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    If you find this free chapter useful

    then buy the book! The second edition

    of the a students guide to group

    accounts by Tom Clendon and

    published by Kaplan is available online from amazon, from leading

    accountancy book shops and from

    FTMS offices across SE Asia. For

    further details contact the author direct

    on his face book page.

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    Whats new?

    The second edition of my book A students guide to group accounts published byKaplan, has nineteen chapters that set out how to prepare the group statement offinancial position and how to prepare the group statement of total comprehensive

    income.

    This brand new chapterwhich is only available on line - is all about the preparationof the group cash flow statement.

    In order to prepare a statement of group cash flows you will need know two things.

    1. The format of the cash flow statement.2. How to calculate a cash flow and where in the cash flow statement that cash

    in or out flow is reported.

    1. The format of the cash flow statement

    In principle the format of the cash flow statement is quite simple as IAS7 Statementof Cash Flows (IAS7) proscribes only three headings. These are Operating Activities,Investing Activities and Financing Activities. The exact order of the items shownunderneath these three headings is not formally proscribed.

    In preparing a statement of cash flows you are going to have remember the formatas it will not be given in the question. When preparing group cash flows we are onlygiven the opening and closing group statement of financial positions and the groupstatement of total comprehensive income.

    There are two alternative formats to the cash flow.

    a) The direct method.b) The indirect method

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    a) The direct method format

    Group cash flow format - Direct method

    1. Operating Activities $ $

    Cash received from customers XCash paid to and on behalf of staff (X)Cash paid to suppliers (X)Cash paid for other operating expenses (X)Cash generated XInterest paid (X)Taxation paid (X)Pension contribution paid to defined benefit scheme (X) X

    2. Investing Activities

    Payments to buy PPE / Intangibles / Investments (X)Proceeds from sale of PPE / Intangibles / Investments X

    Cash paid to buy investments in new subsidiary / associate / JV (X)Cash / overdraft taken over in new subsidiary X / (X)

    Sale proceeds from disposal of shares in subsidiary / associate /JV XCash / overdraft passed away on disposal of a subsidiary (X) / X

    Dividends received from investments (inc. from associates and JV) XCapital government grants received X (X)

    3. Financing Activities

    Proceeds from an equity share issue XDividends paid (X)Dividends paid to the NCI (X)

    Control to control cash proceeds when NCI increases XControl to control cash paid when NCI decreases (X)

    Proceeds from the issue of new debt / debentures / loan stock XRepayment of debt / redemption of debentures / loan stock (X)Capital element of repayment of finance lease obligations (X) X/(X)

    Change in cash and cash equivalents X/(X)Opening cash and cash equivalents X/(X)Closing cash and cash equivalents X/(X)

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    Explanation of the direct method

    Unsurprisingly cash inflows are reported as positive numbers whilst cash out flowsare reported as negative numbers, and so in brackets. I make this point becausewhen I am marking scripts I know that too many candidates make this error. To

    quote from a recent ACCA P2 examiners report Consolidated statement of cashflows questions - candidates often place the wrong sign on the correct figure. Forexample, a deduction is made in the statement rather than an addition. If this is asimple subtraction of two figures and the candidate puts the wrong sign on theresultant figure then it is difficult to award marks.

    Operating Activities (direct method)

    The cash flows reported in Operating Activities are the sort of cash flows that youwould expect, in that they relate to the day to day operating activities of the group.Cash is received from customers and then paid to suppliers, staff and for other

    expenses. It is all very logical. It is worth noting that included in Operating Activitiessection is the taxation paid and interest paid.

    At this stage I think it worth pointing out that the taxation paid will not be the samefigure as the taxation charged in the profit or loss. On the same basis the interestpaid may not be the same as the finance cost charged in the statement of profit orloss. The basic reason for this is simple. The cash flow statement is reporting cashflows. The amount of cash paid. Whereas the statement of profit or loss is reportingthe expense of the period which takes into account the accruals concept. Forexample the tax charge to profit or loss will include an adjustment for deferredtaxation which is not a cash item.

    Investing Activities

    The cash flows reported in Operating Activities are cash flows that relate to non-current assets. After all when we talk about investing in the business it means buyingthese type of assets! So it is natural to include the cash spent buying or constructingproperty plant and equipment and intangible assets as well as buying investments insubsidiaries, associates and joint ventures as cash outflows in Investing Activities.Of course if any of these non-current assets are sold for cash or generate a cashreturn (e.g. dividends received) then these cash inflows are also reported in

    Investing Activities.

