Section 7 of 8
When a question provides an income statement and two years' statements of financial position but asks for a statement of cash flows, several figures must be calculated from the data rather than read directly. These are typically shown as working notes.
If only retained earnings figures are given (no income statement):
$$\text{Profit from operations} = \Delta\text{Retained earnings} + \text{Dividends paid} + \text{Tax for year} + \text{Interest paid}$$
Work back from the change in retained earnings to gross profit from operations.
Use the depreciation section of the schedule of NCA, or reconstruct a T-account:
| Dr | Depreciation account | Cr |
|---|---|---|
| Eliminated on disposal | xx | Bal b/d |
| Bal c/d | xx | Charge for year (balancing figure) |
$$\text{Charge} = \text{Bal c/d} + \text{Eliminated on disposal} - \text{Bal b/d}$$
The amount paid differs from the IS charge when the opening and closing tax liability differ:
$$\text{Tax paid} = \text{Tax liability b/d} + \text{Tax charge in IS} - \text{Tax liability c/d}$$
$$\text{Total proceeds} = \Delta\text{Share capital} + \Delta\text{Share premium}$$
Exclude bonus issues — they produce no cash.
$$\text{Repaid} = \text{Loan bal b/d} - \text{Loan bal c/d} \quad \text{(if no new loan taken in the year)}$$
If both a new loan was taken and an old one partly repaid, show each separately.
When the cost of the disposed asset is not given directly:
$$\text{Cost b/d} + \text{Additions} - \text{Disposals (cost)} = \text{Cost c/d}$$ $$\Rightarrow \text{Disposals (cost)} = \text{Cost b/d} + \text{Additions} - \text{Cost c/d}$$
$$\text{NBV at disposal} = \text{Original cost} - \text{Accumulated depreciation at disposal date}$$ $$\text{Profit/(Loss)} = \text{Proceeds} - \text{NBV}$$
A positive result = profit on disposal (deduct in operating activities). A negative result = loss on disposal (add back in operating activities).
If dividends paid is not stated directly, derive from retained earnings:
$$\text{Dividends paid} = \text{Retained earnings b/d} + \text{Profit after tax} - \text{Retained earnings c/d}$$
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