TOPIC 31 - IAS 7 STATEMENT OF CASHFLOWS

Size: px

Start display at page:

Download "TOPIC 31 - IAS 7 STATEMENT OF CASHFLOWS"

Virgil Benson
5 years ago
Views:

1 TOPIC 31 - IAS 7 STATEMENT OF CASHFLOWS a) Overview Notes b) Statement of Cashflows V.S Statement of profit or loss c) Interpreting Statement of Cashflows d) Miscellaneous Points on Statement of Cashflows e) Consolidated Statements of Cashflow 1

2 (a) OVERVIEW NOTES 2

3 3

4 4

5 5

6 6

7 7

8 8

9 9

10 STATEMENT OF CASHFLOWS - INDIRECT METHOD- PRO FORMA Cashflows From Operating Activities Profit Before Taation Adjustments For: Profit/Loss on Disposal of PPE Amortization of Intangible Asset Interest Epense Depreciation Amortisation of Government Grant Impairment Net Non Cash Epense for Employee Benefits Trade Receivables Increase Inventory Decrease Trade Payables Increase Cash Generated From Operations Interest Paid Income Taes Paid Net Cash used/from Operating Activities () () () Cashflows from Investing Activities Proceeds from sale of property, plant & equipment Acquisition/Purchase of property, plant & equipment Development Ependiture Purchase of Intangible Assets Purchase of Investments Receipt of Govt. Grants Investment Income Received Dividend Received Interest Received () () () () Net Cash From/Used in Investing Activities 10

11 Cashflows from Financing Activities Proceeds from Issue of Share Capital Proceeds from Issue of Loan/Debentures Repayment/Redemption of Loan/Debentures Payment of Finance Lease Obligations (Capital) Dividend Paid () () () Net Cash Used/From Financing Activities Net Increase/Decrease in Cash & Cash Equivalents (Derived from Info Given in Question) Cash & Cash Equivalents at Beginning of Period (From Question) Cash & Cash Equivalents at End of Period (From Question) 11

12 (b) Statement of Cashflows VS Statement of profit or loss Cash is King an entity profit for a period differs from its cashflow because 1. Statement of profit or loss and SOFP are prepared on an accrual basis (i.e. we match income and epense to the periods they relate to irrespective of which they are actually paid and received). 2. Cashflows are not affected by an entity accounting policies. Reasons Why Cashflow Information is Useful 1. Cashflows are factual and are therefore difficult to change/manipulate. 2. Cashflow Information for the current period can be used as a basis for predicting future cashflows. 3. Cashflow is easier to understand than profit, especially for non business people. 4. If the statement of cashflows is prepared using the indirect method, it shows the relationship between an entity s profit and its cash generating ability by reconciling profit before ta to cash generated from operating activities. Seeing this link is of benefit to users of Statement of Cashflows as it gives an indication of the quality of the entity s earnings (aka profits). Limitations of Cashflow Information 1. Cash balances are measured at a specific point in time so management of a company could arrange transactions so that the cash balance is affected as little as possible e.g. lease an asset rather than outright purchase. 2. Management could also delay paying suppliers until after the year end to preserve cash balances for the preparation of the Statement of Cashflows. 3. Cashflow is not the same as earnings/profits. Cash is important in the short term, but profits are also needed for long term survival. 12

13 (c) Interpreting Statement of Cashflow Start at Cashflows from Operating Activities and Work Through the Statement 1. Cash Generated from Operations Compare to Profit Before Ta If Cash Generated from Operations is similar or higher than Profit Before Ta then no major cause for concern. BUT If Cash Generated from Operations is much lower than profit before ta Worrying Reasons (a) (b) Entity is epanding rapidly and is absorbing cash generated from operations to fund the epansion Working Capital Management is poor (too much money invested in inventory with a knock effect to Trade Payables) 2. Interest Paid, Taation Paid and Dividends Paid Compare these to cash generated from operations INTEREST AND TAXATION MUST BE PAID Threat to Going Concern Payment of Equity Dividend is Optional 3. Investing Activities Purchase/Sale Proceeds relating to non current assets How has purchase of non current assets been financed Cash/Share Issue/Long Term Borrowing (Link to Financing Section of Statement of Cashflows) 13