    Financing Activities

    As you may know from your financial management studies there are two ways offinancing the long term capital of a business, debt and equity.

    The financing activities therefore includes those cash flows with equity i.e. theshareholders. These are primarily to do with the issue of shares for cash and thepayment of dividends but also include the cash flows when there are control tocontrol transactions that increase or decrease the NCI.

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    The financing activities also include the cash flows with debt e.g. those who havelent money to the business. These include the cash received following the issue ofdebentures and the cash paid back to redeem those loans. As finance leases are insubstance a loan so the loan repayments on finance lease obligations are alsoreported as a cash out flow under financing activities.

    Cash and cash equivalents.

    The cash flow statement reconciles to the changes in cash and cash equivalents.These comprise cash on hand and demand deposits, together with short-term, highlyliquid investments that are readily convertible to a known amount of cash, and thatare subject to an insignificant risk of changes in value.

    IAS 7 does not define short term but does state an investment normally qualifies asa cash equivalent only when it has a short maturity of, say, three months or less from

    the date of acquisition.

    Consequently, equity or other investments which do not have a maturity date areexcluded from cash equivalents unless they are, in substance, cash equivalents.

    This three-month time limit is somewhat arbitrary but is consistent with the conceptof insignificant risk of changes in value and a purpose of meeting short-term cashcommitments.

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    b) The indirect format

    The other cash flow statement format is known as the indirect method. This onlydiffers from the direct method in the initial part of the Operating Activities section.

    Group cash flow format - Indirect method

    1. Operating Activities

    Profit before tax XLess investment income (X)Less income from associate / joint venture (X)Plus finance cost XDepreciation XLess capital government grant released (X)Amortisation XImpairment loss (charged in profit or loss) e.g. goodwill XLoss on disposal of assets (profit) X / (X)Increase in provisions included in profit before tax (decrease) X / (X)Foreign exchange loss (gain) at the individual company stage X / (X)Current service cost / Past service cost / Settlement & curtailments XShare based payments XChange in working capitalIncrease / decrease in inventory (X) / XIncrease / decrease in receivables and prepayments (X) / XIncrease / decrease in trade payables and accruals X / (X)

    Cash generated X

    Interest paid (X)Taxation paid (X)Pension contribution paid to defined benefit scheme (X) X

    2. Investing Activities

    Payments to buy PPE / Intangibles / Investments (X)Proceeds from sale of PPE / Intangibles / Investments X

    Cash paid to buy investments in new subsidiary / associate / JV (X)Cash / overdraft taken over in new subsidiary X / (X)

    Sale proceeds from disposal of shares in subsidiary / associate /JV XCash / overdraft passed away on disposal of a subsidiary (X) / X

    Dividends received from investments (inc. from associates and JV) XCapital government grants received X (X)

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    3. Financing Activities

    Proceeds from an equity share issue XDividends paid (X)

    Dividends paid to the NCI (X)Control to control cash proceeds when NCI increases XControl to control cash paid when NCI decreases (X)

    Proceeds from the issue of new debt / debentures / loan stock XRepayment of debt / redemption of debentures / loan stock (X)Capital element of repayment of finance lease obligations (X) X/(X)

    Change in cash and cash equivalents X/(X)Opening cash and cash equivalents X/(X)Closing cash and cash equivalents X/(X)

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    Explanation of the indirect method

    In what initially seems a little bizarre for something called a cash flow statement, theindirect method opens up, not with a cash at all but rather Profit Before Tax. TheProfit Before Tax is then reconciled to the cash generated by adjusting for non-cash

    items. From interest paid the rest of the cash flow statement is the same.

    In the reconciliation of Profit Before Tax to cash generated (the reconciliation)non-cash expenses charged against profit before tax are added back. Take for exampledepreciation as the classic non-cash expense. This has clearly reduced profit buthas not resulted in a cash outflow. So when we are trying to reconcile profit to thecash generated it is necessary to add back depreciation. Other non-cash expensesthat have been charged in arriving in profit are also added back for example losseson disposal on non-current assets, finance costs and increases in provisions.

    On the same basis items of income which boost profit but are not cash flows are

    deducted in the reconciliation. Examples of income that are deducted include profiton the disposal of non-current assets or decreases in provisions.

