Questions asking you to produce statements of cash flows have become a staple of F1 exams, so you would be well advised to learn and practise a methodical approach to meeting this requirement
Statements of cash flows were examined as section-C questions in the November 2010, May 2011 and August 2011 F1 papers, so they are clearly here to stay. Finding a logical way to tackle these is essential, therefore, so in this article I will work through question 4(a) of the May 2011 paper to demonstrate my recommended approach (the question is available to download free via your “My CIMA” account on www.cimaglobal.com).
places: the cash flow from operations reconcilia- tion and the interest paid working.
After you have completed this step, you should have an answer that looks something like table 1 and the following partial workings:
Working 1: property, plant and equipment [Tip: leave a blank page to complete this working later. You can see from the additional information that you read in step one that more than one T-account will be required. It’s more sensible to work on these towards the end.]
Step five: tackle additional information
At this point you should have gained quite a few of the easier marks available simply by drawing up the pro forma and transferring in numbers from the financial statements. You could now work through the additional information in the order presented or try the bits that you find least diffi- cult first. Exam technique is important here. You should never spend longer than the allocated time on a question. For this question you shouldn’t spend much more than 34 minutes (1.8 marks per minute x 19 marks). If you are stuck as to what to do with some of the additional information, leave it and move on. You could always return to it at the end of the exam if there’s time left.
Remember that the additional information pro- vided may need to be used in different parts of your answer. For example:
Plant and equipment disposals in (iii) will affect the cash from operations (add back the non-cash loss on sale of $6,000) and the PPE working (dis- posal of $45,000) and the proceeds from disposal in cash from investing activities (net book value less loss on disposal = proceeds of $5,000).
Development expenditure amortisation of $15,000 in (v) will affect cash from operations (add back, as it’s a non-cash movement) and should be included in the development expenditure working.
The examiner for this paper commented that many candidates left the dividends paid figure out of their answers, suggesting that students perhaps didn’t know how to deal with this aspect, so let’s look at it here. The simplest way to calculate divi- dends paid is to open a T-account for retained earn- ings, insert the opening and closing balances from the statement of financial position and the profit for the year from the statement of comprehensive income as follows:
The balancing figure represents the dividends paid – easy when you know how. Remember that it is profit for the year, not total comprehensive income for the year, that you need to use here. (Note that total comprehensive income includes revaluation gains/losses that are taken to the revaluation reserve, not retained earnings.)
The examiner also commented that many stu- dents were not sure what to do with the legal claim provision. Remember that the double entry to set up a provision is Dr profit or loss for the year, Cr provisions. No cash has been paid, so the only adjustment required is to add back the expense in the cash from operations reconciliation, since it is a non-cash movement.
Step six: complete your calculations
Once you have dealt with the additional informa- tion, you can finish off the workings. So balance off the T-accounts and calculate the missing figures required for the statement of cash flows. Insert these into your pro forma as you calculate them.
Step seven: complete the statement
This is the final stage. Finish off your statement of cash flows by adding up the figures in the pro forma. If you are short of time, don’t add up your state- ment of cash flows, as this is unlikely to be worth many marks.
The full answer to this question is shown in table 2, along with the following completed workings:
Total property, plant and equipment additions in year: $171,000 + $230,000 + $31,000 = $432,000.