14 A purchase of non current assets may eperience a time lag before the increased investment reaches its full beneficial effect If an entity has financed the purchase of non current assets from a short term source of finance (e.g. a bank overdraft) this could put a lot of strain on the cash resources of the company and again thereafter going concern. 4. Financing Activities If borrowings have increased, will the entity have enough cash to meet additional interest payments in the future?? Are there any penalties for the entity if it repays borrowings early?? What is the level of gearing in the company?? 5. Increase/Decrease in Cash and Cash Balances A decrease Did the company repay a loan An Increase Could the ecess cash be invested elsewhere at a profit. If the company has a closing overdraft, how close is it to its overdraft limit?? Does the entity have enough cash to cover Current liabilities (ta and interest) The current level of dividends (optional) Any plans for epansion of the business Any other spending commitments Borrowings to be repaid in the net 12 months General Points Re Answering Theory on Statement of Cashflows BULLET POINT ANSWERS CLEAR HANDWRITING USE OF TERMINOLOGY/KEYWORDS DO NOT NEGLECT THE THEORY ASPECTS CASHFLOWS FROM OPERATING ACTIVITIES 14

15 Operating Activities are the Principal Revenue Generating Activities of an Entity e.g. Brown Thomas selling clothes and cosmetics Fyffes cashflows earned from selling fruit CASH AND CASH EQUIVALENTS CASH: Cash in Hand, Cash in Bank and Cash Equivalents CASH EQUIVALENTS: Include, short term highly liquid investments that are easily convertible into cash and are subject to insignificant risk of changes in value. (Note: Short Term Equity Investments are not cash equivalents because they are eposed to significant changes in value i.e. Market movements) 15

16 (d) Miscellaneous Points on Statement of Cashflows 1. Profit Before Ta or Profit After Ta If you choose to start the statement with the Profit After Ta, you must firstly addback/subtract the Income Ta Epense/Relief). Then continue to prepare the Statement as normal adjusting for finance costs, depreciation etc. If you choose to start the statement with the Profit Before Ta (which is most common), then the Income Ta Epense/(Relief) can initially be ignored because your starting position ecludes the Income Ta Epense/(Relief). However, you will need to adjust for finance costs. * Under either scenario, you will need to calculate: The actual cashflows relating to Finance Costs and Income Ta Epense/(Relief). * 2. Movement in Amounts Due from Construction Contracts Essentially treated the same as Trade Receivables Increase Cash Outflow Decrease Cash Inflow Classified as a Movement in Working Capital 3. For the Purposes of Working Capital Movements Trade Receivables includes prepayments Trade Payables include Accruals (only to the etent of accruals which are not dealt with separately in another part of Statement of Cashflow) e.g. Accrued Interest and Taation). 4. Cash Generated From Operations When reviewing a Statement of Cashflow, this is a key figure to eamine Can the entity finance its Interest Charge and Taation Charge from it s Cashflows from Operating Activities 5. Cash and Cash Equivalents At Beginning/End of Period In the eam, transcribe these figures direct from the question 16

17 i.e. Bank/Bank Overdraft Figures and any Cash Equivalents like Deposit Accounts. Do not depend on your Worked Solution to get the figure for Cash and Cash Equivalents at end of Period. And from doing the above, you will derive your figure for Net Increase/Decrease in Cash & Cash Equivalents (Do not depend on your worked solution) 6. Finance Leases Where the reporting entity uses an asset held under a finance lease, the amounts to go in the statement of cash flows as financing activities are repayments of capital only (plus any deposit paid). The interest paid will be shown under operating activities Finance Lease Eample: The notes to the financial statements of Hayley Co show the following in respect of obligations under finance leases Year Ended 30 June $000 $000 Amounts Payable Within 1 Year 12 8 Within 2 to 5 Years Less: Finance Charges Allocated to Future Periods Additions to tangible non current assets acquired under finance leases were shown in the non current asset note at $56,000 Required: Calculate the capital repayment to be shown in the statement of cash flows of Hayley Co for the year to 30 June

