Investing and financing cashflows
This chapter focuses on how to calculate cash flows from investing activities and financing activities. Together with operating activities, these two sections complete the statement of cash flows and give users a clear picture of how a business:
- acquires and disposes of long-term assets
- raises capital
- returns funds to its providers of finance
Learning objective
By the end of this chapter, you should be able to:
- calculate the figures needed for the statement of cash flows in accordance with IFRS Accounting Standards, including:
- cash flows from investing activities
- cash flows from financing activities
- identify the treatment of given transactions in a statement of cash flows
Cash flow from investing activities
Investing activities focus on the acquisition and disposal of long-term assets and investments. The cash paid for acquisitions and cash received from disposals may not be given directly in the question. When that happens, you’ll use the work-back approach and the movements shown in the statement of financial position.
Illustration: investing activities
The opening and closing carrying amounts of property, plant and equipment were $850,000 and $920,000 respectively. During the period, equipment with an original cost of $80,000 and accumulated depreciation of $58,000 was sold at a profit of $6,000.
Required: Calculate cash flows from investing activities.
Suggested solution:
- Compute the additions (acquisition) of property, plant and equipment during the period.
Note: Since the asset was disposed of, the carrying amount (CA) must be written off. Here, the opening and closing balances are given at carrying amount, so you write off the carrying amount, not the original cost. If the question had instead given opening and closing balances at cost, then you would write off the cost of the asset disposed of. The key point is to work with like terms.
This example assumes no depreciation charge for the year. In exam questions, the depreciation charge for the year is credited to the PPE (carrying amount) account alongside the disposal, which increases the balancing additions figure. Any revaluation surplus during the year is debited to the account, because it is a non-cash increase in carrying amount.
- Calculate proceeds from the disposal
Recall that when an asset is disposed of, the carrying amount of the asset is transferred to a disposal account. Any profit or loss on disposal is the difference between the proceeds received and the carrying amount of the asset. In this case, the carrying amount is $22,000 ($80,000 cost less $58,000 accumulated depreciation), and a profit of $6,000 was made, so the proceeds must be $28,000. Gain (profit) on disposal is on the debit side of the asset disposal account.
Let’s prepare the cash flow.
Cash flow from investing activities:
| $ | |
|---|---|
| Cash paid for property, plant, and equipment | (92,000) |
| Cash received from disposal of equipment | 28,000 |
| Net cash flow from investing activities | (64,000) |
Cash flows from financing activities
Financing activities reflect how the entity raises capital and returns capital to providers.
The work-back approach also applies here. If the cash figure is not directly given, you can derive it by constructing the relevant ledger account and treating the cash movement as the balancing figure.
Dividend payments often need extra care. The cash paid for dividends is not always the same as the dividends declared:
- Dividends declared increase the dividend payable liability.
- Dividends paid reduce the dividend payable liability.
So, to find the cash outflow for dividends, you adjust the declared amount for the movement in the dividend payable balance (as shown in the illustration below).
Illustration: financing activities
The extract of the statement of financial position of Asempa Ltd is given as follows.
| Closing balances | Opening balance | |
|---|---|---|
| Equity: | $ | $ |
| Share capital | 450,000 | 400,000 |
| Share premium | 130,000 | 100,000 |
| Liabilities: | ||
| Long-term loan | 200,000 | 250,000 |
| Dividend payable | 18,000 | 12,000 |
Dividends declared during the year were $75,000.
Required: Calculate cash flows from financing activities.
Suggested solution:
You may decide to draw up the general ledgers to determine the cash flow. For share capital, share premium, and loans, this can often be read directly from the movements:
- An increase (closing balance higher than opening balance) is usually a cash inflow.
- A decrease (closing balance lower than opening balance) is usually a cash outflow.
Watch out for a bonus issue of shares or shares issued for non-cash consideration (for example, in exchange for assets) - these change share capital without any cash moving, so they must be excluded. Dividends paid cannot be read from the movement in the dividend payable balance; they must be worked out from the dividend payable account, as shown below.
You can confirm each figure by drawing up the relevant ledger accounts.
| $ | |
|---|---|
| Proceeds from issue of shares | 80,000 |
| Payments of long-term loan | (50,000) |
| Dividend paid | (69,000) |
| Net cash flow from financing activities | (39,000) |
Dividends paid: opening payable 12,000 + declared 75,000 − closing payable 18,000 = 69,000.