1. Freehold property was revalued upwards by $$ \mathrm{Sh} .20,000,000 $$ 2. Additional land was acquired at $$ \mathrm{Sh} .80,000,000 $$ 3. Bonus shares of $$ \mathrm{Sh} .40,000,000 $$ were issued at par during the year utilizing the revaluati on reserve. 4. Interest expenses charged to the income statement for the year amounted to $$ \mathrm{Sh} .16,00 $$ 0,000 5. Depreciation on plant and machinery amounting to $$ \mathrm{Sh} .8,000,000 $$ was provided in the in come statement for the year. 6. Plant with a net book value of Sh. $$ 16,000,000 $$ was sold at a profit of Sh. $$ 6,000,000 $$ durin g the year. 7. During the year, tax amounting to $$ \mathrm{Sh} .12,000,000 $$ was paid 8. Total dividends for the year amounted to $$ \mathrm{Sh} .10,000,000 $$ 9. The profit after tax for the year amounted to $$ \mathrm{Sh} .16,000,000 $$ Required: Statement of cash flows (in conformity with IAS 7 - Cash flow statements) for the year ended 30 Se ptember 2014 .

Question

UpStudy AI · Accepted Answer

$$
\textbf{Step 1: Determine Adjustments to Operating Profit (Indirect Method)}
$$

Starting with the profit after tax of $$ \mathrm{Sh}\, 16,000,000 $$, we identify non‐cash items and items not affecting cash:

1. $$\textbf{Depreciation on plant and machinery}$$:  
   This is a non‐cash charge added back:  
   $$
   +\, \mathrm{Sh}\, 8,000,000
   $$

2. $$\textbf{Profit on sale of plant}$$:  
   The plant was sold where the net book value was $$ \mathrm{Sh}\, 16,000,000 $$ and the profit was $$ \mathrm{Sh}\, 6,000,000 $$.  
   The actual cash received on sale is:  
   $$
   16,000,000 + 6,000,000 = \mathrm{Sh}\, 22,000,000
   $$  
   Since the $$ \mathrm{Sh}\, 6,000,000 $$ profit is included in profit after tax but did not represent an operating cash inflow, it is deducted:  
   $$
   -\, \mathrm{Sh}\, 6,000,000
   $$

Thus, the adjusted operating profit before working capital changes is:
$$
16,000,000 + 8,000,000 - 6,000,000 = \mathrm{Sh}\, 18,000,000
$$

$$
\textbf{Step 2: Adjust for Other Operating Cash Flows}
$$

Additional cash outflows that affect operations include:

- $$\textbf{Interest Paid}$$: $$ \mathrm{Sh}\, 16,000,000 $$  
- $$\textbf{Tax Paid}$$: $$ \mathrm{Sh}\, 12,000,000 $$

Subtract these amounts:
$$
18,000,000 - 16,000,000 - 12,000,000 = -\mathrm{Sh}\, 10,000,000
$$

Thus, the net cash flow from operating activities is:
$$
\boxed{(\mathrm{Sh}\, 10,000,000)}
$$

$$
\textbf{Step 3: Investing Activities}
$$

Identify cash flows resulting from investing activities:

1. $$\textbf{Acquisition of additional land}$$:  
   Cash outflow of $$ \mathrm{Sh}\, 80,000,000 $$.  
2. $$\textbf{Proceeds from sale of plant}$$:  
   Cash inflow of $$ \mathrm{Sh}\, 22,000,000 $$.

Net cash flow from investing activities is:
$$
22,000,000 - 80,000,000 = -\mathrm{Sh}\, 58,000,000
$$

$$
\textbf{Step 4: Financing Activities}
$$

Identify cash flows related to financing:

1. $$\textbf{Dividends paid}$$:  
   Cash outflow of $$ \mathrm{Sh}\, 10,000,000 $$.

Other items such as the upward revaluation of freehold property and the bonus shares issued (utilizing the revaluation reserve) are non‐cash and do not affect the financing cash flows.