18 Obligations Under Finance Lease Bal Bd 66 Capital Repaid (Plug) Additions Bal C/d INDIRECT & DIRECT METHOD OF PRESETNING CASH GENERATED FROM OPERATIONS ( IAS 7) 18

19 19

20 20

21 21

22 Hopper Company Direct v Indirect Method for Presenting Cash Generated from Operating Activities 22

23 23

24 24

25 25

26 (e) IAS 7 - STATEMENTS OF CASHFLOW CONSOLIDATED STATEMENTS OF CASHFLOW What s new? We came across statements of cashflows in earlier studies The step up to this level is the added dimension of Consolidated statements of cashflows So what s new? o Associates o NCI o Acquisition of Subsidiaries o Disposal of Subsidiaries N.B. : The group statement of cashflows should only deal with flows of cash and cash equivalents eternal to the group, so all intra group cash flows should be eliminated. Dividends paid Remember to NCI should the Layout? be included under the Financing Activities and disclosed separately o Start with profit before ta o Work back up to Operating Profit o Adjust for non cash items o Then, deal with Investing activities o And financing activities o That will give Net Cash flow for the Year o Add to Opening Cash & Cash Equivalents o And that should agree with Closing Cash & Cash Equivalents 26

27 CONSOLIDATED STATEMENT OF CASHFLOWS - INDIRECT METHOD- PRO FORMA Cashflows From Operating Activities Profit Before Taation Adjustments For: Profit/Loss on Disposal of PPE () Amortization of Intangible Asset Interest Epense Depreciation Amortisation of Government Grant Impairment (Consol Goodwill) Share of Profit (Loss) of Associate Gain/Loss on Disposal of Subsidary Trade Receivables Increase Inventory Decrease Trade Payables Increase Cash Generated From Operations Interest Paid Income Taes Paid Net Cash used/from Operating Activities () () () Cashflows from Investing Activities Proceeds from sale of property, plant & equipment Acquisition/Purchase of property, plant & equipment Development Ependiture Purchase of Intangible Assets Purchase of Investments Receipt of Govt. Grants Investment Income Received Dividend Received Interest Received Dividend from Associate Acquisition Cost /Disposal Proceeds of Subsidary Net Cash From/Used in Investing Activities () () () () 27

28 Cashflows from Financing Activities Proceeds from Issue of Share Capital Proceeds from Issue of Loan/Debentures Repayment/Redemption of Loan/Debentures () Payment of Finance Lease Obligations (Capital) () Dividend Paid to Equity Holders () Dividend Paid to NCI ( ) Net Cash Used/From Financing Activities Net Increase/Decrease in Cash & Cash Equivalents (Derived) Cash & Cash Equivalents at Beginning of Period (From Question) Cash & Cash Equivalents at End of Period (From Question) Definitions: o Cash: comprises cash on hand and demand deposits o Cash equivalents: are short term (less than or equal to 3 months), highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value o Cash Flows: are inflows and outflows of cash and cash equivalents The New Elements o Associates Dividends received from associates will be shown within Investing Activities Remember that the interest in the Associate in the Statement of profit or loss and other comprehensive income is shown as a single line entry before Profit Before Ta but the figure is calculated as our share of Associate Profit After Ta (i.e. it is a profit based figure and not cash) Eample Etracts from Rybka s consolidated financial statements for the year ended 31 December 2009 Group Profit from Operations 53,000 Share of Ezelis Associate Profits 13,000 66,000 Ta (15,900) 28

