CPA P1 Corporate Reporting
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TOPIC 40_41 - 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
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STATEMENT OF CASHFLOWS - INDIRECT METHOD- PRO FORMA
€000 €000
Cashflows From Operating Activities
Profit Before Taxation x
Adjustments For:
Profit/Loss on Disposal of PPE x
Amortization of Intangible Asset x
Interest x
Depreciation x
Amortisation of Government Grant x
Impairment x
Net Non Cash Expense for Employee Benefits x
_______
x
Trade Receivables – Increase (x)
Inventory – Decrease x
Trade Payables – Increase x
___________
Cash Generated From Operations x
Interest (x)
Income Taxes Paid (x)
_________
Net Cash used/from Operating Activities x
Cashflows from Investing Activities
Proceeds from sale of property, plant & equipment x
Acquisition/Purchase of property, plant & equipment (x)
Development Expenditure (x)
Purchase of Intangible Assets (x)
Purchase of Investments (x)
Receipt of Govt. Grants x
Investment Income Received x
Dividend Received x
Interest Received x
______
Net Cash From/Used in Investing Activities x
Expense
PAID
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€000 €000
Cashflows from Financing Activities
Proceeds from Issue of Share Capital x
Proceeds from Issue of Loan/Debentures x
Repayment/Redemption of Loan/Debentures (x)
Payment of Finance Lease Obligations (Capital) (x)
Dividend Paid (x)
________
Net Cash Used/From Financing Activities x
_____________
Net Increase/Decrease in Cash & Cash Equivalents
(Derived from Info Given in Question) x
Cash & Cash Equivalents at Beginning of Period (From Question) x
_____________
Cash & Cash Equivalents at End of Period (From Question) x
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(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 expense 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 tax 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.
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(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 Tax
If Cash Generated from Operations is similar or higher than Profit
Before Tax then no major cause for concern.
BUT
If Cash Generated from Operations is much lower than profit before
tax Worrying
Reasons
(a) Entity is expanding rapidly and is absorbing cash
generated from operations to fund the expansion
(b) Working Capital Management is poor (too much money
invested in inventory with a knock effect to Trade
Payables)
2. Interest Paid, Taxation 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
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Cash/Share Issue/Long Term Borrowing
(Link to Financing Section of Statement of Cashflows)
A purchase of non current assets may experience 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 excess 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 (tax and interest)
The current level of dividends (optional)
Any plans for expansion of the business
Any other spending commitments
Borrowings to be repaid in the next 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
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“CASHFLOWS FROM OPERATING ACTIVITIES”
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 exposed to significant changes in value i.e.
Market movements)
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(d) Miscellaneous Points on Statement of Cashflows
1. Profit Before Tax or Profit After Tax
If you choose to start the statement with the Profit After Tax, you must firstly
addback/subtract the Income Tax Expense/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 Tax (which is most
common), then the Income Tax Expense/(Relief) can initially be ignored because your
starting position excludes the Income Tax Expense/(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 Tax Expense/(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 extent of accruals which are not
dealt with separately in another part of Statement of Cashflow) e.g. Accrued
Interest and Taxation).
4. Cash Generated From Operations
When reviewing a Statement of Cashflow, this is a key figure to examine
Can the entity finance its Interest Charge and Taxation Charge from it’s
Cashflows from Operating Activities
5. Cash and Cash Equivalents At Beginning/End of Period
In the exam, transcribe these figures direct from the question
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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 Example: The notes to the financial statements of Hayley Co show the
following in respect of obligations under finance leases
Year Ended 30 June 2005 2004
$000 $000
Amounts Payable Within 1 Year 12 8
Within 2 to 5 Years 110 66
Less: Finance Charges Allocated to
Future Periods - 14 - 8
108 66
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 2005
Obligations Under Finance Lease
1.7.04 Bal Bd 66
Capital Repaid (Plug) 14
30.6.05 Additions 56
30.6.05 Bal C/d 108
122 122
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INDIRECT & DIRECT METHOD OF PRESENTING CASH GENERATED FROM
OPERATIONS – IAS 7
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Hopper Company – Direct v Indirect Method for Presenting Cash Generated from Operations
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(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
Remember the Layout?
o Start with profit before tax
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”
N.B. : The group statement of cashflows should only deal with flows of cash and cash
equivalents external to the group, so all intra group cash flows should be eliminated.