Thus, the net cash flow from financing activities is:
$$
-\mathrm{Sh}\, 10,000,000
$$

$$
\textbf{Step 5: Summarise the Statement of Cash Flows}
$$

$$
\begin{array}{rcl}
\textbf{Cash flows from operating activities} & : & -\mathrm{Sh}\, 10,000,000 \
\textbf{Cash flows from investing activities}   & : & -\mathrm{Sh}\, 58,000,000 \
\textbf{Cash flows from financing activities}   & : & -\mathrm{Sh}\, 10,000,000 \
\hline
\textbf{Net decrease in cash during the year}   & : & -\mathrm{Sh}\, 78,000,000 \
\end{array}
$$

$$
\textbf{Non-cash Investing and Financing Transactions:}
$$
$$
\begin{array}{rcl}
\text{1. Upward revaluation of freehold property} & : & \mathrm{Sh}\, 20,000,000 \quad (\text{non-cash}) \
\text{2. Bonus shares issued at par (utilizing revaluation reserve)} & : & \mathrm{Sh}\, 40,000,000 \quad (\text{non-cash}) \
\end{array}
$$

$$
\textbf{Final Statement of Cash Flows (Year Ended 30 September 2014)}
$$

\[
\begin{array}{lcl}
\textbf{Cash flows from operating activities:} & &  \
\quad \text{Profit after tax} & : & \mathrm{Sh}\, 16,000,000 \
\quad \text{Adjustments for non-cash items:} & &  \
\quad\quad \text{Depreciation} & : & +\, \mathrm{Sh}\, 8,000,000 \
\quad\quad \text{(Less) Profit on sale of plant} & : & -\, \mathrm{Sh}\, 6,000,000 \
\quad \text{Adjusted operating profit} & : & \mathrm{Sh}\, 18,000,000 \
\quad \text{Less: Interest paid} & : & -\, \mathrm{Sh}\, 16,000,000 \
\quad \text{Less: Tax paid} & : & -\, \mathrm{Sh}\, 12,000,000 \
\quad \textbf{Net cash from operating activities} & : & -\, \mathrm{Sh}\, 10,000,000 \
\
\textbf{Cash flows from investing activities:} & &  \
\quad \text{Proceeds from sale of plant} & : & \mathrm{Sh}\, 22,000,000 \
\quad \text{Less: Acquisition of additional land} & : & -\, \mathrm{Sh}\, 80,000,000 \
\quad \textbf{Net cash used in investing activities} & : & -\, \mathrm{Sh}\, 58,000,000 \
\
\textbf{Cash flows from financing activities:} & &  \
\quad \text{Dividends paid} & : & -\, \mathrm{Sh}\, 10,000,000 \
\quad \textbf{Net cash used in financing activities} & : & -\, \mathrm{Sh}\, 10,000,000 \
\
\textbf{Net decrease in cash and cash equivalents} & : & -\, \mathrm{Sh}\, 78,000,000 \
\
\textbf{Non-cash transactions disclosed separately:} & &  \
\quad \text{Upward revaluation of freehold property} & : & \mathrm{Sh}\, 20,000,000 \
\quad \text{Bonus shares issued at par (utilizing revaluation reserve)} & : & \mathrm{Sh}\, 40,000,000 \
\end{array}
\]
$$ \textbf{Statement of Cash Flows (Year Ended 30 September 2014)} $$ \[ \begin{array}{lcl} \textbf{Cash flows from operating activities:} & & \ \quad \text{Profit after tax} & : & \mathrm{Sh}\, 16,000,000 \ \quad \text{Depreciation} & : & +\, \mathrm{Sh}\, 8,000,000 \ \quad \text{(Less) Profit on sale of plant} & : & -\, \mathrm{Sh}\, 6,000,000 \ \quad \text{Interest paid} & : & -\, \mathrm{Sh}\, 16,000,000 \ \quad \text{Tax paid} & : & -\, \mathrm{Sh}\, 12,000,000 \ \quad \textbf{Net cash from operating activities} & : & -\, \mathrm{Sh}\, 10,000,000 \ \ \textbf{Cash flows from investing activities:} & & \ \quad \text{Proceeds from sale of plant} & : & \mathrm{Sh}\, 22,000,000 \ \quad \text{Acquisition of additional land} & : & -\, \mathrm{Sh}\, 80,000,000 \ \quad \textbf{Net cash used in investing activities} & : & -\, \mathrm{Sh}\, 58,000,000 \ \ \textbf{Cash flows from financing activities:} & & \ \quad \text{Dividends paid} & : & -\, \mathrm{Sh}\, 10,000,000 \ \quad \textbf{Net cash used in financing activities} & : & -\, \mathrm{Sh}\, 10,000,000 \ \ \textbf{Net decrease in cash and cash equivalents} & : & -\, \mathrm{Sh}\, 78,000,000 \ \ \textbf{Non-cash transactions:} & & \ \quad \text{Upward revaluation of freehold property} & : & \mathrm{Sh}\, 20,000,000 \ \quad \text{Bonus shares issued at par (utilizing revaluation reserve)} & : & \mathrm{Sh}\, 40,000,000 \ \end{array} \]

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