Topic: IAS 7: Statement of cash flows

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  • 4 Marks

CR – May 2018 – L3 – Q4a – IAS 7: Statement of cash flows

Explain four arguments against the view that historical cash flow is more useful than historical profit in appraising a company.

It is often argued that historical cash flow is more useful in appraising a company than historical profit, particularly because cash flows are factual and do not involve the exercise of judgment.

Required:
Explain FOUR arguments against this view. (4 marks)

Arguments against the view that historical cash flow is more useful than historical profit in appraising a company:

  1. Accrual-Based Accounting Provides a Fuller Picture:
    Profit is calculated on an accrual basis, meaning it takes into account income and expenses when they are earned or incurred, not when cash is received or paid. This gives a better reflection of the company’s true performance during the period. Cash flow may exclude significant non-cash items like depreciation and provisions, which can be important indicators of long-term profitability.
  2. Manipulation of Cash Flow:
    Management can manipulate cash flows by delaying payments to suppliers or speeding up the collection of receivables. Such actions can improve short-term cash flows but do not reflect the underlying economic reality. Profit figures are less easily manipulated because they incorporate accruals, which smooth out timing differences in payments and receipts.
  3. Non-Cash Expenses Matter:
    Non-cash items such as depreciation, amortization, and impairment losses are included in profit calculations but are not reflected in cash flows. These expenses are vital for assessing the long-term sustainability of a company because they represent the allocation of costs over the life of an asset, and their omission can distort performance analysis.
  4. Ability to Normalise for Exceptional Items:
    In profit figures, exceptional or one-off items (e.g., restructuring costs or gains from asset sales) are often disclosed separately, allowing analysts to “normalise” the profit and better assess sustainable performance. Cash flow figures may not clearly identify these items, making it difficult to distinguish between recurring operational cash flows and one-off impacts.
  • 20 Marks

FA – Nov 2023 – L1 – Q4 – IAS 7: Statement of cash flows

Prepare a statement of cash flows for Oti Ltd for the year ended 31 March 2022, including a discussion on cash equivalents.

Extracts from the financial statements for Oti Ltd for the year ended 31 March 2022 are as follows:

Statement of Profit or Loss for the year ended 31 March 2022

Description Amount (GHȼ)
Profit from operations 752,960
Interest payable (60,420)
Profit before tax 692,540
Income tax (210,400)
Profit for the year 482,140

Statements of Financial Position as at 31 March

Description 2022 (GHȼ) 2021 (GHȼ)
Non-current assets
Property, plant, and equipment 1,480,000 1,297,570
Current assets
Inventories 440,000 295,000
Trade receivables 385,840 197,750
Bank – 4,120
Total assets 2,305,840 1,794,440
Equity and liabilities
Share capital 640,800 540,200
Retained earnings 641,340 301,200
Non-current liabilities
10% Loan note 604,200 604,200
Current liabilities
Trade payables 154,700 150,300
Income tax payable 204,600 198,540
Bank overdraft 60,200 –
Total equity and liabilities 2,305,840 1,794,440

Additional information:

i) The depreciation charged for the year was GHȼ200,000.
ii) Dividends of GHȼ142,000 were paid during the year.
iii) During the year, plant with an original cost of GHȼ450,000 and a carrying amount at the date of disposal of GHȼ315,000 was sold for GHȼ412,000, which was received in cash.

Required:

a) In accordance with IAS 7: Statement of Cash Flows, prepare a Statement of Cash Flows for Oti Ltd for the year ended 31 March 2022. (18 marks)
b) Explain what is meant by the term ‘cash equivalents’ in relation to cash flow statements. (2 marks)

a) Oti Ltd: Statement of Cash Flows for the year ended 31 March 2022


b) Cash Equivalents:

Cash equivalents are short-term, highly liquid investments that are readily convertible into known amounts of cash and that are subject to an insignificant amount of risk of changes in value. An investment normally qualifies as a cash equivalent only if it has a short maturity, say, three months or less, from the date of acquisition.

