We shall now turn out attention to the second section of the Statement of Cash Flows, which looks at cash flows from investing activities.
This section records the amounts of cash paid for and received from
- The disposal of property, plant and equipment and other non-current assets
- The acquisitions of property, plant and equipment and other non-current assets
- The amount of interest and dividends received
Proceeds from the disposal of property, plant and equipment
The proceeds received from disposals can be calculated by identifying the carrying value of the assets that have been disposed of and the profit/gain or the loss made on disposal.
The proceeds equal the carrying value plus any gains made on disposal less an losses made on disposal and less any disposal proceeds that have yet to be received from the customer at the year-end).
As the proceeds are inflows of cash they will be recorded as positive figures in the statement.
Question
During the year, a company disposed of a computer that originally cost £28,000 and against which accumulated depreciation of £21,000 had been charged. The company made a profit on disposal of £3,000
How much was received from the sale of the computer?
Click here to reveal the answer
The answer is £10,000 being the carrying value of the computer at the date of disposal of £7,000 (i.e £28,000 less £21,000) plus the profit made on disposal of £3,000.
Acquisitions of property, plant and equipment
The amount spent acquiring property, plant and equipment can be calculated as:
- The carrying value of property, plant and equipment at the start of the period
- Less the depreciation for the period
- Less the carrying value of disposals in the period
- Less the carrying value at the end of the period
- Less any amounts owed at the period-end to the supplier for the property, plant and equipment
As the acquisitions are outflows of cash they will be recorded as negative figures in the statement.
Question
At the end of its financial year, a company’s property, plant and equipment had a carrying value of £682,415. During the year, the company charged depreciation on these assets of £93,773. The company disposed of property, plant and equipment with a carrying value of £30,422. At the start of the year, the company’s property, plant and equipment had a carrying value of £751,038
What was the value of the company’s acquisitions of property, plant and equipment in the year?
Click here to reveal the answer
- Carrying value at the start of the year £751,038
- Less depreciation £93,773
- Less carrying value of disposals £30,422
- Less carrying value at the end of the year £682,415
- Equals the acquisitions for the year £55,572
Question
A company had property with a carrying value £2,388,457 at the start of its financial year. By the end of the year this had fallen to £2,166,209. During the year, the company sold a property for £840,000 on which it made a profit on disposal of £516,700. Lastly, the company charged depreciation of £283,000 on its property in the year.
Calculate the amount spent buying new property in the year
Click here to reveal the answer
- Carrying value at the start of the year; £2,388,457
- Less depreciation; £283,000
- Less carrying value of disposals (£840,000-£516,700); £323,300 (see note)
- Less carrying value at the end of the year; £2,166,209
- Equals the amount spent; £384,052
Note: The carrying value of the property disposed of is the amount it was sold for less the profit made on disposal
Interest received
In most exam questions, the amount of interest received will equal the amount of interest income in the Statement of Profit or Loss. Do however, check the Statements of Financial Position and the additional notes in case there is any mention of interest included in Current Assets at the start and/or end of the financial period.
The interest received will be calculated as the interest owed to the company at the start of the period, plus the interest income included in the Statement of Profit or Loss less the interest owed to the company at the end of the period.
Interest received is an inflow of cash, so the amounts will be recorded as positive numbers in the statement.
Question
At the start of its financial year, a company was owed £7,225 in interest on its savings, by the end of the year, this had changed to £1,627. In the company’s Statement of Profit or Loss it recorded interest receivable of £31,593.
How much interest was received in the year?
Click here to reveal the answer
- Interest owed at the start of the year; £7,225
- Plus interest receivable in the Statement of Profit or Loss £31,593
- Less the interest owed at the end of the year £1,627
- Equals interest received in the year £37,191
Dividends received
Again, the amount of dividends received will usually equal the amount of dividend income in the Statement of Profit or Loss but you must check both the Statements of Financial Position and the additional notes in case either mentions any dividends owed to the company at the start and/or end of the financial period.
The dividends received will be recorded as positive numbers in the statement
Illustration
We will continue with the example used in 4.02 to illustrate the calculation of Cash Flows from Operating Activities. The financial statements and additional notes are reproduced below.
1 Proceeds from the disposal of property, plant and equipment
The notes tell us that property, plant and equipment costing £55,000 were sold in the year and there was accumulated depreciation pf £25,000 charged against these assets up to the date of their disposal. Their carrying value was therefore £30,000. The Statement of Profit of Loss records a profit on disposal of £4,000.
The proceeds from the assets’ sales is therefore:
2 Acquisitions of property, plant and equipment
The carrying values at the start and end of the period can be taken from the Statement of Financial Position. The depreciation charges for the period are given in the notes and the carrying value of the assets that were disposed of was calculated above when we determined the proceeds from disposals. The amount spent acquiring property, plant and equipment is therefore:
3 Interest and dividends received
The example does not include details of any interest or dividends received in the period.
This section of the Statement of Cash Flows can now be completed as shown below. You will see that the net figure is negative which tells us that the company used £28,000 of the company’s cash in its investing activities.
