Topic 8

Statement of cash
flow (SCF)
(COMPANY LEVEL)
1
MFRS 107
UKAF3073 Corporate Reporting
 LECTURE OBJECTIVE

 This lecture will consider:

 The regulations governing the presentation of

Statement of cash flow
 The purpose of Statement of cash flows
 Preparation and presentation of Statement of cash
flows in accordance with MFRS 107
 Analysis and interpretation of Statement of cash
flows

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 LECTURE OUTCOME

At the end of this lecture, you should be able

to:

 Explain the purpose of Statement of cash

flows
 Prepare and present Statement of cash
flows in accordance with MFRS 107
 Analyze and interpret Statement of cash
flows
3
READING
Jane Lazar (2018) Chap 5

MFRS 107 Statement of Cash Flows

4
Introduction
 SCF is one of the financial statements
prepared and presented by companies as
part of the statutory accounts (in simple
term, it is a summary of cash book)

 Regulations:
 Companies Act 2016 requires the preparation of
statement of changes in financial position
 MFRS 107 Statement of cash flows

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 Importance of statement of cash flows

 Users will gain further knowledge of an entity’s

 Changes in the net assets
 Management’s decision on cash flows
 Liquidity and solvency of the entity
 Assess the effectiveness of management on managing
cash and cash equivalent
 Ability to adapt to changing circumstances

 Indicator of amount, timing and certainty of future cash

flows.

 Relationship between profit and cash flows can be analyzed.

 Enhance comparability as it is not affected by differing

accounting policies (unlike the SOPL).
 Benefits of Cash Flow Information
 The link between profitability and viability is
expressed by an entity’s cash flows.
 Profit is only a symbol of performance. The
ultimate survival of an entity depends on its
cash generating ability.
 Cash flow information enhances the
comparability of reported operating
performance by different entities because it
eliminates the effects of using different
accounting treatments, which involves
subjective allocations, valuations, etc
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 Limitations
 Information
provided is historical.
However, the information is
 An indicator of the amount, timing and certainty of future
cash flows.
 Useful in checking the accuracy of past assessments of
future cash flows
 Useful in examining the relationship between profitability
and net cash flow

 Inclusion
of cash equivalent could be
misleading

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Why we need to look at
SCF ?
 Sometimes earnings fail
 Large non-cash expenses  write-offs, depreciation,
provisions.

 Relevant information is in one statement

 Operating, investing and financing activities.
 It will be easier for the users to analyze the
information

 It is used as a forecasting tool

 To analyze whether the operating, investing and
financial activities are consistent and workable.

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 Definitions

Cash
Cash comprises cash on hand,
at bank and demand deposits.

Cash equivalents
Cash equivalents are short-term, highly liquid
investments that can readily be converted into
cash and are held for meeting short-term
commitments.
 Components of SCF
 Three Components:
a) Operating activities
b) Investing activities
c) Financing activities

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(a) Operating Activities (OA)
 Cash derived from principal revenue earning
activities

 A key indicator of
 the extent to which the operations of the
enterprise have generated sufficient cash flows
to repay loans
 sufficient cash flows to maintain the operating
capability of the enterprise
 sufficient cash flows to pay dividends and make
new investments without having to resort to
external sources of financing.

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Operating Activities (cont.)
 Examples:
 Cash receipts from the sale of goods and the
rendering of services
 Cash receipts from royalties, fees, commissions
and other revenues
 Cash payments to suppliers for goods and
services
 Cash payments to and on behalf of the
employees
 Cash receipts or refunds of taxes
 Cash receipts and payments from contracts held
for dealing or trading

 For financial institutions, cash movements relating

to trading of securities and cash advances/loans
13 made are classified as OA
 (b) Investing Activities
 Transactions involving acquisition and
disposal of long-term assets and non-cash
equivalent investments

 The amount of cash flows arising from

investing activities represents the extent
to which expenditure have been made for
resources intended to generate future
income and cash flows.

