Sub (100%) is subtracted. This is because in the Consolidated Balance Sheet, 100% of the Sub’s cash would be included [I know, the cash in the Sub is not really a true cash inflow.]

Note to the Statement of Cash Flows on Acquisition of Subsidiary (required by IAS 7)

  • Net assets acquired:
    • FV of assets of the Sub at acquisition date
    • – FV of liabilities of the Sub at acquisition date
    • = Net assets of Sub at acquisition date
    • – NCI in Sub at acquisition date
    • + Goodwill
    • = FV of net assets acquired
  • Satisfied by:
    • Issue of shares in holding company
    • Cash paid
    • = Total purchase consideration

Change in Working Capital Calculations

  • Take note that if an acquisition occurs between two reporting dates of Consolidated Balance Sheet, the opening balance of working capital items (e.g. receivables, inventory, payables) would not include values from the Sub,  but the closing balance would. Hence to isolate the real change in working capital, you have to take that into account
    • Opening balance
    • + Addition from Sub
    • + Change in working capital item
    • = Closing balance
  • The same principle applies to disposals, and all other accounts.

-END-

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