What is Cashflow statement?

 A cash flow statement tells you how much cash is entering and leaving your business.
Along with balance sheets and income statements, it’s one of the three most important
financial statements for managing your small business accounting and making sure you
have enough cash to keep operating.

Presentation of Statement of Cash Flows

 PAS 1 states that all financial statements should be prepared
under the accrual basis of accounting except statement of cash flows which is prepared
under the cash basis of accounting. When preparing statements of cash flows.Include
only the transactions that have affected cash and cash equivalents (e.g., purchase of
assets by paying cash). Exclude transactions that have not affected cash and cash
equivalents (e.g., purchase of assets by issuing note payable or shares of stocks).

Purpose of Cashflows
 To provide relevant information about cash receipts and cash payments
an entity during a period.
 The cash flow statement includes cash made by the business through operating,
investing, and financing.
 The statement of cash flows is designed to provide information about the change in an
entity's cash and cash equivalents.

Cash includes money and other negotiable instrument that is payable in money and
acceptable by the bank for deposit and immediate Credit. Examples of cash are coins, bills,
currency, checks, bank drafts and money orders (cash on hand). That includes also demand
deposits (cash in bank). Demand deposits demand deposit account (DDA) consists of funds
held in a bank account from which deposited funds can be withdrawn at any time, such as
checking accounts. DDA accounts can pay interest on a deposit into the accounts but aren’t
required. A DDA allows funds to be accessed anytime, while a term deposit account restricts
access for a predetermined time. 

Cash equivalents are investments that can be readily converted to cash. Common examples
of cash equivalents include commercial paper, treasury bills, short term government bonds,
marketable securities, and money market holdings.

 PAS 7, provides that an investment normally qualifies as a cash equivalent only when it
has a short maturity of three months or less from date of acquisition. An item should
satisfy the following criteria to qualify for cash equivalent:

 The investment should be short term. They should mature in less than three months.
If they mature in more than three months they will be classified as other
investments.
 They should be highly liquid. This means that they should be easily sold in the
market. The buyers of these investments should be easily available.
 They should be convertible to known amounts of cash. This means that their market
price should be available and this market price should not be subject to significant
fluctuations.
 They should not be too risky. There should be very little risk of changes in their value.
This means that equity shares cannot be classified as cash equivalents. But
preferred shares purchased shortly before the redemption date can be classified as
cash equivalents.

Importance of Cashflow Statement

 The cash flow report is important because it informs the reader of the business cash
position. It compliments the statement of profit or loss and the statement of financial
position.
 Cash flow information is useful in assessing the ability of an entity to generate cash and
cash equivalents to conduct their operations, to pay their dues and to provide returns to
their investors.
OPERATING ACTIVITIES

The amount of cash flows arising from operating activities is a key indicator of the extent to
which the operations of the enterprise have generated sufficient cash flows to maintain the
operating capability of the enterprise, pay dividends, repay loans, and make new investments
without recourse to external sources of financing. (Information about the specific components
of historical operating cash flows is useful, in conjunction with other information, in forecasting
future operating cash flows.

Cash flows from operating activities are primarily derived from the principal revenue
producing activities of the enterprise. Therefore, they generally result from the transactions
and other events that enter into the determination of net profit or loss.

Examples of cash flows from operating activities are:

a. Cash Receipts from Sale of Goods and Rendered Services.
b. Cash Receipts from royalties, Rental, 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 (e.g., cash
payments for purchases of and cash receipts from sale of financial assets and financial
liabilities that are held for trading).

Treatment for Interest Received, Interest Paid, Dividends Received and Dividends Paid
In PAS7 paragraph 33 provides that Interest Received, Interest Paid and Dividends
Received are primarily classified as Operating Cash flow because it enters into the
determination of net income. Alternatively, Interest Received and Dividends Received are
secondarily classified as and Investing Cash flow because it is a return on investment. While
the Interest Paid is alternatively classified as Financing Cash flows because it is a cost of
obtaining financial resources.

PAS7 paragraph 34 provides that Dividends Paid is classified as Financing Cash Flows
because it is a cost obtaining financial resources. Alternatively, may classified as operating
cash flow in order to assist users to determine the ability of the entity to pay dividends out of
cash flows.

GAINS AND LOSSES:

1. Gains and Losses from sale of Non - Current Asset.
2. Gains and Losses recognized in profit or loss
3. Gains and Losses in amortization of premium or discount on financial instruments and
Depreciation and Amortization expenses enter into the determination of profit or loss.
(Those three types of gains and losses does not affect the cash flows so it was excluded in
the operating activities.)

Reporting Cash flows from Operating Activities Presented using either:

1. Direct Method
2. Indirect Method

Direct Method
The direct method provides information which may be useful in estimating future cash flows
and which is not available under the
indirect method. (and is, therefore, considered more appropriate than the indirect method.
Under the Direct method, information about major classes of gross cash receipts and gross
cash payments may be obtained either:
a) From the accounting record of the enterprise; or
b) By adjusting sales, cost of sales (interest and similar income and interest expense
and similar charges for financial enterprise) and other items in the statement of profit
or loss for:
1) Changes during period in inventories and operating receivables and payables;
2) Other non – cash items; and
3) Other items for which the cash effects are investing or financing cash flows.

Indirect Method
By this approach, the net cash increase or decrease from operating activities would be
derived indirectly by starting with
the reported net profit/loss and working backward to convert that amount to a cash basis.

Two types of adjustments to net profit/loss to compute the Operating Activities of net
Cash Flows are needed

 The Current Assets adjustments have a indirect effect in the profit/loss.

 While the Contra Assets and Current Liabilities adjustments have a direct effect in the
profit/loss.

Investing Activities
 Investing activities are inflows and outflows of cash related to the acquisition and
disposition of:
(1) non-current assets used in the operations of the business.
(2) investments in securities(except qualified as cash equivalents).
(3) non-trade receivables.
Cash inflows from investing activities:
a) The sale of long -lived assets used in the business.
b) The sale of investment securities ( other than cash equivalents and trading
securities)
c) The collection of non-trade receivable such as a bond, note , or loan receivables.
d) Investment in revenue such as interest and dividends from investing in the
shares and bonds of other entities
Cash outflows from investing activities:
a) Purchase of long-lived assets used in the business.
b) Purchase of investment securities such as the shares and bonds of other.
entities (other than cash equivalents and trading securities)
c) Loans to other entities.
 PAS 7 allows companies to classify cash inflows from interest and dividends as investing
activities or operating activities.

Financing Activities
Financing activities would include any changes to long term liabilities (and short term notes
payable from the bank) and equity accounts (common stock, paid in capital accounts,
treasury stock, etc.).

What’s included in Cash Flow from Financing Activities?

It’s important for accountants, financial analysts, and investors to understand what makes up
this section of the cash flow statement and what financing activities include. Since this is the
section of the statement of cash flows that indicates how a company funds its operations, it
generally includes changes in all accounts related to debt and equity.

Financing activities include:

 Issuance of equity
 Repayment of equity
  Payment of dividends
 Issuance of debt
 Repayment of debt
 Capital/finance lease payments

Non-Cash Investing and Financing Activities

A company does not generate any cash inflows or cash outflows from non-cash investing and
financing activities, however, these activities can still have a material effect on a company’s
financial position.

These are reported at the bottom of the Statement of cash flow or in the notes to the Financial
Statements.
Examples of non-cash activities include:

 The issuance of common shares for dividend purposes, or in relation to the

conversion of convertible bonds or convertible preferred shares; and
 The exchange of one non-monetary asset for another non-monetary asset.