Overview

The Cash Flow Statement is prepared in accordance with FRS 102, The Financial Reporting Standard applicable in the UK and Republic of Ireland. The standard requires that cash flows be classified and shown

In the  Cash Flow Statement under three main headings, namely:

• Cash generating from Operating Activities
• Cash generating from Investing Activities
• Cash generating from Financing Activities

An entity shall present cash flows from operating activities using either:

• The direct method of Cash Flow Statement
• The indirect method of Cash Flow Statement

This guide uses the indirect method.

Components of Cash Flow Statement

Operating Activities:

Operating activities are the principal revenue producing activities of the enterprise that are not investing or financing activities.

Investing Activities:

Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. This activity includes transactions involving purchase and sale of assets like machinery, Land etc.

Financing Activities:

Financing activities are the activities that result in a change in the size and composition of owner’s capital, preference share capital and borrowings of the enterprise.

Operating Activities

Check list of preparation of Operating Cash Flow under Indirect Method:

After computing the net profit before tax and extraordinary items i.e., operating profit, it is further adjusted using the following items to arrive at net Cash Flow from Operating Activities. These adjustments are classified into two categories:

• Adjustments for Non-Cash and Other Items:

Non – Cash items such as depreciation, interest on long-term borrowings, discount on issue of shares or debentures written off, goodwill/ patent amortisations cost, amortisation of government grants, loss on sale on assets or investments, premium payable on redemption of debentures or preferential shares, etc. are to be added back and non-operating income and gains such as profit on sale on fixed assets and investments, interest, rent or dividend received etc. are to be deducted.

• Adjustments for changes in the current Assets and Current Liabilities:

A decrease in current assets and increase in current liabilities is added and an increase in current assets and a decrease in current liabilities is deducted from the operating profit. Effects of changes in current assets and current liabilities are to be adjusted with operating profit as follows:

Current Assets

Accounts Receivable:

• Increases—subtract from net income to get operating cash flow
• Decreases—add to net income to get operating cash flow

Inventory:

• Increases—subtract from net income to get operating cash flow
• Decreases—add to net income to get operating cash flow

Other Current Assets (e.g., prepaid expenses):

• Increases—subtract from net income to get operating cash flow
• Decreases—add to net income to get operating cash flow

Current Liabilities

Accounts and Trade Notes Payable:

• Increases—add to net income to get operating cash flow
• Decreases—subtract from net income to get operating cash flow

Other Liabilities (e.g., accruals), excluding nontrade payables:

• Increases—add to net income to get operating cash flow
• Decreases—subtract from net income to get operating cash flow

Example of Operating Cash Flow

Most Common Issues

The following scenarios are the most commonly reported issues to the support department. These issues can be easily rectified using the below guides.

Taxation

Incorrect postings in the tax payable and paid nominal codes accounts for 70% of cash flow queries raised to the support team. Small differences on the Cash Flow Statement are often caused by differences in taxation.

In the below example the company had tax payable in the comparative year of €13,484.50, posted to code 831 Corporation tax payable, €9,568 was posted as tax paid in the comparative year to 832. In the current year the corporation tax charge is €6,525, posted to 501. In the current year, the company has posted Tax Payable to code 831 of €10,441.

This will result in a €1 difference in the cash flow because the amount which should have been posted in the current year is incorrect by 0.50cent. It is important to remember when using Bright Accounts Production, the system will automatically round individual figures up or down before adding them to other amounts in the same range. In this case the balance of €13,484.50 gets rounded up to €13,485, the user MUST account for this rounding when posting paid and payable amounts. The correct calculation would be as follows:

Calculation:

Comparative year Corporation Tax Payable + (Comparative year Corporation Tax Paid) + Comparative Year Corporation Tax Repaid + Current Year Corporation Tax Charge MUST = Current Year Corporation Tax Payable (831)

Therefore €13,485 + (€9,568) + €6,525 = €10,442, €10,442 MUST be posted to nominal code 831.

