The Statement of Cash Flows ‘The phrase ‘Financial Statements’ indicates mainly the SOFP and SOCI, However, these two statements do not give adequate information about cash. ‘The statement of cash flows (SOCF) which gives information about the inflow and outflow of cash is necessary to understand the liquidity of the entity. Cash is the lifeline for any business and it is have sufficient information about its movements. tial that the owners and other users CASH IS KING!!!!!! FAILURE to manage cash properly may snap that lifeline ~ endangering the survival of the business. Differentiate between profit and cash flow _ PROFIT = CASH 22??? WRON The net profit figure is affected by NON-CASH items such as: Y Depreciation expense ¥ Accounting of sales and purchases on an accrual basis ¥ Accrual or prepayment adjustments at the end of the year Therefore, profit eamed and cash generated from operations are two entirely different amounts, Management need to control cash flow for the following reason: 1. Cash is the lifeline for any business. If adequate cash is not available on time, the day-to-day operations may be hampered. 2. The survival of an entity depends on its ability to generate cash from operations. Profit tied up in large amount of stock may weaken the liquidity of the company. Trade creditors and banks are interested in cash flow figures. Bad cash management can also affect profitability. ay heen. FS meeBenefits of SOCF in comparison with SOC1 ‘The statement of cash flows enhances the comparability of the operating performance of two entities or two periods by eliminating the effects of using ifferent accounting treatments for the same transactions and events, ‘The survival of an entity depends upon on its ability to generate cash and cash equivalents from operations. Trade creditors and bankers are more interested in cash flow figures. They want to know the repayment capacity of the entity. . The cash flow statement is simpler to understand even for businessmen who don’t have in-depth accounting expertise. SOCF gives better information than the traditional profitability statements to the management for decision making. Help to plan future cash movements ‘SOCF is easier to audit. Definitions under LAS 7 : Cash Flow Statements CASH ‘Cash comprises of cash in hand and demand deposits, CASH EQUIVALENTS Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Cash equivalents enable the entity to meet short-term cash commitments.For an investment to be treated as cash equivalent, the following conditions should be met ¥_ It should be readily convertible to cash. ¥ Ithas short maturity period eg less than 3 months. ¥ There should be no significant risks of changes in the value to be realized. Bank overdrafts repayable on demand are treated as part of cash equivalents OPERATING ACTIVITIES Operating activites are the principal revenue producing activities ofthe entity and other activities that are not investing in financing activities. Examples; Cash receipts from the sale of goods and the rendering of services, Cash receipts from royalties, fees, commissions and other revenue. Cash payments to suppliers for goods and services. Cash payment to and on behalf of employees Cash receipts and cash payments of an insurance enterprise for premiums and claims, annuities and other policy benefits Cash payments or refunds of income taxes Cash receipts and payments from contract held for dealing or trading purposes, yawns ae INVESTING ACTIVITIES Investing are the acquisition and disposal of long-term assets and other investments not included in cash equivalents, Examples: |. Property, plant and equipment, intangibles and other long term assets eg, Acquisition or disposal of equipment 2. Shares or debt of other entities ¢-g acquisition or disposal of ordinary shares 3+ Cash advances and loans made to other parties (other than those made by a financial institution) e.g A Co gives loan to BCo.FINANCING ACTIVITIES ‘inancing activities are activities that result in changes in the size and composition of the contributed equity and borrowings of the entity. Examples: 1._ Issue o redemption of shares 2. Borrowing and repayment of debentures, loan notes, bonds , mortgages and other short of long term borrowings 3. Cash payments towards the principal portion by the lessee of a financial lease. a of Interest and Dividends ‘A Ltd’s financial statement show a net profit of $600,000 before the following adjustments: 1. Interest paid $55,000 2. Interest received $7,000 3. Dividends received $18,000 4, Dividends paid $49,000 Method 1 (classify all under Operating activities) I. Interest paid $55,000 is classified under operating activities. 2. Interest received $7000 and dividends received $18,000 are classified under operating activities. Method 2 (classify under Financing and Investing activities) 1. Interest paid $55,000 is classified under financing activities 2. Interest received $7000 and dividends received $18,000 are classified under investing activities. Classification of Dividends Paid 1. Method 1 - Classify under Financing activities because they are a cost of obtaining financial resources. Dividends needs to be paid to shareholders, otherwise shareholders will not continue to hold their shares. It is their return on investment. 2. Method 2 - Classify under Operating activities so that the users can assess whether the entity is able to pay dividends out of operating cash flows,1AS 7: CASHFLOW STATEMENTS Format — Indirect Method Name Cashflow Statement (Indirect Method) For the year ended ... Notes $ $ Cashflow from Operating Activities Profit/(Loss) before taxation XXK/ (XXX) Add Depreciation peed Add Loss on disposal of non current assets XXX Less Profit on disposal of non current assets (ox) Add Finance cost Or Less Investment income (000) (Increase)/Decrease in inventories (2009 Poo. {Increase}/Decrease in receivables / (00x) 00 Increase/ (Decrease) in trade payables 00/(000() Increase/ (Decrease) in other payables 100/00) Cash generated from operations 2001/0000, Less Taxation paid (0K), Less Interest paid POX) ‘Net cashflow from operating activities HXX/(XXX) Cashflow from Investing Activities Less Purchase of non current assets (XXX) Add Sales of non current assets XX Add interest received x Add Dividends received 10 Net Cashflow from Investing Acti YOY (XXX), Cashflow from Financing Activities Proceeds from issues of shares OK Proceeds from long term borrowings OK Payment of finance lease liabilities (xX) Redemption of shares Pox) Repayment of loans (009) Dividend paid (ox) Net Cashflow from Financing Activities 1XX/(200)) Net Cashflow 20/0004 Cash and Cash Equivalent at the beginning XX / (XXX) Cash and Cash Equivalent at the end 00/000)