29 50, Investment in Ezelis 190, ,000 Calculate dividend received from Ezelis (Associate) Investment Brought Fwd 180,000 Add: Investor Share of Profit After Ta of 13,000 Associate 193,000 Investment Carried Forward (190,000) Therefore Dividend Received 3,000 Non Controlling Interest: Only the money paid (i.e. a dividend) to NCI by a sub will be shown, within Financing Activities Remember in Consol FS intragroup dividend is cancelled leaving dividend paid by sub to NCI which is outside the Group Eample Etracts from Orbit s Statement of profit or loss and other comprehensive incomefor the year ended 31 December 2009 Group Profit Before Ta 91,000 Ta (30,700) Profit After Ta 60,300 Attributable To: Equity Holder of the Parent 49,900 NCI 10,400 60,300 SOFP NCI 115, ,000 Calculate the dividend paid to Non Controlling Interests? NCI Balance B/fwd 115,000 Add: Portion of Profits 10, ,400 Less: NCI Balance C/fwd (110,000) Therefore Dividend Paid to NCI 15,400 29

30 Acquisition of Subsidaries o N.B. -The net cash paid (not shares, not loan notes deduct cash acquired on acquisition) in the acquisition of a subsidiary should be shown, within Investing Activities o A disclosure note is required showing the detail of the total purchase consideration, and how much was actually paid in cash o Disclosure is also needed to show the detail of assets and liabilities acquired as well as the cash paid Eample Acquisition of a Subsidary When Sintija acquired 80% of the shares of Armine, on 1 January 2009, the agreed consideration of $72,000, was settled by the issue of 15,000 Sinjita shares, valued at $4 each, and the balance payable in cash. On the date of acquisition, Armine had prepared a SOFP as follows TNCA 40,000 Inventory 8,000 Receivables 16,000 Cash 18,000 Payables (6,000) 76,000 Sintija Consol Financial Statements for 2008 & 2009 were: Statements of Financial Position as at 31 December INCA 10,000 TNCA 115,000 30,000 Inventory 53,000 17,000 Receivables 59,000 20,000 Cash 23,400 12, ,400 79,000 Shares 65,000 50,000 Premium 48,000 3,000 Retained Earnings 32,400 22,000 Revaluation Reserve 60,000 NCI 18, ,600 75,000 Current Liabilities Payables 28,800 3,000 Ta 8,000 1, ,400 79,000 30

31 Consolidated Statement of profit or loss and other comprehensive income for the Year Ended 31 December 2009 Revenue 100,000 Cost of Sales (42,000) 58,000 Admin Epenses 19,000 Distribution Costs 7,000 (26,000) Profit Before Ta 32,000 Ta (8,000) Profit After Ta 24,000 Statement of Changes in Equity Retained Earnings Revaluation Reserve Share Capital Share Premium Non Controlling Interest B/fwd 22,000 50,000 3,000 Issued 15,000 45,000 Profit for the Year 24,000 On 15,200 Acquisition Revaluation 60,000 NCI (3,600) 3,600 Dividend (10,000) (600) C/fwd 32,400 60,000 65,000 48,000 18,200 You are given the following information: All Sinjita s other subsidiaries are wholly owned There were no purchases nor disposals of TNCA during the year Prepare a Consolidated Statement of Cash Flows for the Sinjita Group for the year ended 31 December 2009 Operating Activites Profit Before Ta 32,000 Add Back non Cash items 15,000 Goodwill Impairment 1,200 16,200 48,200 Changes in Working Capital Increase in Inventory (28,000) Increase in Receivables (23,000) Increase in Payables 19,800 (31,200) 17,000 Ta Paid (1,000) (1,000) Net Cash flow from Operating 16,000 31