Dividends paid to NCI should be included under the Financing Activities and disclosed
separately
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CONSOLIDATED STATEMENT OF CASHFLOWS - INDIRECT METHOD- PRO
FORMA
€000 €000
Cashflows From Operating Activities
Profit Before Taxation x
Adjustments For:
Profit/Loss on Disposal of PPE (x)
Amortization of Intangible Asset x
Interest x
Depreciation x
Amortisation of Government Grant x
Impairment (Consol Goodwill) x
Share of Profit (Loss) of Associate x
Gain/Loss on Disposal of Subsidary x
_______
x
Trade Receivables – Increase (x)
Inventory – Decrease x
Trade Payables – Increase x
___________
Cash Generated From Operations x
Interest (x)
Income Taxes Paid (x)
_________
Net Cash used/from Operating Activities x
Cashflows from Investing Activities
Proceeds from sale of property, plant & equipment x
Acquisition/Purchase of property, plant & equipment (x)
Development Expenditure (x)
Purchase of Intangible Assets (x)
Purchase of Investments (x)
Receipt of Govt. Grants x
Investment Income Received x
Dividend Received x
Interest Received x
Dividend from Associate x
Acquisition Cost /Disposal Proceeds of Subsidary x
______
Net Cash From/Used in Investing Activities x
Expense
Paid
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€000 €000
Cashflows from Financing Activities
Proceeds from Issue of Share Capital x
Proceeds from Issue of Loan/Debentures x
Repayment/Redemption of Loan/Debentures (x)
Payment of Finance Lease Obligations (Capital) (x)
Dividend Paid to Equity Holders (x)
Dividend Paid to NCI ( x)
________
Net Cash Used/From Financing Activities x
_____________
Net Increase/Decrease in Cash & Cash Equivalents (Derived) x
Cash & Cash Equivalents at Beginning of Period (From Question) x
_____________
Cash & Cash Equivalents at End of Period (From Question) x
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 Tax “ but the figure is calculated as “our share of
Associate Profit After Tax “ (i.e. it is a profit based figure and not
cash)
Example
Extracts 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
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66,000
Tax (15,900)
50,100
2009 2008
Investment in Ezelis 190,000 180,000
Calculate dividend received from Ezelis (Associate)
Investment Brought Fwd 180,000
Add: Investor Share of Profit After Tax of
Associate
13,000
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
Example
Extracts from Orbit’s Statement of profit or loss and other comprehensive income for the year
ended 31 December 2009
Group Profit Before Tax 91,000
Tax (30,700)
Profit After Tax 60,300
Attributable To:
Equity Holder of the Parent 49,900
NCI 10,400
60,300
SOFP 2008 2009
NCI 115,000 110,000
Calculate the dividend paid to Non Controlling Interests?
NCI Balance B/fwd 115,000
Add: Portion of Profits 10,400
125,400
Less: NCI Balance C/fwd (110,000)
Therefore Dividend Paid to NCI 15,400
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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
Example – 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 2009
2009 2008
INCA 10,000
TNCA 115,000 30,000
Inventory 53,000 17,000
Receivables 59,000 20,000
Cash 23,400 12,000
260,400 79,000
Shares 65,000 50,000
Premium 48,000 3,000
Retained Earnings 32,400 22,000
Revaluation Reserve 60,000
NCI 18,200
223,600 75,000
Current Liabilities
Payables 28,800 3,000
Tax 8,000 1,000
260,400 79,000
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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 Expenses 19,000
Distribution Costs 7,000 (26,000)
Profit Before Tax 32,000
Tax (8,000)
Profit After Tax 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
Acquisition
15,200
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 Tax 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
Tax Paid (1,000) (1,000)
Net Cash flow from Operating Activites 16,000
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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 B/fwd 12,000
Cash & Cash Equivalents B/fwd 23,400
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
2010 2009
Balances with Banks (600) (2,000)
Cash in Hand 24,000 14,000
23,400 12,000
Working 1
Sinjita
80%
Armine
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Working 2
Cost 72,000
NA @ 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
130,000
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 exercise will impact on the Asset & NCI but
not on retained earnings
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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 Tax 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 Tax 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 tax
The figure for repayment of finance leases in “Financing Activities” is capital only –
the interest element is contained within Interest Paid in “Operating Activities”
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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 exam, 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)
Example – 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)
Tax (15,000)
Net Assets 710,000
The consolidated statement of financial position of the Autis Group as at 30 June 2009 and
2008 were
2009 2008
$000 $000
INCA
TNCA 1300 900
Inventory 750 800
Receivables 600 510
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Cash 150 100
2,800 2,310
Shares 1000 817
Premium 100
Retained Earnings 900 800
NCI 400 583
2,400 2,200
Current Liabilities
Payables 300 60
Tax 100 50
2,800 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
Subsidary
303,000
Profit Before Tax 350,000
Tax (120,000)
Profit After Tax 230,000
Consolidated Statement of Changes in Equity
Retained
Earnings
Share Capital Share
Premium
Non
Controlling
Interest
B/fwd 800,000 817,000 583,000
Issued 183,000 100,000
Profit for the
Year
230,000
NCI (30,000) 30,000
Dividend (100,000) (213,000)
C/fwd 900,000 1,000,000 100,000 400,000
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
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Operating Activites
Profit Before Tax 350,000
Add Back non Cash items
Depreciation 200,000
Profit on Disposal of
Subsidary
(303,000) (103,000)
247,000
Changes in Working Capital
Increase in Inventory
(750 – (800 -150))
(100,000)
Increase in Receivables
(600 – (510-100))
(190,000)
Increase in Payables
(300- (60-75))
315,000 25,000
272,000
Tax Paid (55,000) (55,000)
Net Cash flow from Operating
Activites
217,000
Investing Activities
Purchase of TNCA (1300 –
(900-500) -200))
(1,100,000)
Net Proceeds on Disposal of
Subsidary (800 -50)
750,000 (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
B/fwd
100,000
Cash & Cash Equivalents
B/fwd
150,000
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
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Payables (75,000)
Tax (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 497,000
497/710 = 70%
2. Payment to NCI Per SOCIE 213,000
213/710 = 30%
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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 Tax – then “PAID IS” (Non Cash Items)
o Profit/Loss on Disposal of NCA
o Amortisation
o Impairment
o Depreciaition
o Interest Expense
o Share of Profit of Associate
o then RIP (Movements in Working Capital)
o Calculate Interest Paid & Taxation 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 Exam Questions – IAS 7
Q3 (8) August 2013
Q2 April 13 (Single Company SOCF)
Q1 Aug 2011 (Consol. Statement of Cashflow)
Q3 Aug 11
Q3 Apr 11