Preparation of cashflow statements, Financial Accounting

Preparation of cashflow statements

IAS 7 recommends that the cashflow statement can be prepared using two methods:-

I) Direct method
Whereby, cash from operations is determined by getting the differences between cash received from customers and cash paid to suppliers of goods an services and employees.

II) Indirect method
The cash from operations is determined by making adjustments to the profit before tax for the following items.

  • Non-cash income and expenses e.g. depreciation, amortization, loss or profit on disposal of PPE
  • Incorrectly classified items e.g. investment income and interest charged
  • Working capital changes.

 

In addition to the above items, the following points need to be noted about preparation of consolidated cashflow statements.

a) Goodwill impaired for the year is a non-cash expense that should be added back to the group profit before the tax.

b) Where the group has investments in associate company then dividends received from associate should be reported as a separate item under investing activities. The dividend to be reported can be determined as follows.

Investment in associate account

 

£

 

£

Balance b/d

x

Share of tax in associate company

 

Share of profit before tax in  associate company

 

Dividends balance figure

x

 

 

Balance c/d

x

 

x

 

x

 

The dividends paid to minority interest should also be disclosed separately from those of the holding company and classified under financing activities

 

Dividends paid to minority interest may be determined as follows:

 

 

Minority interest account

 

£

 

£

Dividends balance figure

x

Balance b/d

 

Balance c/d

x

Share of profits in subsidiary

x

 

 

 

 

 

x

 

x

 

 

Posted Date: 12/12/2012 5:39:10 AM | Location : United States







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