32 Activites Investing Activities Acquisition of Subsidary 6,000-6,000 Financing Activites - Dividends Paid Sinjita (10,000) - NCI (600) (10,600) Net Cash Flow for the Year 11,400 Cash & Cash Equivalents 12,000 B/fwd Cash & Cash Equivalents 23,400 B/fwd Note: Acqusition of Subsidary Tangible Non Current Assets 40,000 Inventory 8,000 Receivables 16,000 Cash 18,000 Payables (6,000) 76,000 Non Controlling Interest (15,200) 60,800 Goodwill 11,200 Total Consideration 72,000 Less: Cash in Subsidary (18,000) 54,000 Less: Non Cash Consideration 60,000 Net Cash Flow on Acquisition 6,000 Note 2: Tangible Non Current Assets Acquired During the period, Sintija revalued property and equipment by $60,000. No property, plant and equipment was acquired neither by Purchase nor under finance lease Note 3: Cash and cash equivalents: Cash and cash equivalents comprise cash in hand, balances with banks and investment in Treasury Bills. Cash and cash equivalents included in the Statement of Cash flows Balances with Banks (600) (2,000) Cash in Hand 24,000 14,000 23,400 12,000 32

33 Working 1 Sinjita 80% Armine Working 2 Cost 72,000 doa per q =76,000 *80% (60,800 ) 11,200 Impaired (1,200) SOFP 10,000 Working 3 TNCA b/f 30,000 Added on Acquisition 40,000 Revalued 60, ,000 TNCA c/f 115,000 Therefore Depreciation 15,000 Learning Point: In a consol statement of cashflow question, if on acquisition of a sub, an upward fair value adjustment is made, then the double entry is Dr Asset Cr NCI Cr Cost of Control (Group Share) The point being that the fair value eercise will impact on the Asset & NCI but not on retained earnings 33

34 34

35 35

36 36

37 37

38 Notes: Where a Consolidated Statement of Cashflow question includes an acquisition of a Sub, then you will need to Ascertain Group Structure and calculate Goodwill on Acquisition to check for a possible impairment. Also on acquisition of a Sub, the NCI will be credited with their share of the net assets of the Sub at the reporting date - this will impact on calculation of dividend paid to NCI Also only the net cash paid on acquisition of the sub will be accounted for (i.e. Cash paid less cash and cash equivalents acquired) Be Careful not to double count Share of Profit After Ta of Associate when calculating Dividend Paid in Financing Activities if applicable Watch out for impairment of Consol Goodwill non cash item addback immediately after Profit Before Ta with Operating Activities section So need to calculate Consol Goodwill on Acquisition and compare to consol goodwill at reporting date A Gain or Loss on Disposal of a Subsidary o Gain: Subtract within Operating Activities o Loss: Addback within Operating Activities Investment Income Investing Activities account for investment income actually received - i.e. net of ta The figure for repayment of finance leases in Financing Activities is capital only the interest element is contained within Interest Paid in Operating Activities 38

39 Cash and Cash Equivalents b/f & c/f beware of signs!! For Acquisitions of Tangible Non Current Assets, beware of Finance Leases and Revaluation Reserve and Fair Value Adjustments Cash and Cash Equivalents At Beginning/End of Period In the eam, transcribe these figures direct from the question i.e. Bank/Bank Overdraft Figures and any Cash Equivalents like Deposit Accounts. Do not depend on your Worked Solution to get the figure for Cash and Cash Equivalents at end of Period. And from doing the above, you will derive your figure for Net Increase/Decrease in Cash & Cash Equivalents (Do not depend on your worked solution) 39

40 Eample Disposal of a Subsidary The same principles apply here as with acquisitions. Part of the changes in the Statement of Financial Position figures are accounted for by the disposal of the subsidiary s assets and liabilities Autis sold his entire shareholding of Lokys on 28 February 2009 for $800,000. He had held the shares for 10 years since the incorporation of Lokys At the date of disposal, the Lokys Statement of Financial Position was TNCA 500,000 Inventory 150,000 Receivables 100,000 Cash 50,000 Payables (75,000) Ta (15,000) Net Assets 710,000 The consolidated statement of financial position of the Autis Group as at 30 June 2009 and 2008 were $000 $000 INCA TNCA Inventory Receivables Cash ,800 2,310 Shares Premium 100 Retained Earnings NCI ,400 2,200 Current Liabilities Payables Ta ,800 2,310 Consolidated Statement of profit or loss and other comprehensive income for the Year Ended 30 June 2009 Operating profit 47,000 Profit on Disposal of 303,000 Subsidary Profit Before Ta 350,000 40

