ZIMSEC A Level · Accounting · Form 6
A statement of cash flows explains changes in cash and cash equivalents, under three headings (IAS 7).
1. Operating activities (indirect method)
Profit from operations (or profit before tax)
+ depreciation and losses on disposal (non-cash items); − gains on disposal
− increase in inventory and trade receivables / + decreases
+ increase in trade payables / − decreases
− interest paid and tax paid
Worked example: Profit from operations US$50 000; depreciation US$8 000; inventory increased by US$5 000; trade receivables fell by US$3 000; trade payables fell by US$2 000; tax paid US$9 000. Find the net cash from operating activities.
50 000 + 8 000 − 5 000 + 3 000 − 2 000 = 54 000 cash generated from operations
54 000 − 9 000 = US$45 000 net cash from operating activities
2. Investing activities
Purchase of non-current assets (outflow), proceeds from sale of non-current assets, interest and dividends received.
3. Financing activities
Proceeds from share issues and loans, repayment of loans, dividends paid.
Usefulness
Shows how cash was generated and used, the ability to pay debts and dividends, and why profit differs from cash. Cash is harder to manipulate than profit.
Check yourself
- Why is depreciation added back in the indirect method?
- Under which heading is the purchase of a delivery van shown?
- Trade receivables increased by US$4 000. How is this treated?
Show answers
- It is a non-cash expense that reduced profit.
- Investing activities.
- Subtracted from profit in operating activities.
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