DFS - Statement of Cash flows

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Jonno1
Jonno1 Registered Posts: 63 Regular contributor ⭐
in AAT Level 4 (Level 8 in Scotland)
I'm busy revising DFS - Limited Company Accounts for my CBA in 3 weeks time. I've come stuck on statement of cash flows, right at the end - calculating the net increase/(decrease) in cash and cash equivalents.

Looking at the Osborne workbook, one example has cash & c/e at beginning of year as 135, cash & c/e at end of year as (486), net increase/(decrease) in cash and cash equivalents as (621). How is the (621) calculated, how do I interpret this as cash inflows/outflows to help me understand this?

Also, I've come stuck on the treatment of gains/losses on disposal in the profit from operations section of the cash flow statement. Why are profits on disposal taken away from cash flows, and losses on disposal added in to cash flows?

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  • Rinske
    Rinske Registered Posts: 2,453 Beyond epic contributor 🧙‍♂️
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    You started with a positive balance of 135.
    That got reduced to 486 negative.

    135 plus ? is (486)

    So ? is 621, which is the decrease in your cash flow.

    A decrease in your cash flow means you have more cash tied up in the items and therefore you got less cash to spent.

    Disposal issue:

    You have the gains on disposal added to the profit from operations, but this is not directly related to your operations, but instead to your investments part. So you take it out of the cash flows from operations.

    The losses get added to the cash flow from operations, because you deducted it earlier from the profit on operations.

    I hope this helps,

    Rinske
  • Steve Collings
    Steve Collings Registered Posts: 997 Epic contributor 🐘
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    Some excellent advice there from Rinske.

    Gains/losses on disposal of non-current assets ALWAYS feature on the DFS/FNST paper so it's well worth practising lots and lots of these. Remember losses on disposal are the same as depreciation - they are 'paper' losses, not cash based so need to be added back. Gains are the opposite and need to be deducted from operating profit.

    Students often get confused with the add/subtract issue relating to the statement of cash flows, but the best way is to do lots of question practise to make it second nature.

    You may also find my article on IAS 7 helps explain this topic.

    Best regards
    Steve
  • Jonno1
    Jonno1 Registered Posts: 63 Regular contributor ⭐
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    Hi Steve & Rinske,

    Thanks for you advice, it has helped a lot. However to quote 'The losses get added to the cash flow from operations, because you deducted it earlier from the profit on operations' - I'm not too sure what this means, can you explain?
    Many thanks,
    Jonno1
  • Rinske
    Rinske Registered Posts: 2,453 Beyond epic contributor 🧙‍♂️
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    Jonno1 wrote: »
    Hi Steve & Rinske,

    Thanks for you advice, it has helped a lot. However to quote 'The losses get added to the cash flow from operations, because you deducted it earlier from the profit on operations' - I'm not too sure what this means, can you explain?
    Many thanks,
    Jonno1

    When you prepare an income statement or statement of comprehensive income, you deduct the losses from your investments from the revenue and all the other bits to get to the profit from operations, even though no actual cash went out.

    So when you start with the profit from operations in your statement of cash flow, you already deducted the investment loss from your opening figure and will now need to add it back to it, to get to the cash flows from operations.

    Hope that helps,

    Rinske

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