Statement of Cash Flows (Cambridge International A-Level Accounting)

Statements of cash flows

Spec point — how to prepare for a limited company in line with the relevant international accounting standards and legal requirements: – statement of cash flows

Statements of cash flows

What is a statement of cash flows?

• A statement of cash flows shows the movement of cash and cash equivalents during the year

• It separates the cash flows into three sections to show the cash from or used in these activities

  • Cash flows from operating activities
  • Cash flows from investing activities
  • Cash flows from financing activities

• Use "cash from" if the net cash for the activities is positive

• Use "cash used in" if the net cash for the activities is negative

What are the uses of a statement of cash flows?

• To show the amount of money that has entered and left the business during a period
• To show why the profit for a period is different to the increase in cash
• To show sources of finance during a period
• To enable the directors to assess the liquidity of the business
• To enable stakeholders to see how well cash has been used
• To enable stakeholders to compare the year's cash flow with previous years or with other businesses

How do I prepare a statement of cash flows?

Cash flows from operating activities

• Start with the profit from operations

  • This is the profit before loan interest and tax

• Make adjustments for non-cash items included in the calculation for the profit

  • Add the depreciation charge for the year
  • Add the loss on disposal of non-current assets
  • **Subtract **the profit on disposal of non-current assets

• Make adjustments for** changes in working capital**

  • Change in inventories

    • Add if it is a decrease
    • Subtract if it is an increase

  • Change in trade receivables

    • Add if it is a decrease
    • Subtract if it is an increase

  • Change in trade payables

    • Add if it is an increase
    • Subtract if it is a decrease

• This gives the cash from or used in operations

• Subtract the actual amount paid for interest and tax

• This gives the net cash from or used in operating activities

Exam Hint It can be helpful to understand why changes to assets and liabilities are added or subtracted from the cash flows from operating activities.

A decrease to an asset is added to the cash flow because a part of its balance at the beginning of the year has been converted to cash. Whereas, a decrease to a liability is subtracted from the cash flow because the company has paid some of the balance off.

Cash flows from investing activities

• Add the sale proceeds from the disposals of non-current assets

• Subtract the **purchase **amounts of non-current assets

• The net amount is the** net cash from or used in investing activities**

  • It is usually net cash used in investing activities

Cash flows from financing activities

• Add the amounts raised to finance the company

  • Issue of share capital
  • Money from new debentures or loans

• Subtract the amounts paid to investors, lenders and shareholders

  • Repayment of debentures or loans
  • Dividends paid

• The net amount is the net cash from or used in financing activities

Exam Hint A bonus issue raises no cash, so it is excluded from the cash flow statement. A rights issue raises cash, so the full amount received (nominal value + share premium) appears as a cash inflow under financing activities.

Layout of a statement of cash flows

How do I calculate the profit from operations?

• You might be given the profit from operations in the question or you might be required to calculate it

• You can calculate the profit or the loss for the year by looking at the change in equity

  • Calculate the change in retained earnings
  • Add back the dividends paid
  • Add back any amounts of retained earnings that were transferred or used in a bonus issue of shares

• You can then work backwards from the profit or loss to find the profit from operations

  • Add back the amount due for finance costs for the year
  • Add back the amount due for taxation for the year

Exam Hint The amounts due for interest and tax might not be the amounts that were actually paid. The amounts due are used to calculate the profit from operations. The amounts paid are used to calculate the net cash from operating activities.

Worked Example W plc's financial year ends on 31 December.

The following information for the year ended 31 December 2025 is available.

1. The following balances are given.

	1 January 2025 $	31 December 2025 $
Inventory	29 000	21 000
Trade receivables	32 000	33 000
Trade payables	27 000	30 000
Cash and cash equivalents	11 000	17 000
Accrued loan interest	-	1 000
Ordinary share capital	100 000	120 000
Share premium	10 000	20 000
Retained earnings	30 000	34 000
Debentures	20 000	20 000

1. The following balances were on 1 January 2025.

	$
Non-current assets at cost	200 000
Provision for depreciation	85 000

1. Office equipment costing $25 000 was sold for $7 000. It had a carrying value of $10 000 at the point of sale. New office equipment was purchased for $105 000. Non-current assets are depreciated at 20% per annum using the straight-line method. A full year's depreciation is charged in the year of purchase but none is charged in the year of disposal.
2. There was a rights issue of shares during the year.
3. Loan interest, $1 000, was paid.
4. Taxation, $2 000, was paid.
5. Dividends, $12 000, were paid.

(a) Calculate the profit for the year 2025.

(b) Prepare the statement of cash flows for the year ended 31 December 2025.

Answer:

(a)

Calculate the profit

• Find the increase in the retained earnings
• Add the dividends paid

	$
Retained earnings at 31 December 2025	34 000
Retained earnings at 1 January 2025	(30 000)
Dividends paid	12 000
Profit for the year	16 000

Final answer: Profit for the year was $16 000

(b)

Calculate the loan interest that was due

• Add the amount paid to the amount that is still accrued

$1 000 + $1 000 = $2 000

Calculate the profit from operations

	$
Profit for the year	16 000
Add: Loan interest	2 000
Add: Tax	2 000
Profit from operations	20 000

Calculate the depreciation charge for the year

• Find the total cost of the non-current assets at the end of the year

$200 000 - $25 000 + $105 000 = $280 000

• Find 20% of this amount

20% × $280 000 = $56 000

Calculate the loss on sale of equipment

$10 000 - $7 000 = $3 000

Calculate the amount received from the rights issue

• Subtract the old share capital from the new share capital

($120 000 + $20 000) - ($100 000 + $10 000) = $30 000

Calculate the change in inventory, trade receivables and trade payables

		$
Inventory	29 000 - 21 000	8 000	Decrease
Trade receivables	33 000 - 32 000	1 000	Increase
Trade payables	30 000 - 27 000	3 000	Increase

Prepare the statement of cash flows

	$000	$000
Cash flows from operating activities
Profit from operations		20
Depreciation		56
Loss on sale of equipment		3
Decrease in inventory		8
Increase in trade receivables		(1)
Increase in trade payables		3
Cash from operations		89
Interest paid		(1)
Tax paid		(2)
Net cash from operating activities		86
Cash flows from investing activities
Purchase of equipment	(105)
Proceeds of sale of equipment	7
Net cash used in investing activities		(98)
Cash flows from financing activities
Proceeds of rights issue of ordinary shares	30
Dividends paid	(12)
Net cash from financing activities		18
Net increase in cash and cash equivalents		6
Cash and cash equivalents at 1 January 2025		11
Cash and cash equivalents at 31 December 2025		17