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.

The work-back approach involves constructing a ledger account for the relevant non-current asset using the information available, typically the opening and closing balances from the statement of financial position, along with any additional information about disposals, depreciation charges, or revaluations during the period. The cash figure then becomes the balancing figure in the ledger account. This technique is a core skill in preparing the statement of cash flows and is frequently tested in examinations.

Only cash transactions appear in the statement of cash flows. If a non-current asset was acquired through a non-cash transaction (for example, through a finance lease or in exchange for shares), that transaction does not appear in the investing activities section. Instead, it must be disclosed separately as a significant non-cash transaction, in accordance with IAS 7.

Note: Disposals can make the work-back approach more complicated. Where needed, prepare separate accounts for the disposal of asset account and the non-current asset account. Refer to disposal of assets to refresh your memory.

Illustration: Investing activities

Given that the Property, plant, and equipment opening and closing carrying amounts for the period 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:

1. 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.

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2. 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.

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Let’s prepare the cash flow.

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

Given that the dividends declared during the year was $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. However, this question can also be read directly from the movements:

• An increase (closing balance higher than opening balance) is a cash inflow.
• A decrease (closing balance lower than opening balance) is a cash outflow.

You can confirm each figure by drawing up the relevant ledger accounts.