    Also included in the reconciliation part of the indirect method operating activities arethe changes in working capital. For example if the business buys inventory then thistransaction on its own has no impact on profit but can result in a reduction in cashthus an increase in inventory year on year is bad for cash flow and the difference isa negative in the reconciliation. On the same logic receiving cash from a receivablealso has no impact on the profit but is good for cash as it results in a cash inflowand so for any decrease in receivables year on year the difference is a positive in the

    reconciliation. Finally paying a trade creditor has no impact on profit but results in areduction in cash so any decrease in trade payables year on year is bad for cashand the difference is a negative in the reconciliation.

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    2. How to calculate a cash flow and where in the cash flow statement that cashin or out flow is reported

    Now that we have looked at the format of cash flows we can now turn our attentionas to how to calculate cash flows. Basically cash flows are derived as missing

    figures. Ascertaining cash flows at its simplest do not deserve a complicatedworking.

    For example if the finance cost charged in profit is $100 but at the year-end there isan accrual for interest owing of $5 then it seems natural to conclude that the interestactually paid and an operating cash outflow is only $95 (being $100 - $5) as all of theexpense has been paid.

    Where the cash flow needs a proper working because it is not just involving twofigures then it is necessary to reconcile the opening balance of an item to its closingbalance showing all the reasons why the item has either increased or decreased. In

    this process of making the opening and closing balances reconcile the cash flow willbe revealed as the missing / balancing figure.

    To quote from a recent ACCA P2 examiners report - Consolidated statement ofcash flows questions - It is important as always to show all workings. For example,very few candidates correctly calculated the income taxes paid figure but there wereseveral marks for this calculation, which were often awarded in the workings in thescripts. Many of the figures in the statement do not need workings but where theydo, it is important to show them.

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    Cash Flow Exercise to show the basic techniqueCalculate the cash flows given the following extracts from statements of financialposition drawn up at the year ended 31 December 20X0 and 20X1.

    20X1 20X0Non-Current Assets $ $Property Plant & Equipment (PPE) 300 100

    During the year depreciation charged was $20, a revaluation surplus of $60 wasrecorded, PPE with a CV of $15 were disposed of and PPE acquired subject tofinance leases had a CV of $30.

    Required: How much cash was spent on PPE in the period?

    Answer to cash flow exerciseWell we know that the cash spent on PPE will be an outflow and an investing activity.The working showing the reconciliation is as follows.

    PPE ExplanationOpening balance 100 From the opening s of fpDepreciation (20) Depreciation reduces the carrying valueSurplus 60 The revaluation gain increases carrying valueDisposal (15) The carrying value of the asset being sold reducesFinance lease 30 A new finance lease means there is more PPE

    155Cash - balancing figure 145Closing balance 300 From the closing s of fp

    The explanationsare provide for your benefit and it would be unnecessary to includein an examination answer.

    Incidentally in terms of exam technique never show your workings like this

    100-20+60-15+30-300 = 145

    This row format of numbers does not lend itself to any form of reference orannotation as to the source of the numbers so is difficult to mark.

    The working can be shown as a T account. T accounts are perhaps a little oldfashioned and can lead to errors unless you are already very proficient with doubleentry. This working is shown as a T account in the double entry section.

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    Group cash flow issuesLet me take you through four cash flow issues that specific to group accounts.

    1. Dividends paid to the NCI.

    In a group cash flow statement intercompany cash flows are not reported. The wholebasis of preparing group accounts is to show the group as if it were a single entity.Thus any dividends paid by the subsidiary that are received by the parent are neithera cash out flow or inflow of the group. However the dividend that the subsidiary paysout to the NCI is a cash out flow and is reported in Financing Activities as it is a cashtransaction with equity. If the group statement of changes in equity is not given in thequestion then the dividends paid to the NCI can be ascertained as a balancing figureof the NCI.

    Cash Flow Exercisedividend paid to the NCICalculate the cash flow given the following extracts from statements of financial

    position drawn up at the year ended 31 December 20X0 and 20X1.

    20X1 20X0Equity $ $Non-controlling interest 840 440

    In the group statement of comprehensive income, the total comprehensive incomeattributable to the NCI was $500. During the year the parent acquired more shares inthe subsidiary and this changed the NCI by $60.

    Required: How much was the cash dividend paid to the non-controllinginterest?

    Answer dividend paid to the NCI

    The dividend paid to the NCI is cash out flow and a financing activity.The working is as follows.