Another example of incorrect tax postings is as follows:

• Company has tax payable of €127,596.36 last year
• Corporation tax paid last year was €105,365.95
• An amount of €36,965 was posted to nominal 833, Corporation tax repaid
• In the current year the tax charge was €149,693

If we then use the same calculation as above, we can calculate what the correct Corporation Tax Payable would be for the current year.

€127,596 + (€105,366) + €36,965 + €149,693 = €208,888, €208,888 MUST be posted to nominal code 831 in the current year.

Normally the adjustment journal would then be to debit code 831 and credit code 832, or vice versa, by the amount of the difference. The reason we suggest this correction is because nominal code 831 does not hit the cash flow (being a non cash movement) and 832 will hit the cash flow as this is the amount actually paid.

Depreciation

Differences in depreciation amounts posted to the balance sheet and the profit and loss can result in a difference on the Cash Flow Statement. Again, this is a common issue which is presented to the support team.

The main cause of this issue is due to balances not being rounded correctly, or a rounded balance being posted to one location and an unrounded balance posted to another.

In this scenario the following amounts have been posted.

The postings to nominals 652.01 and 395 will result in a €1 difference on the cash flow because the amount in 652.01 will round up to €259,457 but the amount posted to 395 has been rounded down to €259,456.

The same issue occurs where the cumulative balance of depreciation gets posted to one nominal code on the P&L. In this scenario the following amounts have been posted.

Once again, the above example will result in a €1 difference on the cash flow because the rounded balances have not been accounted for correctly. In all cases it is VITAL that the individual nominal code balance be rounded up or down first before being accumulated into other postings. The correct posting to 397 would be €453,353.00, as below.

Differences in Brought Forward Balances of Assets and Loans

The Check Brought Forward Balances utility will enable you to view a report of all brought forward figures. When this option is selected the system looks at any balances which are considered as being ‘Brought forward’ or opening balances on loans or assets for example. It then checks the postings from the previous year to see if the cumulative amounts for that asset or loan add up to what has been posted in the current year. If there are any differences this will be shown in a report view. It is important that you recognise how these differences occur and how to resolve them. The Check Brought Forward Balances tool is accessed from the toolbar of the Nominal Ledger screen.

In the above screen shot the system has recognised differences in the brought forward amounts posted to 661, 662 and 904. For example, in code 904 Long-term bank loan balance b/fwd an amount of €25,000 was posted in 2018. In 2019 €39,200 was posted resulting in a difference of €14,200. By then looking at the amounts in the nominal ledger we can see the difference.

To resolve this issue, the posting to 904 needs to be adjusted, in this case the €14,200 was an increase and was incorrectly posted to 904. The correct nominal code to use is 904.01 Long-term bank loan increase. When the amount is posted as an increase the brought forward balance will be correct at €25,000.

Taxation                                                                                           

Tax paid is to be deducted from cash generated from operations to arrive at the cash flow from operating activities before extraordinary items. After that we add or subtract the proceeds of extraordinary items to get Net Cash generated from operating activities.

We need to note that only tax paid during the year should be deducted from operating cash flow as the provision for tax represents the amount of tax provided for the current year. So it’s added back to the current year’s profit to calculate net profit before tax and extraordinary items. It is merely a book entry and does not involve outflow of cash.

Taxation Issue - Number 1

XYZ Limited has made a tax provision during the current financial year amounting to €35, last years tax liability was €1,650. During the current year the company paid €1,620 out of a total tax liability of €1,685. The company needs to post the following journal during the year:

In this case the tax paid during the year will be reflected in the Cash Flow Statement and the provision for taxation will be added back with the operating profit being the non cash transaction.

Taxation Issue - Number 2

In the comparative year XYZ made a tax provision of €35 and has a total tax liability in that financial year of €75. On the basis of tax analysis, the company needs to make a provision for tax of €27.50 in the comparative year (i.e., year 2018). During the current financial year (i.e., year 2019) the company made a further provision of €37.50 and the tax paid during the year was €62.50.  The following journals are required to be posted in this case. 