  • 20 Marks

FA – Aug 2022 – L1 – Q4 – IAS 7: Statement of cash flows | Interpretation of financial statements (Financial Ratios)

Preparation of a Statement of Cash Flows using IAS 7, including cash flows from operating, investing, and financing activities, with an analysis of the benefits of preparing cash flow statements.

a) The following information relates to the activities of Chemu Ltd:

Statement of Financial Position as at 31 December

Account 2021 (GHȼ’000) 2020 (GHȼ’000)
Assets
Non-current assets 1,295 810
Current assets
Inventory 1,500 500
Receivables 2,680 890
Bank – 740
Total assets 5,475 2,940
Equity and liabilities
Equity
Share capital 600 400
Retained earnings 1,625 600
Total equity 2,225 1,000
Non-current liabilities
10% Debentures 160 360
Current liabilities
Bank overdraft 1,810 –
Payables 1,000 680
Taxation 280 900
Total liabilities 3,250 1,940
Total equity and liabilities 5,475 2,940

Additional information:

i) The Statement of Profit or Loss for the year ended 31 December 2021 shows the following:

Account Amount (GHȼ’000)
Operating profit 1,531
Interest payable (26)
Profit before taxation 1,505
Taxation (480)
Profit for the period 1,025

ii) Payables consist of trade payables and accrued interest. The accrued interest as at 31 December 2021 was GHȼ45,000 and as at 2020 was GHȼ80,000.

iii) Profit before taxation had been arrived at after charging GHȼ395,000 for depreciation on non-current assets.

iv) During the year, non-current assets with a carrying amount of GHȼ200,000 were sold for GHȼ190,000.

Required:
Prepare a Statement of Cash Flows for Chemu Ltd for the year ended 31 December 2021, in accordance with IAS 7: Statement of Cash Flows.
(16 marks)

b) Identify FOUR (4) benefits Chemu Ltd may derive from preparing a Statement of Cash Flows.
(4 marks)


b)
Benefits of Preparing a Statement of Cash Flows:

  1. Assessment of Liquidity:
    Helps in assessing the company’s ability to generate cash from operations, meet its short-term obligations, and manage its liquidity effectively.
  2. Performance Analysis:
    Provides insight into how well the company’s operations are generating cash, which is crucial for evaluating overall business performance.
  3. Investment and Financing Decisions:
    Assists in determining how much cash is being used for investments in non-current assets and how financing activities are being managed, supporting better decision-making.
  4. Transparency and Compliance:
    Ensures that the company complies with IAS 7, providing a clear, standardized view of cash flows that is useful to investors, creditors, and other stakeholders.

(4 marks evenly spread)

 

  • 20 Marks

FA – Nov 2020 – L1 – Q5 – IAS 7: Statement of cash flows | Interpretation of financial statements (Financial Ratios)

Analysis of financial performance using ratios and calculation of additional liquidity ratios and explanation of the importance of the statement of cash flows.

The following financial information relates to Mawoekpor Ltd. for the year ended 31 December 2019 (with comparative figures for the year ended 31 December 2018):

Statement of Financial Position as at 31 December 2019

Required:
a) Select THREE (3) of the ratios listed above and briefly outline what information each ratio provides to users of financial information, commenting specifically on the financial results of Mawoekpor Ltd.
(9 marks)

b) Calculate TWO (2) additional ratios for both 2018 and 2019 that would provide further evidence of the liquidity of the company.
(5 marks)

c) Explain THREE (3) importance of preparing a statement of cash flows.
(6 marks)

  • 20 Marks

FA – Nov 2018 – L1 – Q2 – IAS 7: Statement of cash flows

Prepare a statement of cash flows using the indirect method and differentiate between the direct and indirect methods.

