7.3 Cash Flows from Investing & Financing Activities

Investing and Financing Activities

While operating activities focus on the day-to-day trading cycle, investing and financing activities reflect the long-term capital decisions of the entity. Accurate preparation of these sections frequently requires reconstructing ledger accounts to find missing cash figures.

Investing Activities

Investing activities represent the extent to which expenditures have been made for resources intended to generate future income and cash flows. Common line items include:

• Cash paid to purchase property, plant, and equipment (PPE) or intangible assets.
• Cash proceeds from the sale of PPE.
• Interest received and dividends received (though IAS 7 permits these to be classified as operating cash flows in some circumstances, they are typically tested as investing cash flows in ACCA FA).

Reconstructing the PPE Account

To find the cash paid for additions (purchases) of PPE, you must often perform a reconciliation using the net carrying amount of PPE.

The standard formula/T-account structure for PPE (Carrying Value) is: Opening Carrying Value

• Additions (Cash paid - unknown figure to find)
• Revaluation surplus for the year

• Depreciation charge for the year
• Carrying value of disposals = Closing Carrying Value

Example 3: Calculating Cash Paid for PPE An entity has PPE with an opening carrying amount of $500,000 and a closing carrying amount of $620,000. During the year, depreciation was $60,000. Land was revalued upwards by $50,000. Equipment with a carrying value of $30,000 was sold for $40,000. What was the cash paid for new PPE?

Reconciliation: Opening balance: $500,000

• Revaluation: $50,000

• Depreciation: ($60,000)
• Disposal carrying value: ($30,000) Subtotal before additions: $460,000

Since the closing balance is $620,000, Additions must be: $620,000 - $460,000 = $160,000. This $160,000 is reported as a cash outflow under investing activities.

Note on Disposal Proceeds: The equipment was sold for $40,000. This full $40,000 represents cash received and is reported as a cash inflow under investing activities. The gain on disposal ($40,000 proceeds - $30,000 carrying value = $10,000) would have been deducted in the operating activities section.

Financing Activities

Financing activities result in changes in the size and composition of the contributed equity and borrowings of the entity.

Key line items include:

• Proceeds from issue of share capital.
• Proceeds from long-term borrowings.
• Repayment of borrowings or lease liabilities.
• Dividends paid to shareholders.

Reconstructing Equity Accounts

1. Share Capital and Premium When shares are issued at a premium, the cash received is the sum of the nominal value and the premium. To find the cash proceeds, you must aggregate the changes in both the Share Capital and Share Premium accounts.

Example: Opening Share Capital is $100,000 and Closing is $150,000. Opening Share Premium is $20,000 and Closing is $40,000. Increase in Share Capital = $50,000. Increase in Share Premium = $20,000. Total cash proceeds from share issue = $70,000 (Financing cash inflow).

2. Dividends Paid Dividends are paid out of retained earnings. Often, the exam will not state the dividend paid directly; you must deduce it by reconstructing the Retained Earnings account.

The standard formula/T-account structure for Retained Earnings is: Opening Retained Earnings

• Profit for the year (Profit after tax)

• Dividends paid (Cash outflow - unknown figure to find) = Closing Retained Earnings

Example 4: Calculating Dividends Paid Opening Retained Earnings: $120,000 Closing Retained Earnings: $145,000 Profit for the year (after tax): $65,000

Reconciliation: $120,000 + $65,000 - Dividends Paid = $145,000 $185,000 - Dividends Paid = $145,000 Dividends Paid = $40,000. This $40,000 is reported as a cash outflow under financing activities.

Reconstructing Borrowings

Increases in bank loans represent cash inflows, while decreases represent cash outflows (repayments). It is important to group current and non-current portions of loans if a single loan is split across current and non-current liabilities in the statement of financial position.

Final Reconciliation

Once operating, investing, and financing net cash flows are calculated, they are summed up:

Net cash from operating activities

• Net cash from investing activities
• Net cash from financing activities = Net increase / (decrease) in cash and cash equivalents

To prove the accuracy of the statement, this net movement is added to the opening balance of cash and cash equivalents. The result MUST perfectly equal the closing balance of cash and cash equivalents from the statement of financial position. If it does not, an error has been made in the calculations.