    NCI Explanation

    Opening balance 440 From the opening s of fpProfit attributable to the NCI 500 Profit increases equity / NCIReduction in the NCI (60) Parent buys out the NCI (control to control)

    880Cash - balancing figure 40Closing balance 840 From the closing s of fp

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    2 Dividends received from equity accounted investments (Associates andJoint Ventures)

    The application of equity accounting means that in the group statement ofcomprehensive income and the group statement of financial position the share of

    profit has been recognised. In the group statement of cash flows we want to havereported the cash flow received as a return on such investments! The cash that thegroup will receive will be in the form of dividends. This is a cash inflow and as returnon an investment will be reported in investing activities.

    The dividend received from the associate (or joint venture) will be ascertained as abalancing figure when reconciling the opening and closing balances of the carryingvalue of the equity accounted investment in the group accounts.

    Cash Flow Exercisedividend received from an associate

    Calculate the cash flow given the following extracts from statements of financialposition drawn up at the year ended 31 December 20X0 and 20X1.

    20X1 20X0Non-Current Asset $ $Investment in associate undertaking 500 200

    The group statement of profit or loss reported Income from Associate Undertakingsof $750.

    Required: How much was the cash dividend received by the group?Cash in and an investing activity.

    Answerdividend received from an associate

    The dividend received from an associate is a cash inflow and an investing activity.The working is as follows.

    Investment in the associate ExplanationOpening balance 200 From the opening s of fp

    Plus the % of profit 750 Profit increases the asset950Cash - balancing figure 450Closing balance 500 From the opening s of fp

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    3 Acquisition or disposal of a subsidiary.

    When a parent buys shares in an entity such that the parent gains control then asubsidiary has been acquired and the cash element of the consideration paid is acash outflow and reported in investing activities. In addition the cash and cash

    equivalents held by the new subsidiary that has been taken over will flow into thegroup and also be reported in investing activities.

    When a parent sells part or all of an investment that results in control being lost thismeans the parent has disposed of an investment and the cash element of theconsideration received, a cash inflow and reported in investing activities. In additionthe cash and cash equivalents held by the old subsidiary will flow out of the groupand also be reported in investing activities.

    However there is an all pervading complication when there has been an acquisitionof a subsidiary as the business combination will mean that the group has more

    goodwill, more NCI, and more of each asset and each liability. This means that whenwe are reconciling any opening or closing balance to ascertain the cash flow as thebalancing figure we will have to add the impact of the acquisition of the subsidiary onthat item.

    Now the same all pervading complication also arises when there has been adisposal of a subsidiary as the disposal results in the group having less goodwill,NCI, assets and liabilities. This means that when we are reconciling any opening orclosing balance to ascertain the cash flow as the balancing figure we will have todeduct the impact of the disposal of the subsidiary on that item.

    ,Cash Flow Exerciseincluding the impact of an acquisition and disposal of asubsidiary in the period

    Calculate the cash flow given the following extracts from statements of financialposition drawn up at the year ended 31 December 20X0 and 20X1.

    20X1 20X0Non-Current Assets $ $Property Plant & Equipment 600 450

    During the year depreciation charged was $200, and the group acquired onesubsidiary with PPE of $300, and disposed of another with PPE of $10.

    Required: How much cash was spent on PPE in the period?

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    Answer Cash Flow Exerciseincluding the impact of an acquisition anddisposal of a subsidiary in the period

    The payment to buy PPE is a cash outflow and an investing activity.The working is as follows.

    PPEOpening balance 450 From the opening s of fpDepreciation (200) Depreciation reduces the assetPPE acquired in the new sub 300 The new sub results in more PPEPPE lost on disposal of sub (10) The disposal of the sub results in less PPE

    540Cash - balancing figure 60Closing balance 600 From the closing s of fp

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    4 Foreign exchange differences

    Now I hope you saying to yourselfhang on but foreign exchange differences arenot cash flows! Well you are correct! Foreign exchange differences, whether theyarise at the individual or group stage, are like depreciation in that they are not cash

    flows themselves but are necessary to be included in reconciliations when we areascertaining cash flows.

    You know how when the group acquires a subsidiary during the accounting period itmeans that in the group statement of comprehensive income there is the need tomake adjustments all over the place for time apportioning, well it is like that in agroup cash flow where there is an overseas subsidiary! Here a lot of exchangedifferences are thrown up, not only on assets and liabilities but also on goodwill andNCI, so whenever any of these are being reconciled to ascertain the cash flow as abalancing figure their exchange difference will also have to be taken into account.Foreign exchange gains increase assets but decrease liabilities. Foreign exchange

    losses decrease assets and increase liabilities.