a) Mensah & Co. Ltd
Statement of Financial Position as at 31 December 2017

Required:
a) Prepare a statement of cash flow as at 31 December 2017 for Mensah & Co. Ltd using the indirect method. (17 marks)

b) Differentiate between the Direct and Indirect Method of reporting cash flow from operating activities. (3 marks)

a) Mensah and Co Limited
Statement of Cash Flow for the year ended 31 December 2017

b) Differences between Direct and Indirect Methods of reporting cash flow from operating activities:

  • Direct Method: Discloses major classes of gross cash receipts and gross cash payments. It also discloses information not available elsewhere in the financial statements.
  • Indirect Method: Presents net profit or loss adjusted for the effect of non-cash transactions, deferrals, and items of income or expense associated with investing or financing activities. It is also simpler to use and is widely used. (2 points for 3 marks)
  • 20 Marks

FA – May 2018 – L1 – Q4 – IAS 7: Statement of cash flows

Prepare the statement of cash flows for a company based on provided financial data.

New World Company Limited is a large manufacturer of electrical goods. You are a trainee accountant working for the company. The following statement of profit or loss and other comprehensive income and statement of financial position extracts relate to New World Company Limited.

Required:
Prepare the statement of cash flows for New World Company Limited for the year ended 31 December 2017. (20 marks)

Statement of Cash Flows for the year ended 31 December 2017

  • 20 Marks

FA – May 2017 – L1 – Q5 – IAS 7: Statement of cash flows

Preparation of statement of cash flows for Saasa Company Ltd using the indirect method, with adjustments for various transactions and working capital changes.

Below are the statement of financial position for Saasa Company Limited at 31 December 2015 and 31 December 2016 and the income statement for the year ended 31 December, 2016.

Income Statement for the year ended 31 December 2016

GH¢’000
Revenue 900
Cost of sales (550)
Gross profit 350
Expenses (245)
Finance costs (9)
Profit on sale of equipment 7
Profit before tax 103
Income tax expense (30)
Profit for the period 73

Additional information
i) Deferred development expenditure amortized during 2016 was GH¢25,000.
ii) Additions to property, plant, and equipment totaling GH¢167,000 were made. Proceeds from the sale of equipment were GH¢58,000, giving rise to a profit of GH¢7,000. No other items of property, plant, and equipment were disposed of during the year.
iii) Finance costs represent interest paid on the new 6% debentures (2016-2022) issued on 1 January 2016.
iv) Current asset investments represent treasury bills acquired. The company deems these to represent cash equivalents.
v) Dividends paid during the year amounted to GH¢65,000.

Required:
Prepare a statement of cash flows for Saasa Company for the year ended 31 December 2016, using the indirect method in accordance with IAS 7: Statement of Cash Flows.

Saasa Company Ltd – Statement of Cash Flows for the year ended 31 December 2016

GH¢’000 GH¢’000
Cash flows from operating activities
Profit before taxation 103
Adjustments for:
Depreciation 135
Amortization 25
Interest expense 9
Profit on disposal of equipment (7)
Operating profit before working capital changes 265
Increase in trade receivables (23)
Increase in inventories (33)
Decrease in trade payables (39)
Increase in provisions 5
Cash generated from operations 175
Interest paid (9)
Income taxes paid (25)
Net cash from operating activities 141
Cash flows from investing activities
Development expenditure (42)
Purchase of property, plant, and equipment (167)
Proceeds from sale of equipment 58 (151)
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issue of shares 60
Proceeds from issue of debentures 150
Dividends paid (65)
Net cash from financing activities 145
Net increase in cash and cash equivalents 135
Cash and cash equivalents at the beginning of the period 4
Cash and cash equivalents at end of the period 139

  • 20 Marks

FA – May 2016 – L1 – Q4 -Preparation of financial statements of a sole trader | IAS 7: Statement of cash flows

Prepare an adjusted cash book, a bank reconciliation statement, and discuss the benefits of reconciling cash book and bank statement balances.

The Statements of Financial Position for the last two years for AO Ltd are shown below. AO Ltd implemented an expansion programme during the year ended 31st May 2015.

