In this session we shall look at the third main part of the Statement of Cash Flows. The part looks at how the company’s debt and shares have changed over the year. The types of cash flows seen in this part include:
- Proceeds from the issue of shares
- Proceeds from new loans and/or the repayment of loans
- Payments of dividends
Proceeds from the issue of shares
The amount received from an issue of shares can be calculated as the total of the company’s share capital and share premium at the end of the period less the total of the share capital and share premium at the start of the period. Note that if there are any amounts unpaid on the issued shares at the end of the period you should deduct this amount.
Proceeds from the issue of shares are cash inflows and will therefore be recorded as positive numbers in the statement.
At the start of its financial year, a company had share capital of £1,000,000 and share premium of £700,000. By the end of the financial, share capital had changed to £2,500,000 and share premium had changed to £1,900,000.
How much was raised from the company’s share issue?
Click here to reveal the answer
Proceeds from new loans/debentures and/or the repayment of loans/debentures
In any financial period, a company might take out new loans or issue debentures and/or repay existing loans or debentures. The proceeds from new loans should not be netted off against the amounts repaid and should be presented separately in the Statement of Cash Flows.
Proceeds from new loans are cash inflows and will therefore be recorded as positive numbers in the statement but repayments are cash outflows and will therefore be recorded as negative numbers.
Let’s say that a company had £25m of debentures in issue at the start of a financial period and £31m at the end of the period and that during the period there was an issue of £10m of debentures. From this information we can calculate that the company must have repaid £4m of debentures in the period (i.e. the opening balance of £25m plus the issue of £10m less the closing balance of £31m). The Cash Flows from Financing Activities would therefore include the following two lines:
- Proceeds from the issue of debentures £10m
- Repayment of debentures £4m
Many exam type questions might only provide information about the opening and closing debt in which case we would have to make the assumption that:
- An increase in borrowings over the period only consists of new loans taken out
- A decrease in borrowings over the period only consists of loan repayments
Note: When calculating the company’s borrowings/debt do not include any bank overdrafts
A company had debentures in issue at the end of its financial year of £7,500,000. At the start of the year it had debentures of £1,800,000. During the year the company paid off debentures worth £1,100,000.
What was the value of the debentures issued in the year?
Click here to reveal the answer
The dividends paid in the period will include any interim dividends declared in the period together with any final dividends for the previous period. Remember that a final dividend for the current period will actually be paid in the subsequent period.
As dividends paid are a cash outflow from the company they will be recorded as negative numbers in the statement.
We will continue with our previous example. The financial statements and notes are shown below:
1 Proceeds from the issue of shares
The total of the company’s share capital and share premium was:
- £41,000 at the end of the year (i.e. £30,000 + £11,000)
- £35,000 at the start of the year (i.e. £25,000 + £10,000)
The company therefore received £6,000 from the issue of shares in the year (i.e. £41,000 less £35,000).
2 Proceeds from new loans
At the start of the year, bank loans were £65,000. By the end of the year, bank loans had increased to £77,000. As no further information is provided in the scenario we would assume that the difference of £12,000 represents new loans taken out in the year.
3 Dividends paid in the year
We are told in the notes that the company paid dividends of £30,000 in the year.
This section of the Statement of Cash Flows can now be completed and the net figure for this section is negative which tells us that the company’s financing activities used up £12,000 of the company’s.
The only section of the Statement that remains to be completed is the Reconciliation and we shall look at this in the next session.