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 Investing Activities (cont.)
 Examples:
 Cash payments to acquire and cash receipts on
disposal of (i) tangible and intangible non-
current assets (inclusive of development
expenditure and expenditure to construct fixed
assets) and (ii) equity/debt instruments of
other entities.
 Cash payments to acquire long term assets
and receipts on disposal of long term assets
 Cash advances and loan made to other parties
and cash receipts from the repayment thereof

 Separate disclosure of IA is required to assess

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the extent of company expansion and its
 (c) Financing Activities
 Activities that result in changes in the
equity capital and borrowings of the
entity

 The separate disclosure of cash flows

arising from financing activities is useful
in predicting claims on future cash flows
by providers of capital to the enterprise

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 Financing Activities (cont.)
 Examples:
 Cash receipts from the issuance of shares/equity
& debt instruments and cash payments for the
redemption of equity (shares) and debt
instruments (debentures)
 Cash receipts from other short term or long term
borrowings and cash repayments of amount
borrowed.
 Cash repayments of finance lease outstanding

 Disclosure will enable to forecast the future cash

flow claim by capital providers
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Net increase/decrease in CACE
 The residual net liquid assets generated from the
3 activities of the company

 Is the difference between opening and closing

balance of CACE.

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 Interest Paid and Received
 Paid and Received  To be disclosed
separately but need to be consistent
 Interests paid can be classified under
 Operating activities because finance cost is the
normal expenditure deducted in arriving at profit
figure (norm for financial institution)
OR
 Financing activities because it is the cost of obtaining
the financial resources

 However interest received is normally be

presented under investing activities.
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Dividends Paid and Received

 Paid and Received  To be disclosed

separately but need to be consistent
 Dividends paid can be classified under
 Operating activities to determine the company’s
ability to pay dividend out of operating cash flow
OR
 Financing activities because it is the cost of obtaining
the financial resources by issuing shares

 Dividends received should go under

investing activities.
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 Taxes

 Separately disclosed under operating

activities unless it can be specifically
identified with financing and investing
activities

 If taxes paid allocated over more than one

class of activity, total amount of tax paid is
disclosed

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 Non-cash transactions
 Investing and financing activities that do not
have impact on current cash flow should be
excluded though they can affect the capital
and asset structure

 Example:
 Acquisition of assets or enterprise not using any
cash but by issuing shares
 Acquisition of assets by finance lease
 Exchange of non-monetary assets
 Conversion of debt to equity
 Revaluation of fixed assets
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Presentation of SCF

 Two methods:
 Direct Method
 Indirect Method

 The methods only differs in respect to

difference in presentation of cash flow from
operating activities

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 Direct Method

 Disclosure of cash flow based on major classes

of gross cash receipts and gross cash payments

 Straightforward and intuitive

 To provide a reconciliation of cash flow from

operations with the net profit or loss for the
period

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Direct Method cont’d…
Cash inflow: Source of information:
Cash sales Sales records
Cash collected from Trade receivables accounts:
customers
• Sales + op. receivables – cls. receivables
• Sales + decrease in receivables / sales –
decrease in receivables
Cash outflow:
cash purchases Purchase records
Payment to suppliers of Trade payables accounts:
goods
• Purchases + op. payables – cls. payables
• Purchase +/(-) decrease / (increase) in
payables
• Cost of sales + cls. Inventories – op.
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inventories + op. payables – cls. Payables
 Direct Method cont’d…
Payments to • Wages & salaries as charged in SOCI
employees + decrease in wages & salaries
accrued –increase in wages & salaries
accrued
Payments for other Other expenses as charged in SOCI:
expenses • (-) depreciation
• (-) losses on disposal on non-current
assets
• [+] decrease in accrued expenses
• [+] increase in prepaid expenses
• [+] gain on disposal of non-current
assets

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 Cash Flow Berhad
Statement of cash flow for the year ended 31 Dec 20xx
Cash flow from operating activities: RM RM
Cash receipts from customers xx
Cash paid to suppliers and employees (xx)
Cash generated from operations xx
Interest paid (xx)
Income taxes paid (xx)
Net cash flows from operating activities xx

Cash flow from investing activities:

Purchase of property, plant and equipment (xx)
Proceeds from disposal of property, plant and equipment xx
Purchase of investment (xx) Direct
Interest received xx Method
Dividends received xx
Net cash inflows from investing activities xx

Cash flows from financing activities:

Proceeds from issue of equity xx
Proceeds from borrowings xx
Payment of finance lease obligations (xx)
Dividends paid (xx)
Net cash flows from financing activities xx
Net increase in cash and cash equivalents xx
27 Cash and cash equivalents at beginning of the period xx
(Note a)
Indirect Method