Additional information:
i) The total depreciation provision incorporated in the statements of financial position was GH¢48,000 at 31st May 2014 and GH¢122,000 at 31st May 2015.
ii) During the year ended 31st May 2015, a non-current asset costing GH¢22,000 with a carrying amount of GH¢6,000 was sold for GH¢1,000. No other disposals took place.
iii) The revaluation surplus represents a revaluation of premises during the year ended 31st May 2015.

Required:
a) Prepare a Statement of Cash Flows for AO Ltd for the year ended 31st May 2015 in accordance with IAS 7. (Use the indirect method). (12 marks)
b) State the effects of the expansion policy on AO Ltd. (8 marks)

a) Statement of Cash Flows for AO Ltd for the year ended 31 May 2015

b) Effects of the Expansion Policy on AO Ltd

  1. Liquidity Position: The liquidity position has fallen, as evidenced by the decrease in cash. The current ratio has fallen from 1.85:1 to 1.68:1, indicating a slight decline in the company’s ability to cover its short-term liabilities.
  2. Investment in Non-Current Assets: The company has significantly increased its investment in non-current assets, with a total investment cost of GH¢218,000. This increased investment may enhance future profitability and improve the return on capital employed, thereby benefiting shareholders.
  3. Risk: The company’s large investment in non-current assets carries risk. If the anticipated increase in income does not materialize, it could result in a lower return for shareholders.
  4. Equity Share Capital: The equity share capital increased due to the issuance of GH¢140,000 worth of shares. This provides more shares available for trading on the stock market, but it could also alter the control dynamics due to the increased voting power of ordinary shareholders.
  • 20 Marks

FA – Nov 2015 – L1 – Q3 -Interpretation of financial statements (Financial Ratios) | IAS 7: Statement of cash flows

Define key terms related to cash flow and calculate liquidity ratios using given financial data.

(a) Explain what is meant by the following terms as per IAS 7:
i. Statement of Cash flow (3 marks)
ii. Cash (1 mark)
iii. Cash equivalents (1½ marks)
iv. Operating activities (1½ marks)
v. Investing activities (1½ marks)
vi. Financing activities (1½ marks)

(b)
(i) Yaa Baby Company Ltd. has the following items in its Statement of Financial Position as at 31st December, 2014:

Item GH¢
Inventories 130,000
Trade Receivables 60,500
Cash in hand 3,453
Trade Payables 96,750

The company belongs to a Trade Association that has recently published industry averages for key financial ratios based upon a survey of its members. The industry averages for current and quick ratios applicable to the business of Yaa Baby Co. Ltd are:

  • Current ratio = 1.55: 1
  • Quick ratio = 0.95: 1

Required:
Calculate Current and Quick ratios of Yaa Baby Co. Ltd. and briefly comment on the result with reference to the industry averages. (5 marks)

(ii) Financial Ratios can be grouped under three (3) broad categories i.e. Profitability, Liquidity/Working capital, and Debt and Gearing/Leverage ratios. List all the ratios under Liquidity or Working capital ratios. (5 marks)

(a)
i. Statement of Cash flow is a statement which provides users of Financial Statement with the ability of an entity to generate cash and cash equivalents, as well as indicating the cash needs of the entity. In simple terms, it is the Statement of how cash and cash equivalents have been generated and used by an organization.

ii. Cash comprises cash on hand (physical cash) and demand deposits.

iii. Cash Equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in values.

iv. Operating Activities are the principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities.

v. Investing Activities are the acquisition and disposal of non-current assets and other investments not included in cash equivalents.

vi. Financing Activities are activities that result in changes in the size and composition of the equity capital and borrowing of the entity.

(b) (i) Calculation of Ratios

 

 

Comments: The company’s Current ratio of 2:1 is higher than the industry average of 1.55:1, while the Quick ratio of 0.66:1 is below the industry average of 0.95:1.

(ii) Liquidity/Working Capital Ratios:

  • Current ratio
  • Quick ratio
  • Receivables collection period
  • Payable payment period
  • Inventory turnover period

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