1aS7 CASH FLOW STATEMENT This statement is required to be produced as part of a company’s financial statements. The statement provides guidelines for the format of Cash Flow Statements. The statement is divided into three categories: 1. Operating activities - the main revenue generating activities of the business, together with the payment of interest and tax. 2. Investing activities - the acquisition and disposal of long term assets and other investing activities, 3. Financing activities - receipts from the issue of new shares, payments for the redemption of shares and changes in long term borrowings. ‘At the end of the statement the net increase in cash and cash equivalent is shown, both at the start and end of the period under review. For this purpose: Cash is defined as: cash on hand and demand deposits Cash equivalents as: short term, highly liquid investments that can easily be converted into cash. This is usually taken to mean money held in a term deposit account that can be withdrawn within three months from the date of deposit. Bank overdrafts - usually repayable on demand — are included as part of the cash and cash equivalents, Format of the Statement Operating activities The cash flow from operating activities is calculated as: ‘+ Profit from operations (profit before deduction of tax and interest) ‘+ Add: Depreciation charge for the year. * Add: Loss on sale of non — current assets (or deduct gain on sale of non ~ current assets). © Less: Investment income * Add or deduct changes in inventories, trade and other receivabies or payables + Less: Interest paid © Less: Taxes paid on income (usually corporation tax) 7 © The University of Cambridge Intemational ExaminationsInvesting activiti calculated by including: Inflows from: - proceeds from sale of non — current assets, both tangible and intangible, together with other long — term non ~ current assets. ‘© Outflows from: = cash used to purchase non — current assets, both tangible and intangible, together with other Iong — term non ~ current assets, + Interest received + Dividends received 3. Financing activities This is calculated by including: Inflows from ~ cash received from the issue of share capital = raising or increasing loans © Outflows from: = repayment of share capital repayment of loans and finance lease liabilities. + Dividends paid 18 (© The University of Cambridge International ExaminationsEXAMPLE. Profit from operations (before tex and interest) ‘Adjustments for: Depreciation charge for the year Increase in inventories Decrease in trade receivables Increase in trade payables Cash (used in}trom operations Interest paid (during the year) Tax paid (during the year) Net cash (used in)/from operating activities ‘Although not part of the statement, questions are often set or require the calculation of the: Reconciliation of profit from operations to net cash flow from operating activities $s 50,000 42,000 (3,000) 2,000 4,000 65,000 (5,000) 48,900) $2,000 Its the final figure from this calculation which is the start point for the Cash Flow Statement, 19 (© The University of Cambridge International ExaminationsEXAMPLE CASH FLOW STATEMENT FOR THE YEAR ENDED «......0.0s00 s $ Net cash (used in)from operating activities (from above) 52,000 Cash flows from investing activiti Purchase of non ~ current assets (20,000) Proceeds from the sale of non — current assets 41,000 Interest received 2,000 Dividends received —500 Net cash (used in)/from investing activities (16,500) Cash flows from financing activities: Proceeds form issue of share capital 80,000 (this would include both the share and share premium amounts) Repayment of fong term borrowings (30,000) Dividends paid (4,000) Net cash (used inj/from financing activities 46,000 Net increase/(decrease) in cash and cash equivalents 81,500 Cash and cash equivalents at the beginning of the year. 10,000 Cash and cash equivalents at the end of the ye Allowable variations: IAS 7 allows some flexibility in the way in which cash fw statements can be presented: 1. Cash flows from interest and dividends received and paid can be shown as operating or investing or financing activities. Whichever is chosen must be applied consistently, 2. Cash flows arising from taxes on income are always classified as operating activities uniess they can be specifically identified with financing andor investing activities, 20 © The University of Cambridge International Examinations