- 15 Marks
FR – L2 – Q74 – Statement of Cash Flows
Question
IAS 7 Statement of Cash Flows states that additional information may be relevant to users in understanding the financial position and liquidity of an entity.
(a) State FOUR advantages of cash flow accounting.
(b) Highlight THREE of the disclosures which are required by the Standard (with comments) by the management of the entity when preparing the statement of cash flow
(c) Nexis Limited’s statement of profit or loss for the year ended 31 December 20X4 and statement of financial position as at 31 December 20X3 and 20X4 are as follows:
NEXIS LIMITED
Statement of profit or loss for the year ended 31 December 20X4
| GH¢’m | |
|---|---|
| Revenue | 360 |
| Raw Materials consumed | 35 |
| Staff costs | 47 |
| Depreciation | 59 |
| Loss on disposal of non-current assets | 9 |
| 150 | |
| Operating profit before interest and tax | 210 |
| Interest payable | 14 |
| Profit before tax | 196 |
| Taxation | 62 |
| 134 |
NEXIS LIMITED
Statement of Financial Position as at 31 December 20X4
| 20X4 GH¢’m | 20X3 GH¢’m | |
|---|---|---|
| Non-Current Assets | ||
| Cost | 798 | |
| Depreciation | 159 | |
| 639 | ||
| Current Assets | ||
| Inventory | 12 | 10 |
| Trade receivable | 38 | 29 |
| Bank | 24 | 28 |
| 74 | 67 | |
| Total Assets | 713 | |
| Equity and liabilities | ||
| Share capital | 198 | 182 |
| Retained earnings | 358 | 291 |
| 556 | 473 | |
| Non-current liabilities | ||
| Long-term loans | 100 | 250 |
| Current liabilities | ||
| Trade payables | 6 | 3 |
| Taxation | 51 | 43 |
| 57 | 46 | |
| Total equity and liabilities | 713 |
Dividend paid was GH¢33 million.
During the year, the company paid GH¢45 million for a new piece of machinery.
Required
Prepare a Statement of Cash Flows for Nexis Limited for the year ended 31 December 20X4, in accordance with the requirements of IAS 7, using the indirect method.
Answer
(a) The advantages of cash flow accounting are as follows:
(i) Survival in business depends on the ability to generate cash. Cash flow accounting directs attention towards this critical issue.
(ii) Cash flow is more comprehensive than “profit” which is dependent on accounting conventions and concepts.
(iii) Creditors (long and short-term) are more interested in an entity’s ability to pay debts than in its profitability. Whereas “profits” might indicate that cash is likely to be available, cash flow accounting is more direct with its message.
(iv) Cash flow reporting provides a better means of comparing the results of different companies than traditional profit reporting.
(b) Disclosure requirements of IAS 7:
(i) Restrictions on the use of access to any part of cash equivalents.
(ii) The amount of undrawn borrowing facilities which are available.
(iii) Cash flows which increased operating capacity compared to cash flows which merely maintained operating capacity.
(c) Nexis Ltd – Statement of cash flow for the year-ended 31/12/20X4
| GH¢’m | GH¢’m | |
|---|---|---|
| Cash flows from operating activities | ||
| Profit before taxation | 196 | |
| Adjustments | ||
| Add: Interest payable | 14 | |
| Loss on disposal of assets | 9 | |
| Depreciation | 59 | |
| Changes in working capital | ||
| Increase in inventory (12 – 10) | (2) | |
| Increase in trade receivables (38 – 29) | (9) | |
| Increase in trade payables (6 – 3) | 3 | |
| Tax paid (43 + 62 – 51) | (54) | |
| Net cash flow from operating activities | 216 | |
| Cash flow investing activities | ||
| Purchase of machinery | (45) | |
| Proceeds from disposal of non-current assets (15 – 9) | 6 | |
| Net cash in-flow from investing activities | (39) | |
| Cash flow from financing activities | ||
| Interest paid | (14) | |
| Issue of shares (198 – 182) | 16 | |
| Redemption of long-term loans (250 – 100) | (150) | |
| Dividend paid | (33) | |
| Net cash out flow from financing activities | (181) | |
| Increase/(decrease) in cash and cash equivalent | (4) | |
| Cash and cash equivalent at the beginning | 28 | |
| Cash and cash equivalent at the end | 24 |
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