Taxation Issue - Number 3

XYZ has tax liability in the last three years of €12,500 (2019), €25,000 (2018), €10,000 (2017). In this scenario the company has shown the tax liability posted to nominal code 831 as €0 (2019), €26,000 (2018), €10,000 (2017).

The company has paid the tax liability of €12,500 (2019), €26,000 (2018), €9,000 (2017).

In the above case the Cash Flow Statement will not balance as the company had erroneously passed the tax liability of the current year as €0 instead of €12,500. The company had off set the tax payment amount with the tax liability and as a result, the tax payment amount had not been reporting in the operating Cash Flow Statement. The company needs to post the following journal entry in the current year.

Taxation Issue - Number 4

On analysis of the tax liability of XYZ during the current financial year (i.e., 2019), it has been observed that the company was required to carry forward the balance of tax liability in nominal code 831 amounting to

€12,501 but the company had carried forward opening balance of €12,500, so the under mentioned journal entry needs to be posted during the year.

Investing Activities       

1. Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.
   Accordingly:
   • • cash inflow and outflow relating to the fixed assets,
     • shares and debt instruments of other enterprises,
     • interests in joint ventures,
     • advances and loans to third parties; and
     • repayments
       are all shown under investing activities in the Cash Flow Statement. 
2. Cash Flow from investing activities is ascertained by analysing the changes in fixed assets and long-term investments in the beginning and at the end of the year.

Example of Investing Activities

Operating and Investing Activities Issue - Number 1

XYZ had purchased a motor vehicle 5 years ago for €1,500 and the company charged depreciation @10% using the straight-line method. The asset has a total life of 10 years with residual value of €100. As per the last annual accounts, the carried forward balance of the asset was €800, and the accumulated depreciation was €700. The company also purchased an additional motor vehicle for €2,000 with a total life of the asset 10 years. The depreciation charged during the financial year amounted to €340. The following journal entry needs to be made:

In the above case the deprecation of €340 should be added back with net operating profit after tax being a non cash transaction. The addition of the new motor vehicle i.e., €2,000 would be treated as cash out-flow from investing activities.

Operating and Investing Activities Issue - Number 2

XYZ sold Furniture from their asset list at a price of €2,700 in the current year, the asset was purchased 5 years ago at a cost of €5,200. The total accumulated depreciation charged up until the last financial year was €1,976 and the depreciation charged for the current financial year was €494. The following journal entry needs to be made during the year:

In this case the accumulated depreciation of €1,976 in the last financial year would be carried forward under code 672 (i.e. Fixtures, fittings and equipment accumulated depreciation b/fwd.) into the current financial year. In-flow of €2,700 would show as cash inflow from investing activities and the depreciation and loss on sale of furniture of €494 and €30 would be added back with the operating profit being noncash transactions.

Operating and Investing Activities Issue - Number 3

XYZ established that Furniture and Fixtures has the WDV value of €2,500 and has carrying value more than its recoverable amount. On the basis of testing of impairments, the company wanted to make a provision for diminution of said asset amounting to €125 and during the same year the company also charged depreciation of €250. The following journal entry needs to be made during the year:

In this case the transaction showing provision for diminution in value of fixed assets and deprecation on fixtures, fittings and equipment would be added back with the operating profit since this is a non-cash transaction.

Operating and Investing Activities Issue - Number 4

XYZ signed an agreement with ABC to acquire one of their multi brand products and according to the agreement XYZ can only sell the product in the UK. According to the brand valuation, XYZ considered €12,500 as goodwill. XYZ wanted to write off the same goodwill over the term of 5 years. The following journal entry needs to be made during the year: 

In this case the funds of €12,500 will be an outflow in the current financial year (i.e. 2019) and would be treated as investing activity. The goodwill depreciation charge of €2,500 would be added back to operating profit in the year 2019 being the non cash transaction.

