Statement of changes in owner's equity and statement of cash flows
The equity statement explains how capital moved during the year. The cash flow statement explains how cash moved, under operating, investing and financing activities.
Worked example 1: statement of changes in owner's equity
Ruwani Fashions: capital at 1 April 2025 Rs. 2,200,000; profit for the year Rs. 686,000; drawings of Rs. 300,000 in cash and goods costing Rs. 25,000. No new capital was introduced. Prepare the statement for the year ended 31 March 2026.
- Opening capital: 2,200,000.
- Add profit: 2,200,000 + 686,000 = 2,886,000.
- Less drawings: 300,000 + 25,000 = 325,000.
- Closing capital: 2,886,000 − 325,000 = 2,561,000.
Capital at 31 March 2026 = Rs. 2,561,000, the same figure as in the statement of financial position.
Why a cash flow statement?
Profit is not cash. A business can show a profit and still run short of cash, because profit includes non-cash items such as depreciation, and money can be tied up in inventory and receivables. The statement of cash flows (in Sri Lanka, LKAS 7) shows where cash came from and where it went, in three groups: operating (day-to-day trading), investing (buying and selling non-current assets) and financing (owner's capital, drawings, loans). The indirect method starts from profit and adjusts it to cash.
Data: Kasun Hardware, statements of financial position at 31 March (Rs.)
| Item | 2026 | 2025 |
|---|---|---|
| Equipment at cost | 1,800,000 | 1,400,000 |
| Accumulated depreciation | (520,000) | (340,000) |
| Inventory | 640,000 | 560,000 |
| Trade receivables | 310,000 | 350,000 |
| Cash and cash equivalents | 180,000 | 230,000 |
| Total assets | 2,410,000 | 2,200,000 |
| Capital | 1,630,000 | 1,270,000 |
| Bank loan | 500,000 | 700,000 |
| Trade payables | 280,000 | 230,000 |
| Total capital and liabilities | 2,410,000 | 2,200,000 |
Other information for 2025/26
- Profit for the year: Rs. 620,000 (no interest; ignore tax).
- Kasun introduced new capital of Rs. 100,000 and withdrew Rs. 360,000.
- No equipment was sold during the year.
Worked example 2: statement of cash flows (indirect method)
Prepare the statement of cash flows of Kasun Hardware for the year ended 31 March 2026.
- Depreciation: 520,000 − 340,000 = 180,000 (no disposals).
- Working capital: inventory up 640,000 − 560,000 = 80,000 (cash out); receivables down 350,000 − 310,000 = 40,000 (cash in); payables up 280,000 − 230,000 = 50,000 (cash in).
- Operating activities: 620,000 + 180,000 − 80,000 + 40,000 + 50,000 = 810,000.
- Investing activities: equipment bought 1,800,000 − 1,400,000 = 400,000, an outflow of (400,000).
- Financing activities: new capital 100,000 − drawings 360,000 − loan repaid (700,000 − 500,000 = 200,000) = (460,000).
- Net change in cash: 810,000 − 400,000 − 460,000 = −50,000.
- Check: opening cash 230,000 − 50,000 = 180,000, the closing cash in the 2026 statement.
Operating Rs. 810,000; investing (Rs. 400,000); financing (Rs. 460,000). Cash falls by Rs. 50,000, from Rs. 230,000 to Rs. 180,000.
Worked example 3: check the capital movement
Show that Kasun's capital moved from Rs. 1,270,000 to Rs. 1,630,000.
- 1,270,000 + 100,000 (new capital) = 1,370,000.
- 1,370,000 + 620,000 (profit) = 1,990,000.
- 1,990,000 − 360,000 (drawings) = 1,630,000.
The statement of changes in owner's equity agrees with the closing capital of Rs. 1,630,000.
Indirect method: what to add and subtract
| Item | Adjustment to profit | Why |
|---|---|---|
| Depreciation | Add | An expense with no cash outflow |
| Loss on disposal | Add | Non-cash; the sale proceeds go under investing |
| Gain on disposal | Subtract | Non-cash; the sale proceeds go under investing |
| Increase in inventory or receivables | Subtract | Cash is tied up |
| Decrease in inventory or receivables | Add | Cash is released |
| Increase in payables or accruals | Add | Cash is kept longer |
| Decrease in payables or accruals | Subtract | Cash is paid out |
Many Sri Lankan SMEs that look profitable still struggle to pay suppliers because cash is stuck in inventory and credit sales. A cash flow statement shows the owner, and the bank, exactly where the cash went.
Short answer: “Name the three sections of a statement of cash flows.” Operating activities, investing activities and financing activities.
Structured question: “Prepare a statement of changes in owner's equity from the given data.” Opening capital + new capital + profit − drawings (cash and goods) = closing capital, set out as a statement.
Essay: “From two statements of financial position and additional information, prepare a statement of cash flows using the indirect method.” Profit + depreciation ± working capital changes = operating cash; then investing and financing; reconcile the net change to opening and closing cash.
Indirect method: asset up = cash down, liability up = cash up. Always finish with opening cash + net change = closing cash.