 Adjustment of net profit for the effects of

 non cash transactions
 deferrals
 accrual payment
 cash flow associated with investing or
financing activities

 Highlight the factors that cause net

income and cash from operations to
differ and highlight how cash flow can be
improved in the short run by adjusting
operating procedures (i.e. working
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capital)
 Indirect Method cont’d…

 The following items are adjusted:

 Depreciation
 Amortization
 Gain and losses on disposal of assets
 Foreign currency gains and losses
 Provision for doubtful debts
 Interests capitalized
 Amortization of government grants
 Changes in working capital
 Increase or decrease in receivables
 Increase or decrease in inventories
 Increase or decrease in payables
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 Indirect method format

 The format of SCF using the indirect method is

similar to the direct method EXCEPT for the
component of Cash flows from operating
activities.

 The cash flows from investing and financing

activities components are the same.

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 Cash Flow Berhad
Statement of cash flow for the year ended 31 Dec 20xx
Cash flow from operating activities: RM RM

net profit before taxation xx

adjustments for:
Depreciation xx
Foreign exchange loss xx
Investment income (xx)
interest expense xx
interest income (xx)
Gain on disposal of PPE (xx)
Indirect
Loss on disposal of investment xx
Method
Bad debts written off xx
Amortization of intangibles xx
Operating profit before working capital changes xx
Decrease in receivables xx
increase in inventories (xx)
increase in trade payables xx
cash generated from operations xx
interest paid (xx)
Income taxes paid (xx)
31 Net cash flows from operating activities xx
 Example 2 (pg 169)
 From the information given below, prepare the
statement of cash flows for the year ended 31
Dec 20X9 using:

a) Direct method
b) Indirect method

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 Lovely Child Bhd
Statement of Profit or Loss for the yr ended 31 Dec 20X9
RM’000 RM’000
Sales 220
Cost of sales (98)
122
Selling and distribution costs 25
Administrative costs 15
Depreciation 2
Profit on sale of plant (2) (40)
82
Interest expense (6)
Investment income 1
Gain on sale of investment 2
Profit before tax 79
Taxation (22)
Profit
33 after tax 57
 Extract of statement of changes in equity

Ord. Shares Retained profits

(RM) (RM)

1 Jan 20X9 100,000 50,000

Profit for the year 57,000

Dividends (17,000)

Conversion of 10% debentures 10,000

Issue of share for cash 30,000

140,000 90,000

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 Lovely Child Bhd
Statement of financial position as at 31 Dec
20X9 20X8
RM RM
Ordinary shares 140,000 100,000
Retained profit 90,000 50,000
Non-current liabilities:
10% convertible debentures 50,000 60,000
Bank loan 23,000 33,000
Current liabilities:
Accrued selling expenses 2,500 1,000
Trade payables 12,500 15,000
Tax payable 2,000 1,000
320,000 260,00
0
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 Lovely Child Bhd
Statement of financial position as at 31 Dec
20X9 20X8
RM RM
Non-current assets:
Land 200,000 140,000
Plant and machinery (cost) 30,000 40,000
Accumulated depreciation – plant & machinery (5,000) (6,000)
Motor vehicles (cost) 20,000 20,000
Accumulated depreciation – MV (3,000) (2,000)
Investments 30,000 40,000
Current assets:
Inventories 7,000 5,000
Trade receivables 20,000 17,000
Cash in hand 21,000 6,000
320,000 260,00
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0
 Example 2 : Additional information
1. RM10,000 of the convertible debentures were
converted into ordinary shares in year 20X9 (no
cash flow)
2. The increase in the issued share capital is due to
the issue of shares for cash and the conversion
of debentures. (part cash, part not cash –
financing activities)
3. Sale of plant and machinery was for cash. There
were no purchases of plant and machinery
during the year. (cash - investing)
4. An investment of RM3,000 was purchased during
the year (cash – investing)
5. Land was purchased for cash (cash – investing)
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6. Depreciation charge of RM2,000 in the SOPL
(a) Solution – Direct Method-Operating activities

 Cash collection from customers:

= Sales – increase in trade receivables

= 220k – 3k = RM217,000

 Cash payments:
= COS + increase in inventories + decrease in payables

= 98k + 2k + 2.5k = RM102,500

 Payment for administrative expenses is RM15k as there are

no accruals or prepayments for this expense.

