topic 7 group cash flow statement

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School of Accounting Dr Ling Mei Cong

Corporate Reporting 545


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Topic 7

Group Cash Flow Statement

Pre-reading

Kaplan Ch 6

CORPORATE REPORTING 545

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Definitions

Cash consists of cash in hand and deposits repayableupon demand, less overdrafts. This includes cash held in a

foreign currency.

Cash equivalents are short term, highly liquid investments

that are readily convertible to known amounts of cash and

are subject to an insignificant risk of changes in value.

Cash flows are inflows and outflows of cash and cash

equivalents.


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Classification of cash flows

IAS 7 Statement of Cash Flow does not prescribe a formatfor the cash flow statement. It requires it is split into three

sections:

Cash flows from operating activities

Cash flows from investing activities

Cash flows from financing activities


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Methods preparing cash flow statement

There are two methods of calculating the cash fromoperating activities:

Direct method

Indirect method

IAS 7 permits either method.


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Proforma


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Proforma statement of cash flows per IAS 7$ $

Operating activitiesProfit before tax XAdd: interest payable XLess: Income from associate (x)Adjust for noncashitems dealt with in arriving atoperating profit:Add: depreciation XAdd: loss on impairment XAdd: loss on disposal of noncurrent

assets XAdd: increase in provisions XX

Changes in working capital:Increase in inventory (X)Increase in receivables (X)Decrease in payables (X)

Cash generated XInterest paid (X)

Taxation paid (X)

Net cash generated from operating activities X

Investing activities

Payments to purchase NCA (X)Receipts from NCA disposals XCash paid to acquire subsidiary (net of cashbalances acquired) (X)Cash proceeds from subsidiary disposal (net ofcash balances disposed) XDividend received from associate XInterest received X

Net cash flow from investing activities X(X)Financing activities

Proceeds from share issue XProceeds from loan or debenture issue XCash repayment of loans or debentures (X)Finance lease repayments (X)Equity dividend paid (X)Dividend paid to NCI (X)

Net cash flow from financing activities X(X)

Change in cash and equivalents for the year X(X)Cash and equivalents brought forward X(X)

Cash and equivalents carried forward X(X)


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Example

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

The group income statement reported a non-controlling

interest of $500.

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

interest?


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AnswerNon-controlling interest

$ $Cash dividend paid (bal fig) 100 Bal b/f 440Balance c/f 840 Income statement 500

940 940


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Acquisitions and disposals

If the subsidiary joins or leaves a group during a financialyear, the cash flows of the group should include the cash

flows of that subsidiary for the same period

Cash payments to acquire subsidiaries and receipts from

disposals of subsidiaries must be reported separately inthe statement of cash flows under investing activities.


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ExampleThe extracts of a companys statement of financial position

is shown below:20X8 20X7

$ $Inventory 74,666 53,019

During the year, a subsidiary was acquired. At the date ofacquisition, the subsidiary had an inventory balance of$9,384.

Calculate the movement on inventory for the statement ofcash flows.


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Answer

At the beginning of the year, the inventory balance of

$53,019 does not include the inventory of the subsidiary.

At the end of the year, the inventory balance of $74,666

does include the inventory of the newly acquiredsubsidiary.

The movement on inventory is: (974,666 9,384) 53,019

=$12,263 increase. This is shown as a negative cash flow.


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Foreign currency transactions

If the foreign currency has been settled in the year thecash flows will reflect the reporting currency cash receipt

or payment, and thus no problem arises.

An unsettled foreign currency transaction will give rise to

exchange for which there is no cash flow effect in currentyear.


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Example

20X0 20X1$ $

Loan 2,500 1,000

The loan is denominated in an overseas currency, and a loss

of $200 has been recorded on the retranslation.

Required:How much cash was paid?


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Answer

Loan$ $

Cash paid 1,700 Bal b/f 2,500Bal c/f 1,000 Exchange loss 200

2,700 2,700


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Comprehensive example

Textbook, test your understanding 1


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Usefulness of statement of cash flows

It may assist users of financial statements in making judgements on

the amount, timing and degree of certainty of future cash flows.

It gives an indication of the relationship between profitability and

cash generating ability, and thus of the quality of the profit earned.

Historical cash flow information could be useful to check the

accuracy of past assessments.

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

position provides information on liquidity, solvency and adaptability.

Cash flow cannot easily be manipulated and is not affected by

judgement or by accounting policies.


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Limitations of the statement of cash flows

Statements of cash flows are based on historicalinformation and therefore do not provide complete

information for assessing future cash flows.

There is some scope for manipulation of cash flows.

Cash flow is necessary for survival in the short term, but

in order to survive in the long term a business must be

profitable.


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topic 7 group cash flow statement

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