    When the indirect method for operating activities is used and there has been aforeign exchange loss (gain) at the individual company stage correctly recognised inprofit or loss then this has to added back (deducted) just like depreciation as they areboth non-cash expenses.

    Cash Flow Exerciseincluding the impact of a foreign exchange difference

    Calculate the cash flow given the following extracts from statements of financialposition drawn up at the year ended 31 December 20X0 and 20X1.

    20X1 20X0$ $

    Non-current liability 1,000 3,500Loan

    The loan is denominated in a foreign currency, and a loss of $500 has beenrecorded on the retranslation.

    Required: How much cash was spent repaying the loan?

    Answer to Cash Flow Exerciseincluding the impact of a foreign exchangedifference

    Loan ExplanationOpening balance 3,500 From the opening s of fpForeign currency exchange loss 500 The loss will increase the liability

    4,000Cash - balancing figure 3,000Closing balance 1,000 From the closing s of fp

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    Mind Map

    Format

    Indirectmethod(reconciliationPBT)

    OperatingActivities

    Directmethod

    NCApayments tobuy (out)

    InvestingActivities

    NCAsaleproceedsor returns(in)

    Debtborrow (in) or

    repay (out)

    Financing

    Activities

    EquityDividends

    paid (out)proceedsfromshareissue (in)control tocontrol(in or out)

    Cash and cashequivalents

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    Double entry

    All the reconciliation workings to ascertain cash flow as a balancing figure can ofcourse be explained in double entry termsindeed they are really old fashioned Taccounts just turned into a vertical column. I guess if you really love double entry you

    would realised that a long time ago. Let us re-examine the original exercise.

    Cash Flow Exercise to show the techniqueCalculate the cash flows given the following extracts from statements of financialposition drawn up at the year ended 31 December 20X0 and 20X1.

    20X1 20X0Non-Current Assets $ $Property Plant & Equipment (PPE) 300 100

    During the year depreciation charged was $20, a revaluation surplus of $60 wasrecorded, PPE with a CV of $15 were disposed of and PPE acquired subject tofinance leases had a CV of $30.

    Required: How much cash was spent on PPE in the period?

    PPE (carrying value) account

    $ $

    Opening balance 100 Depreciation 20Revaluation surplus 60 Disposal 15Finance lease 30Cashbalancing figure 145 Closing balance 300

    335 335

    The opening balance of $100 is a debit because PPE is an asset and assets aredebit balances

    Depreciation is an expense that is charged to profit (debit) and reduces the carrying

    value of the asset (credit).

    The revaluation surplus is a gain that is recognised in equity and othercomprehensive income (credit) and increases the asset (debit).

    The disposal reduces the carrying value of the asset (credit) and is transferred to adisposal account (debit).

    New finance leases represent new assets (debit) and new liabilities (credit).

    The closing balance is a credit as it has to be a debit when is brought down to be theopening balance of next year.

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    Technical corner

    Usefulness of cash flow statements

    On the one hand you need to know how to prepare a group cash flow statement but

    let us also consider how useful they are.

    A statement of cash flows provides information that is not available from statementsof financial position and statements of comprehensive income.

    Cash flow statements can be the basis of a business valuation. Analysts and otherusers of financial information often, formally or informally, develop models to assessand compare the present value of the future cash flow of entities.

    Cash flow statements can give an indication of the relationship between profitabilityand cash generating ability, and thus of the quality of the profit earned. A business

    that year on year reports a profit but never generates cash is said to how low qualityprofits. The profit may be generated through the manipulation of estimates andpolices.

    Cash flow is free from judgement of value and the subjective allocation of theaccruals concept. It cannot easily be manipulated and is not affected by accountingpolicies. It is reliable.

    A statement of cash flow in conjunction with a statement of financial positionprovides information on liquidity, solvency and adaptability. The statement offinancial position is often used to obtain information on liquidity, but the information isincomplete for this purpose as the statement of financial position is drawn up at aparticular point in time.

    Limitations of the statement of cash flows

    Of course nothing is perfect and we can also consider the limitations of cash flowstatements.

    Statements of cash flows are based on historical information and therefore do notprovide complete information for assessing future cash flows. Users are much more

    interested in future cash flows.