Operating and Investing Activities Issue - Number 5

XYZ acquired plant and machinery valued at €550 under hire purchase agreement and according to the agreement, the company would acquire the same asset over a period of 8 years with the simple interest of 12 % p\a. During the current year the company paid effective interest of €57 out of a total payment of €216. The company also charged depreciation @ 10 % straight line method as the asset has a total life of 10 years with the residual value of €50. The following journal entry needs to be made during the year: 

In this case plant and machinery additions at cost would be the cash outflow from investing activities and the depreciation charged on the asset and Hire purchase interest amount would be added back with the operating profit. The cash outflow from HP liability would be treated as financing activity.

Operating and Investing Activities Issue - Number 6

XYZ had a balance of Freehold Properties at the beginning of the year (2019) of €50,000. Accumulated depreciation at the beginning of the year was €20,000 and depreciation charged during the year was €5,000. Furthermore, impairment losses incurred for the same period was €2,000. In this case the journal entry would be as follows:

As the impairment loss of €2,000 incurred during the year was a non-cash item, it needs to be added back with the net income in the operating activities to tally the Cash Flow Statement.

Operating and Investing Activities Issue - Number 7

Errors in the Cash Flow Statement may also be the result of a rounding difference. Suppose ABC had the following balances in Tangible Fixed Assets in the previous years:

In the above scenario, the balance of code 671 is wrongly brought forward in the year 2018. It must be €14,912.00 instead of €14,912.60, this is due to how the figures are rounded, each individual figure is rounded up or down individually, then added to the other figures posted to nominal codes in its range. In this case 12,556.40 is rounded down to 12,556 and 2,356.20 is rounded down to 2,356. When these figures are added together the total is 14,912. If 14,912.60 is posted, the system will round the figure up and show this as 14,913, resulting in a €1 difference on the Cash Flow Statement. In order to rectify this, the following entry needs to be posted in the comparative year: 

Financing Activities

Financing Activities are those activities which result in a change in the size and composition of owner’s capital and borrowings of the enterprise. It includes proceeds such as:

• Issue of shares or other similar instruments
• Issue of debentures
• Loans
• Bonds
• Other short-term loans or long-term borrowings
• Repayments of amounts borrowed
• Repayment of finance lease   liabilities

Accordingly receipts and payments on account of the above are disclosed in the Cash Flow Statement as the cash flow from financing activities

When shares are issued at a premium, the Cash Flow Statement reflects the total cash generated by the issue (i.e., Face Value of shares + Premium). The cash flow from financing activities is ascertained by analyzing the change in Equity and Preference share capital, Debentures and other borrowings.

Example of Financing Activities 

Financing Activities Issue - Number 1

XYZ borrowed a short-term loan of €100 million @ 12 % on reducing interest rate from the bank one year ago and the current year brought forward loan balance is €76.5 million.  During the current year again the company borrowed €50 million. The company has interest on that loan amounting to €15.18 million and the company repaid €15 million during the year. The company also wants to transfer €25 million of a loan under long-term payment. In this case the journal entry would be as follows:

The short-term loan transfer to long-term payment would have no effect in the Cash Flow Statement as this is a movement of a loan amount from short-term to long-term accounts.

Financing Activities Issue - Number 2

In 2018 the board of directors of XYZ proposed a dividend of €1,250 at its AGM. This dividend was then paid to its shareholders in the current year. In this case the journal entry would be as follows:

The proposed dividend for the last year becomes due and is also paid in current year. It is an outflow of cash and cash equivalents in the current year. So, in this case the proposed dividend of €1,250 of last year would be added back with operating profit and the current year dividend paid amount would be the cash out flow from financing activities.

Financing Activities Issue - Number 3

XYZ has brought forward a credit card balance in the current year from the last year amounting to €1,250.23. During the current year the company paid €375.50, and the closing balance carried forward amounted to €874.73. The company used code 771.05 under the group of Current Creditor (i.e., CurrCr) to show all the credit card transactions.

