Purpose of Statement of Cash Flows

To provide information about the sources of cash receipts and how cash payments were
utilized during a period. This information provides users of financial assessments a
basis in assessing:

a) The ability of the entity to generate cash and cash equivalents,

b) The timing and certainty of the generation of cash flows, and
c) The needs of the entity to utilize those cash flows

Statement of Cash Flows

A component of financial statements that provides information about the historical

changes in cash and cash equivalents of an entity by classifying cash flows during the
period according to

1) Operating activities
2) Investing activities
3) Financing activities

Cash comprises cash on hand and demand deposits

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 change in value.
Cash equivalents are held for the purpose of meeting short-term cash commitments
rather than for investment or other purposes.

A short-term investment may be classified as cash equivalent if it is acquired 3 months

or less before its maturity date.

Presentation of Statement of Cash flows

PAS 1 states that all financial statements should be prepares under the accrual basis of
accounting except statement of cash flows which is prepared under the cash basis of
accounting.

Classification of cash Flows

Cash Flows include inflows (sources) and outflows (uses) of cash and cash equivalents.
The Statement of Cash Flows shall report cash flows during the period classified by:

1) Operating activities
2) Investing activities
3) Financing activities

Classification by activities provides information that allows users to assess the impact of
those activities on the financial position of the entity and the amount of its cash and
cash equivalents.

Operating Activities are the key indicator of the extent to which the operations of the
entity have generated sufficient cash flows to repay loans, maintain the operating
capability of the entity, pay dividends and make new investment without recourse to
external financing.

Cash flows from operating activities are primarily derived from the principal revenue-
producing activities of the entity. They generally result from transactions and other
events that enter into the determination of profit or loss.

Examples:

a) Cash receipts from the sale of goods and the rendering of services;
b) Cash receipts from royalties, fees, commissions and other revenue;
c) Cash payments to suppliers for goods and services;
d) Cash payments to and on behalf of employees;
e) Cash receipts and cash payments of an insurance entity for premiums and
claims, annuities and other policy benefits
f) Cash payments or refunds of income taxes unless they can be specifically
identified with financing and investing activities.
g) Cash receipts and payments from contracts held for dealing or trading purposes.

Investing activities

Cash flows from investing activities are primarily derived from the acquisition and
disposal of long-term assets and other investments that are not considered to be cash
equivalents. Only expenditures that result in a recognized asset in the statement of
financial position are eligible for classification as investing activities.

Examples:

a) Cash payments for the acquisition and subsequent capitalizable cost for
property, plant and equipment, intangibles and other long-term assets.
b) Cash receipts from sales of property, plant and equipment intangibles and other
long-term assets;
c) Cash payments to acquire equity or debt instruments of other entities and
interests in joint ventures;
d) Cash receipts from sales of equity or debt instruments of other entities and
interests in joint ventures;
e) Cash advances and loans made to other parties (other than loans and advances
made by a financial institution);
f) Cash receipts from the repayment of advances and loans made to other
parties(other than loans and advances made by a financial institution);
g) Cash payments for future contracts, forward contracts, option contracts and swap
contracts except when contracts are held for dealing or trading purposes or the
receipts are classified as financing activities.

Financing activities

Cash flows from financing activities are primarily derived from transactions that alter the
equity capital and borrowing structure of the enterprise.

Examples:

a) Cash proceeds from issuing shares or other equity instruments;

b) Cash payments to owners to acquire or redeem the entity’s shares;
c) Cash proceeds from issuing debentures, loans, notes, bonds, mortgages and
other short or long-term borrowings;
d) Cash repayments of amounts borrowed; and
e) Cash payments by a lessee for the reduction of the outstanding liability relating to
a finance lease.
Interest expense, Interest income, Dividend income and Dividends paid

Interest and dividends received and paid may be classified as operating, investing, or
financing cash flows, provided that they are classified consistently from period to period.

Entities except financial institutions have the option of classifying cash flows on interest
expense, interest income, dividend income and dividends paid as either of the following:

Option 1:

Interest income received, interest expense paid and dividend income received are
classified as operating activities because these items enter into the determination of
profit or loss.

Dividend paid to owners is classified as financing activity because payment of dividend

is a transaction with the owners and it alters the equity structure of an entity.

Option 2:

Interest income and dividend income received are presented as investing activities
because these items result from investments (investing activity).

Interest expense paid is presented as financing activity because this items results from
borrowing (financing activity).

Dividends paid to owners is presented as operating activity in order to assist users to

determine the ability of an entity to pay dividends out of operating cash flows.

Taxes on Income

Cash flows arising from income are normally classified as operating, unless they can be
specifically identified with financing or investing activities.

Foreign Currency Cash Flows

Foreign currency cash flows shall be recorded in an entity’s functional currency by

applying the exchange rate in effect at the date of the cash flows.

Reporting cash flows from operating activities

Cash flows may be presented using either:

1. Direct method
The direct method shows each major class of gross receipts and gross cash
payments. Such gross cash flows may be obtained either
a) From the accounting records
b) By adjusting income statement accounts for changes in related operating
assets and liabilities during the period, excluding the effects of non-cash
items
2. Indirect method
The indirect method adjust accrual basis profit or loss for the effects of changes
in operating assets and liabilities and effects of non-cash items.

Reporting cash flows from investing and financing activities

An entity shall report separately major classes of gross cash receipts and gross cash
payments arising from investing and financing activities, except the following cases,
which may be reported on a net basis:

a) Cash receipts and payments on behalf of customers when the cash flows reflect
the activities of the customer rather than those of the entity. Examples:
I. The acceptance and repayment of demand deposits of a bank;
II. The funds held for customers by an investment entity;
III. Rents collected on behalf of, and paid over to, the owners of properties.
b) Cash receipts and payments for items in which the turnover is quick, the amount
are large, and the maturities are short.
I. Principal amounts relating to credit card customers;
II. The purchase and sale of investments; and
III. Other short-term borrowings, for example, those which have a maturity
period of three months or less.

Non-cash transactions
Only those that have resulted to actual cash inflows or outflows are included in the
statement of cash flows. Those that did not result to actual cash flows are excluded and
disclosed elsewhere in the financial statements.

Examples of non-cash transactions that are excluded from the statement of cash flows
are:

a) Acquisition of non-cash asset by issuance of note payable or disposal of non-

cash asset in exchange for a receivable
b) Acquisition of non-cash asset in exchange of another non-cash asset or by
issuanc of equity instrument
c) Declaration and issuance of property or stock dividend
d) Declaration of cash dividends but paid in subsequent year
e) Receipt of subscriptions for equity instruments but collected in succeeding year.