41 Ta (120,000) Profit After Ta 230,000 Consolidated Statement of Changes in Equity Retained Earnings Share Capital Share Premium Non Controlling Interest B/fwd 800, , ,000 Issued 183, ,000 Profit for the 230,000 Year NCI (30,000) 30,000 Dividend (100,000) (213,000) C/fwd 900,000 1,000, , ,000 You are also told that the depreciation charge for the year was $200,000 and, other than the disposal of Lokys, there were no other asset disposals Prepare the Consolidated Statement of Cashflows for the Autis Group for the Year ended 30 June 2009 using the indirect method 41

42 Operating Activites Profit Before Ta 350,000 Add Back non Cash items Depreciation 200,000 Profit on Disposal of Subsidary (303,000) (103,000) Changes in Working Capital Increase in Inventory (750 ( )) Increase in Receivables (600 ( )) Increase in Payables (300- (60-75)) (100,000) (190,000) 247, ,000 25, ,000 Ta Paid (55,000) (55,000) Net Cash flow from Operating Activites Investing Activities Purchase of TNCA (1300 ( ) -200)) Net Proceeds on Disposal of Subsidary (800-50) (1,100,000) 217, ,000 (350,000) Financing Activites - Share Issue - Equity 183,000 Share Issue Share Premium 100,000 Dividends Paid (100,000) 183,000 Net Cash Flow for the Year 50,000 Cash & Cash Equivalents 100,000 B/fwd Cash & Cash Equivalents 150,000 B/fwd Note 1: During the year, Austis purchased $1,100,000 TNCA. No assets were acquired under finance lease Note 2: Austis disposed of its entire shareholding in Lokys for $800,000. Details of the disposal were: TNCA 500,000 Inventory 150,000 Receivables 100,000 Cash 50,000 Payables (75,000) 42

43 Ta (15,000) Net Assets at date of disposal 710,000 NCI (30%) (213,000) 497,000 Proceeds of Sale 800,000 Profit on Sale 303,000 Question: What was the Group Structure in the Austis group?? Two Methods 1. Sale Proceeds of Sub 800,000 Profit on Disposal 303,000 Therefore Group Share of Assets Disposed 497, /710 = 70% 2. Payment to NCI Per SOCIE 213, /710 = 30% 43

44 APPROACH TO CSOCF/SOCF Layout Proforma One Page for Operating Activities and One Page for Investing Activities & Financing Activities Calculate Opening Cash & Cash Equivalents, Closing Cash & Cash Equivalents and Increase/Decrease in Cash & Cash Equivalents Directly from Question Begin with Profit Before Ta then PAID IS (Non Cash Items) o Profit/Loss on Disposal of NCA o Amortisation o Impairment o Depreciaition o Interest Epense o Share of Profit of Associate o then RIP (Movements in Working Capital) o Calculate Interest Paid & Taation Paid Investing Activities Financing Activities Aim is to deal with each line item in the SOFP/CSOFP to identify cash movement if applicable. Tick of each line item as you go. Total CSOCF/SOCF if time allows Past Eam Questions IAS 7 P1 Eam Questions Q3 (8) August 13 Q2 April 13 (Single Company Statement of Cashflow) Q3 Aug 11 Q1 Aug 11 Q3 Apr 11 Q3 Aug 10 Q3 Apr 10 Q2 Aug 10 (Consol. Statement of Cashflow) P2 Eam Questions Q1 August 2014 (Consol. Statement of Cashflow) Q1 April 2012 (Single Company SOCF) Q1 August 2010 (Consolidated SOCF) 44

IAS 7 Statement of Cashflow

IAS 7 Statement of Cashflow Why do we need to prepare a cashflow statement? The fundamental purpose of being in business is to generate a profit. However, profitability is arguably a long-term objective.