Discussion of Statement of Cash Flows – Source: Yt

Statement of Cash Flows

 Statement of Cash Flows : provides information about cash receipts (cash inflows) and cash
payments (cash outflows) of an entity during the period

 Users of entity’s financial statements are interested in HOW THE ENTITY GENERATES AND USES
CASH AND CASH EQUIVALENTS.
 Entities need cash – to conduct their operations, pay their obligations, and provide returns to
their investors.
 Cash flow information : useful in assessing the ABILITY of the entity TO GENERATE CASH AND
CASH EQUIVALENTS.

Classification of Cash Flows

 The statement of cash flows shall report cash flows during the period classified as
 operating
 investing, and
 financing activities

OPERATING ACTIVITIES : cash flows derived primarily from PRINCIPAL REVENUE PRODUCING ACTIVITIES
of the entity

- deals with NORMAL OPERATIONS of the entity

Examples of cash flows from operating activities:

- Cash receipts from:

 sale of goods and rendering of services

 royalties, rental fees, commissions, and other revenue

- Cash payments:

 to suppliers of goods and services

 for selling, administrative, and other expenses

- Cash receipts and payments:

 of an insurance enterprise for premiums and claims, annuities, and other policy benefits
 for securities held for dealing and trading purposes
- Cash payment and refunds of income taxes unless specifically identified with financing and investing
activities

INVESTING ACTIVTIES: cash flows derived FROM THE ACQUISITION AND DISPOSAL OF LONG-TERM
ASSETS AND OTHER INVESTEMENTS not included in cash equivalent

Examples of cash flows from investing activities:

- Cash payments to/Cash receipts from:

 acquire/sales of property plant and equipment, intangible assets, and other long-term assets
 acquire/sales of equity or debt instruments (such as loans) of other entities and interests in joint
ventures
 future contract, forward contract, option contract, and swap contract

- Cash advances and loans to other parties (other than advances and loans made by financial institution)

- Cash receipts from repayment of advances and loans made to other parties

FINANCING ACTIVITIES: cash flows derived FROM THE EQUITY CAPITAL AND BORROWINGS of the entity

- cash flows that result from transactions between

 the entity and its owners (equity financing)

 the entity and its creditors (debt financing)

Examples of cash flows from financing activities:

- Cash receipts from:

 issuing shares or other equity instruments (Ex. Issuance of Ordinary and Preference Shares)
 issuing debentures, loans, notes, bonds, mortgages, and other short term or long term
borrowings

- Cash payments

 to owners to acquire or redeem the enterprise’s shares (Ex. Payment for treasury stock)
  for amounts borrowed
 by a lessee for the reduction of the outstanding liability relating to a finance lease

INTEREST

 PAS 7 provides that INTEREST PAID (Interest Expense) AND INTEREST RECEIVED (Interest
Income) shall be classified as OPERATING CASH FLOWS because they enter into the
determination of net income or loss.

 Alternatively, INTEREST PAID “may be” classified as FINANCING cash flow because it is a cost of
OBTAINING FINANCIAL RESOURCES
 Also, INTEREST RECEIVED “may be” classified as INVESTING cash flow because it is a RETURN OF
INVESTMENT

 Cash flows from interest paid and interest received shall be CLASSIFIED IN A CONSISTENT
MANNER from PERIOD TO PERIOD.

DIVIDENDS

 PAS 7 provides that DIVIDENDS RECEIVED as OPERATING cash flow since it enters into
determination of net income

- yet DIVIDENDS RECEIVED “may be” classified as INVESTING cash flow because it is a return of
investment

 PAS 7 provides that DIVIDEND PAID shall be classified as FINANCING CASH FLOW because it is a
cost of obtaining financial resources

 Alternatively, DIVIDENDS PAID may be classified as OPERATING CASH FLOW in order to assist
users to determine the ability of the entity to pay dividends out of operating cash flows.
  Cash flows from dividends paid and dividends received shall be CLASSIFIED IN A CONSISTENT
MANNER from PERIOD TO PERIOD.

INCOME TAXES

 PAS 7 provides that cash flows arising FROM INCOME TAXES shall be separately disclosed as
cash flows from OPERATING ACTIVITIES, unless they can be specifically identified with investing
and financing activities.
 TAX CASH FLOWS are often difficult to match to the originating underlying transactions so most
of the time ALL TAX CASH FLOWS are classified as arising from OPERATING ACTIVITIES.