    There is some scope for manipulation of cash flows. For example, a business maydelay paying suppliers until after the year-end, or it may structure transactions sothat the cash balance is favourably affected e.g. a sale and lease back, or a raisingfinance by issuing zero coupon bonds which are redeemable at a large premium.

    Deliberate manipulation is possible e.g. assets may be sold and then immediatelyrepurchased or proceeds from raising funds or selling PPE classifies in operatingactivities. The application of the substance over form principle and an understandingof the format should alert users of the financial statements to the true nature of such

    arrangements.

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    Exercise - Operating Activities direct & indirect

    Extracts from the financial statements are as follows.$

    Operating profit 80,000

    Investment income 12,000Finance costs (10,000)Profit before tax 82,000Tax (32,000)Profit for the year 50,000Other comprehensive incomeRevaluation gain 40,000Total comprehensive income 90,000

    Closing balance Opening balanceCurrent assets

    Inventory 30,000 25,000Receivables 20,000 26,000Current liabilitiesTrade payables 14,000 11,000

    Additional information

    During the year depreciation of $25,000 was charged, an impairment loss of $40,000recognised on an asset that had not been revalued. Employment costs chargedincluded $20,000 for a current service cost on the defined benefit pension schemeand $15,000 in respect of an equity settled share based scheme. In arriving atoperating profit negative goodwill of $6,000 and a foreign currency exchange gain of$4,000 have been recognised.

    Receipts from customers, combined with cash sales, were $800,000, payments tosuppliers of raw materials $400,000, other operating cash payments were $100,000and cash paid on behalf and to employees was $126,000.

    Required

    a) Using the indirect method determine the cash generated from operating

    activities

    b) Using the direct method determine the cash generated from operatingactivities

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    Question Weller

    Set out below is a summary of the accounts of Weller for the year ended 31December 20X7.

    Consolidated statement of total comprehensive income for the year ended 31December 20X7.

    $000Revenue 44,754Cost of sales and other expenses (39,613)Income from associates 30Finance cost (note 3) (305)

    ------------Profit before tax 4,866Income tax (2,038)

    -------------Profit for the period 2,828

    Other comprehensive income: items that may be reclassified toprofit or loss in future periodsGroup exchange difference on retranslation of foreign subsidiary(note 5)

    302

    ------------Total comprehensive income 3,130

    ------------

    Profit for the year attributable to:Attributable to owners of the parent 2,805Attributable to Non-controlling interests 23

    ------------Profit for the period 2,828

    ------------

    Attributable to owners of the parent 3,107Attributable to Non-controlling interests 23

    -------Total comprehensive income 3,130-------

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    Statement of Changes in Group Equity

    Shares OCE Retained Earnings NCI Total

    $000 $000 $000 $000 $000Opening balance 7,000 805 6,359 17 14,181Comprehensive income 302 2,805 23 3,130Dividends paid (445) (20) (465)Acquisition of a subsidiary 150 150

    -------- ------- ---------- ----- ---------Closing balance 7,000 1,107 8,719 170 16,996

    --------- ------- ---------- ----- -------

    Consolidated statements of financial position at 31 December

    20X7 20X6Note $000 $000 $000 $000

    Non-current assetsIntangible asset goodwill (4&5) 500 85Tangible assets (1) 11,157 8,900Investment in associate 300 280

    ----------- -----------11,957 9,265

    Current assetsInventories 9,749 7,624Receivables 5,354 4,420Investments (30 day bonds) 1,543 741Cash at bank and in hand 1,013 17,659 394 13,179

    ------------- ---------- ---------- -----------29,616 22,444---------- ----------

    Equity and liabilitiesEquity share capital 7,000 7,000OCE 1,107 805Retained earnings 8,719 6,359NCI 170 17

    ----------- ----------Total equity 16,996 14,181Non-current liabilities:Loans 2,102 1,682Provision for deferred tax 555 689Pension deficit (3) 735 246

    Current liabilities (2) 9,228 5,646---------- ----------29,616 22,444

    ----------- ----------

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    Notes to the accounts

    (1) Tangible assetsNon-current asset movements included the following:

    $000

    Disposals at carrying amount 305Proceeds from asset sales 854Depreciations provided for the year 907

    (2) Current liabilities20X7 20X6$000 $000

    Bank overdraft 1,228 91Trade payables 4,278 2,989Tax 3,722 2,566

    --------- --------

    9,228 5,646--------- --------

    (3) Pension fund deficit

    The company has a defined benefit pension fund and thereconciliation of its deficit is as follows.