 Payment for selling expenses:

= Expenses as SOPL – increase in accrues expenses

38 = 23.5 – (2.5 – 1) = RM23,500

(a) Solution – Direct Method-Operating activities

 Tax paid – Set up the tax payable account to

derive the cash payment to the tax authorities

Tax payable
RM RM
Cash/bank * 21,000 b/f ^ 1,000
c/f ^ 2,000 SOPL 22,000
23,000 23,000

* Balancing figure
^ as per Statement of financial position
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 (a) Solution – Direct Method-Investing activities
Plant & machinery
RM RM
b/f 40,000 Disposal 10,000
c/f 30,000
40,000 40,000

Accumulated depreciation
RM RM
Disposal 2,000 b/f 6,000
c/f 5,000 SOPL 1,000
7,000 7,000

Disposal – Plant & Machinery

RM RM
Plant & machinery 10,000 Acc. depreciation 2,000
SOPL 2,000 Cash 10,000
40 12,000 12,000
(a) Solution – Direct Method-Financing activities

 Dividends paid:

Op. retained profits + PAT – Cls. Retained

profits

= 50k + 57k – 90k

= RM17,000

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 Lovely Child Berhad
Statement of cash flow for the year ended 31 Dec 20x9
Cash flow from operating activities: RM RM
Cash receipts from customers 217,000
Cash paid to suppliers and employees (141,000
)
Cash generated from operations 76,000
Interest paid (6,000)
Income taxes paid (21,000)
Net cash flows from operating activities 49,000

Cash flow from investing activities:

Purchase of land (200k – 140k) (60,000)
Proceeds from disposal of plant & machinery 10,000
Purchase of investment (3,000)
Proceeds from disposal of investment 15,000
Investment income received 1,000
Net cash outflows from investing activities (37,000)

Cash flows from financing activities:

Proceeds from issue of share capital (130k – 10k – 100k + 30,000
10k)
Repayments of bank loan (33k – 23k) (10,000)
Dividends paid (17,000)
Net cash flows from financing activities 3,000
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Net increase in cash and cash equivalents 15,000
(b) Solution – Indirect Method
Lovely Child Berhad
Statement of cash flow for the year ended 31 Dec 20x9
Cash flow from operating activities: RM RM
net profit before taxation 79,000
adjustments for:
Depreciation 2,000
Gain on sale of PPE (2,000
)
Gain on sale of investments (2,000
)
investment income (1,000
)
interest expense 6,000
Operating profit before working capital 82,000
changes
Increase in receivables (3,000
)
increase in inventories (2,000
)

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Decrease in trade payables (2,500
)
 (b) Solution – Indirect Method
Cash flow from investing activities:
Purchase of land (200k – 140k) (60,000)
Proceeds from disposal of plant & machinery 10,000
Purchase of investment (3,000)
Proceeds from disposal of investment 15,000
Investment income received 1,000
Net cash outflows from investing activities (37,000
)

Cash flows from financing activities:

Proceeds from issue of share capital (130k – 10k – 100k 30,000
+ 10k)
Repayments of bank loan (33k – 23k) (10,000)
Dividends paid (17,000)
Net cash flows from financing activities 3,000
Net increase in cash and cash equivalents 15,000
Cash and cash equivalents at beginning of the 6.000
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period
 Analysis of SCF
 It provides movements of cash and
cash equivalents, which is comparable
among different companies regardless of
different accounting policies adopted by
those companies under comparison.

 Provide data in assessing a company’s

financial strength:
 By analyzing the relationships among cash
flows from operating, investing and
financing activities; and
 By computing financial ratios based on cash
flow data.
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 Cash Flow Patterns – Operating Cash Flow
 A positive operating cash flow allows a
company to pay its bills, its creditors, and
its shareholders and to grow and expand.

 A negative operating cash flow means a

company has to look at other sources of
cash, which eventually dry up if
operations are not successful. Several
period of negative cash from operations
is a sure indicator of financial trouble

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Cash Flow Patterns – Investing Cash Flow

 Most companies use cash to expand

or enhance long term assets

 Positive  selling off long term assets

faster than replacing them

 Negative  Growing company ->

investing in long term assets

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 Cash Flow Patterns – Financing Cash
Flow
 Positive – Young and fast expanding
company that uses external funds

 Negative – Mature successful stable

company which use cash flow to repay loan
or pay dividends

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