On IAS 7 - Statement of Cash Flow:

Why SCF?

Simply put, to show the movement of cash during the period, as well as its utilization across the 3 different core business activities, including operating, financing and investing activities. This can be related to the 3 financial decisions every financial managers must make for their respective businesses.

There are two methods of preparing SCF, unlike many students' assumption, IAS 7 encouraged the direct method of Cash Flow presentation but the indirect method is equally acceptable. (see IAS 7.18)

It is understandable that many businesses prepare their Cash Flow using the indirect method. Why?

This is simpler than the direct method. Many corporates prepare their accounts on accrual basis and as such, it's easier to work back than finding ways to trace actual cash spent during the period when the records haven't been kept with such categorisation in mind.

For the sake of practicality, we will be examining only the Indirect Method of Cash Flow preparation.

To prepare SCF line by line:

Operating Activities segment:

- PBIT: We bring this from our Income Statement, representing our profit before interest and tax, with the aim of arriving at the Net Cash Flow from Operating Activities (i.e, we all know that Profit is not Cash and now, we want to get the actual Cash Balance from primary business operations). To arrive at the actual cash, we would need to add and/or subtract certain items that have earlier been subtracted or added before getting the PBIT.

- Add back Non-Cash Items: From here, all you need to do is to go and check the PoL of the account you are preparing SCF for and identify all the non-cash items present in the operating part of the PoL, like depreciation, amortisation, exchange difference, etc. The reason why we are adding these back is simply because they are non-cash items that have been earlier deducted before we get the PBIT.

- Account for Changes in Working Capital: For this, just go to the Current Asset and Current Liability of the SOFP of the account you are preparing, list all the items under them out, aside cash(bank) and cash equivalent balance in your current asset.

For the Current Assets: The idea is that, if the current year balance is higher than the prior year, it means that you have given more money (values) out during the period, as such, money has left your hand. Say, you have N200m receivable in 2023 and by end of 2024, you have N300m receivable balance. It technically means, even with the plus and minus that might have happened during the year, as at the end of 2024, you have given N100m worth of amount out. Thus, you are to subtract the N100m from the PBIT as the net of money that's outside. If the reverse is the case, where you have N300m in 2023 and N200m in 2024, it means, you received N100m during the period, thus, you add.

For the Current Liabilities: Just mirror the current asset treatment. The idea is that, for your liabilities, say, payables, if you have N50m in 2023 and N100m in 2024, it means, you have gotten more items worth of N50m that you should have paid for but didn't. Thus, it can be said that you got money during that period. Hence, we add. Reverse is the case when your payable balance is lower compared to prior year.

Let's now say you don't have a prior year, then, it means, every balance should be taken as higher than prior year, or say, taken as an "increase." Thus, you treat accordingly as explained above.

Also, it makes sense to account for changes in Working Capital under our Operating Activities because it is a reflection of some of the accruals that happened in our income statements. Say, you enjoyed an expense of N50k on credit and it's in your PoL, you know, the expense would have been deducted before arriving at your PBIT. It only makes sense that this same N50k would have been in your Payables, and, increasing Payable means you've to add it back, thus, it creates a nil effect on the expected actual cash flow from operations.

- Remove interest paid for the period

- Remove tax paid for the period

- Get your Net Operating Cash Flow for the period

The trick here is to focus on the FS you are using to prepare the cash flow statement and pick only important info to you. For your operating activities, focus on Income Statement and your changes in Working Capital (Current Asset and Liability)

Investing Activities segment: Here, you are basically looking at accounting for the cash element of the Non-Current Assets in your SOFP, and perhaps, other investment related items in your SOFP that are not to be accounted for as part of your current asset items.

Your PPE, ROU, etc, how were they treated during the period? Check their movement schedules for the additions, disposals or any changes to them during the year.

If you added new Non-Current Assets, technically, it means, money is leaving your hand, as you must have paid for the same. If unpaid for, the nil effect would have appeared in your payables. Thus, you deduct such from your investment segment of your cash flow statement, if you disposed, it means, you are getting cash, then, you add, if you haven't received the cash yet, the nil effect would have reflected in your receivable. For any other changes, just focus on whether or not you are spending or you are receiving value (money).

After the plus and minus, get the net and that would be your Net Cash Flow from Investing Activities.

Financing Activities segment: Here, you are basically looking at accounting for the cash element of the Non-Current Liabilities in your SOFP, and perhaps, other financing related items in your SOFP that are not to be accounted for as part of your current liability items.

Your loan note, lease liability, and other long term financial instruments appear here. Check the schedules for any changes to them. For them, everything that happened to them won't always appear on the face of the account (SOFP), so you have to be very careful with checking the relevant supporting docs. Your equity, if there are additional share purchased during the period, account for it by adding the cash paid. If dividend was paid during the period, account for it here too. Etc.

After the plus and minus, get the net and that would be your Net Cash Flow from Financing Activities.

After getting the 3 Net Cash Flows, from Operating, Financing and Investing, then add them all together, to get the actual Net Cash Flow Balance for the period. Add the same with the opening cash and cash equivalent balance you have, it should give you the closing cash balance for the period.

After all of this and your cash flow doesn't balance, try any of this:

1. Check the treatment of your disposal. Some people don't properly account for sales proceeds on disposals.

2. Check that you have properly accounted for your Non-Cash items from your PoL again. Many don't know proper treatment of exchange difference.

3. Check that your asset additions and reclassifications are properly accounted for. Some of these adjustments are common during audits. Watch out for them.

4. Your IFRS 9 and IFRS 16 finance costs, how were they treated? Some don't know how to properly treat these, too.

5. Check that all the items on your trial balance has been accounted for.

If after all of this, your cash flow is still not balancing, you might just need to reach out to your Consultant, Iwelabi Consulting, @iwelabiconsult

.

Cheers,

#Iwelabi.