This will result in a cash flow error as all credit card transactions need to be shown under the group of Bank Cash (BankCash), the company needs to use the codes from 771 to 771.03 instead of 771.05.

Financing Activities Issue - Number 4

XYZ ltd has created a special reserve account of €3,000 under the code 987.01 in the comparative year by debiting the code 381 (i.e., General Expenses A/C). The company carried forward the special reserve balance in the current year (i.e., 2019) amounting to €3,000 in code 987. This situation will result in the cash flow being imbalanced.

The special reserve account can only be created out of the profit of the company and cannot be created by charging to an expense account (i.e., general expense account in this case). The movement of the special reserve account needs to be shown using nominal code 987.03 (i.e., Special reserve movement to/from cash- based operating profit account). The following journal needs to be posted in the comparative year in order to rectify the Cash Flow Statement.

Financing Activities Issue - Number 5

In the comparative year XYZ generated a fund through the issue of preference share capital amounting to €100,000.00, the company used the code 961.01. A balance of €100,000.00 was carried forward to the current financial year under code 961. This will result in a cash flow error.

The funds raised from the issue of preference share capital are a financial liability; the company needs to use the code 928.01 instead of code 961.01. To rectify the Cash Flow Statement, the following journal needs to be passed.

The company needs to carry forward the balance of €100,000.00 under the code 928 in the current financial year.

Financing Activities Issue - Number 6

XYZ has, during the current year, carried forward a balance of ordinary equity share capital class 1 under code 951 amounting to € 20,000.00. Such shares were issued to the shareholders in the comparative year. However, in the last financial year the company had shown the share capital amount under the nominal code 951. The following adjustment needs to be posted in the comparative year.

Financing Activities Issue – Number 7

XYZ has carried forward a balance of Deferred Income government grants under the code 944, from the comparative year amounting to €800. During the same year a new fund was received amounting to €3,500 under the code 944.01. However, the company carried forward the balances during the financial year under code 944 and 944.01 as €700 and €3,000. During the current financial year, the company received €1,000 towards the contribution of fund and this has been shown under code 944.01.

In this case the Cash Flow Statement would have an error in financing activities amounting to €3,500 as the carried forward balance from the last year should be €4,300 and the new government grant received amount would be €1,000. The following journal entries need to be passed in order to rectify the Cash Flow Statement.

Financing Activities Issue - Number 8

XYZ has carried forward a Long-term HP balance and Long-term HP repayment balance under codes 921 and 921.02 as follows:

In this case the brought forward net fund would differ from the comparative net debt by -4,099.50. The company has carried forward the closing balance of long-term HP Liability from the pre-comparative year i.e., 2017 as €2,250.00 under code 921 but the company did not show the Long-term HP payment amount in the code no 921.01, So the following journal needs to be passed in the pre-comparative year in order to rectify the Cash Flow Statement.

Financing Activities Issue - Number 9

XYZ has a total long-term loan balance at the beginning of the current financial year (i.e., 2019) amounting to €75,000 out of which the company wants to transfer €15,000 to short-term loan accounts. During the

current year a new short-term loan was raised amounting to €10,000. The journal entries to be posted in this case are as follows:

Financing Activities Issue - Number 10

Suppose XYZ had a foreign exchange movement on debt of €25,000 and the company had posted this as a liability under the nominal code 910.04, copy from code as 910.02. The company had posted the carried forward balance to nominal code 910 last year as €30,000. During the current financial year, the company had paid €25,000. The following journal needs to be posted:

Note: Since the nominal code of 910.04 was reporting under 910.02 i.e. (Other long-term loans movement to under 1 year), the cash flow would not be balanced and any increase in the other long-term loan account would require to be shown under 910.01.