    $000At 31 December 20X6 246Net finance cost 29Current service cost 560Cash contribution (100)

    ---------At 31 December 20X7 735

    ---------(4) Hannah

    During the year, the company acquired 82% of the issued equity capital ofHannah for a cash consideration of $1,268,000. The non-controlling interest isvalued using the proportion of net assets method

    $000Non-current assets 208Inventories 612Trade receivables 500Cash in hand 232Trade payables (407)Debenture loans (312)

    ---------833

    -------

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    (5) Group Exchange gains

    Exchange gains on translating the financial statements of a wholly-ownedsubsidiary have been taken to equity and comprise differences on the

    retranslation of the following:$000

    Goodwill 9Non-current assetsPPE 100Inventories 116Trade receivables 286Trade payables (209)

    ---------302

    -------

    Required:

    Prepare the statement of cash flows for the Weller group for the year ended 31December 20X7 using the indirect method.

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    Answer Chapter 20 group cash flow

    AnswerExercise - Operating Activities direct & indirect

    Indirect method $Operating activitiesProfit before tax 82,000Investment income (12,000)Finance cost 10,000Depreciation 25,000Impairment loss 40,000Current service cost 20,000Share based payments 15,000Negative goodwill (6,000)Exchange gainindividual company stage (4,000)

    Increase in inventory (5,000)Decrease in receivables 6,000Increase in payables 3,000Cash generated 174,000

    Direct methodCash received from customers 800,000Cash paid to suppliers (400,000)Cash paid to staff (100,000)Other operating payments (126,000)Cash generated 174,000

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    Answer - Weller

    Group cash flow Weller

    Operating activities $000 $000

    Profit before tax 4,866Add back finance costs 305Less income from associate (30)Depreciation 907Less profit on disposal (854305) (549)

    (W1) Impairment loss on goodwill 179Current service costs 560

    Changes in working capital(W2) Increase inventory (1,397)

    Increase receivables (148)

    Increase payables 673-----------

    Cash generated 5,366Pension contribution paid (100)Interest paid (305pension unwinding 29) (276)

    (W3) Taxation paid (1,016) 3,974------------

    Investing Activities

    Proceeds disposal NCA 854

    Acquisition of subsidiary (1,268)Cash taken over new subsidiary 232

    (W4) Payment to buy NCA (3,161)(W5) Dividends received from associate 10 (3,333)

    -----------

    Financing ActivitiesDividends paid (445)Dividends paid to NCI (20)

    (W6) New loans 108-----------

    (357)----------

    Thus increase in cash and cash equivalents 284

    Opening cash and cash equivalents(394 + 74191)

    1,044

    ----------Closing cash and cash equivalents(1,013 + 1,5431,228)

    1,328

    ----------

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    Workings

    (W1) Goodwill

    Opening balance 85

    Acquire subsidiary 585Exchange gain 9Impairment loss - balancing figure (179)

    ---------c/bal 500

    ---------

    FV of P investment 1,268NCI as a proportion of NA (18% x 833) 150FV NA (833)

    --------

    Goodwill on the acquisition 585--------

    (W2) Working capital changes

    Inventory Receivables PayablesOpening balance 7,624 4,420 2,989Acq subsidiary 612 500 407Exchange difference 116 286 209

    Increase - balancing figures 1,397 148 673------------- ------------- -----------

    Closing balance 9,749 5,354 4,278------------- ------------- ----------

    (W3) Taxation paid

    LiabilityOpening balance CL 2,566Opening balance NCL - deferred tax 689

    Tax charge 2,038Thus cash paid balancing figure (1,016)-------------

    Closing balances (3,722 + 555) 4,277------------

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    (W4) Non-current assets

    o/bal 8,900

    Disposal (305)Depreciation (907)Acq subsidiary 208Exchange gain 100

    7,996Cash paid - balancing figure 3,161

    -------------c/bal 11,157

    --------------

    (W5) Investment in associate

    o/bal 280Income from associate 30

    ---------310

    Cash received - balancing figure (10)----------

    c/bal 300----------

    (W6) Loansnew

    o/bal 1,682Acq subsidiary 312

    ----------1,994

    Cash received - balancing figure 108-----------

    c/bal 2,102-----------