Financing Activities Issue - Number 11

XYZ has a total other long-term loan balance at the beginning of the current financial year amounting to €203,500. During the year it transferred the full amount to other short-term loans by debiting 910.02 (Other long-term loans movement to under 1 year) and crediting 809.03 (Other loans short-term receipt of long- term). In this case the Cash Flow Statement would not be balanced due to the following; since it is the movement of long-term funds to short-term funds, the company needs to use the code 809.05 (Other loans movement from long-term). To rectify the Cash Flow Statement, the following journal needs to be posted.

Financing Activities Issue - Number 12

XYZ has carried forward the Long-term lease obligations balance and Long-term lease obligations increase balance under code 922 and 922.01 as follows.

In the above case the company has carried forward the closing balance of long-term lease obligations from the pre-comparative year i.e. 2014 amounting to €8,000 under the code 922 but the company did not show the Long-term lease increase amount in code 922.01. In this case the brought forward net funds would differ from the comparative net debt by €-3000.00 and can be rectified in the following manner.

Cash Flow Statement Summary

Special Items Treated on The  Cash Flow Statement            

Interests and Dividends

The treatment of interest and dividends received as well as paid depends on the nature of the business i.e., whether the business is of financial or non-financial nature. In the case of a financial company, interest paid and dividend received is treated as operating activities and the dividend paid would be financing activities and in case of other enterprises interest and dividend paid would be financing activities in nature.

Proposed Dividends

The proposed dividend for the current year becomes due and is also paid in next year. It is an outflow of cash and cash equivalents in the next year.

The proposed dividend of the previous year becomes due and is also paid in the current year. It is an outflow of cash and cash equivalents in the current year.

Accounting Treatment of the Proposed Dividend

• Proposed Dividend (current year): Add back to the current year’s profits to find out cash from operating activities.
• Proposed Dividend (Previous year): Net dividend paid (proposed dividend – dividend still payable) is cash used in financing.

Reconciliation of Net Cash Flow to Movement in Net Debt 

The company needs to prepare a net debt reconciliation similar to that formerly required by FRS 1 so that the cash flow generated during the period can be reconciled to the net debt on the balance sheet. It does not have to follow the same format as FRS1. An analysis of changes in net debt from the beginning to the end of the reporting period is required to be presented as (a) the cash flows of the entity; (b) the acquisition and disposal of subsidiaries; (c) new finance leases entered into; (d) other non-cash changes; and (e) the recognition of changes in market value and exchange rate movements.

The following example provides an illustration of reconciliations of net cash flows to movements in net debt.

Example: Reconciliation of Net Cash Flow to Movement in Net Debt

RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT

Cash  Flow Statement Proof

The Cash Flow Statement proof is a major tool available in the software to analyse the movement of the cash and cash equivalent of each activity.

You can use the Cash Flow Statement proof to review and drill down onto the various amounts for both the current and comparative years to see the make-up of the balances by nominal code. By comparing this analysis with the source documents from the client, you should be able to find the reason for the difference.

To view the Proof Pages, go to Produce Accounts, then click the Pages Cash Flow Statement Proof.

There are two reconciliation statements available in the software in order to test the net fund to be carried forward for the comparative year as well as the current year and these are:

1. Reconciliation of net funds/debt in comparative to opening in current year
2. Reconciliation of current net funds/debt to closing balance in analysis of changes to net funds/debt note

Areas which can cause issues and should be checked are:

• Movement of operating activity
• Movement of debtors and creditors.
• Return on Investment and servicing finance.
• Cash flow from taxation.
• Capital expenditure investments.
• Cash flow from acquisition and disposal.
• Cash movement from the financing activities.

All the above movements need to reconcile with the previous year net funds in order to compute the net funds to be carried forward to the next financial year. If there are any irregularities found in the movement of any of the above then information messages will be shown, example of these are as follows:

• Current balances of cash and cash equivalents differ with the Cash and Cash Equivalents note by (-).
• Comparative balances of cash and cash equivalents differ with the Cash and Cash Equivalents note by (-).
• Opening balances of cash and cash equivalents differ with the Comparative Cash and Cash Equivalents by (-)