IAS 7 Summary Notes

IAS 7 Statement of cash flows

PURPOSE & SCOPE

The fundamental purpose of being in business is to generate profit, as this will

increase the owners' wealth. Profitability relates to the long term performance of the
business and indicates that over the long term a business will generate cash. In the
short term, the business' viability is determined by its ability to generate cash. However
Purpose
as an statement of profit or loss is prepared on an accruals basis, the profit for the year
is unlikely to correlate with the movement in the company's bank balance. Items such
as depreciation, provision movements and impairment of goodwill will mean that profits
and cash flows may differ dramatically.
Users need to know about the cash generating ability and financial adaptability of an
Users’
entity, i.e. can the business generate cash and can it alter the timing of its cash flows.
needs
If the entity can answer positively, users will be confident about the entity's prospects.
Therefore, IAS 7 requires that entities should prepare a statement of cash flows as an
Scope
integral component of financial statements.

DEFINITIONS

Cash comprises cash on hand and demand deposits.

Cash are short terms, highly liquid investments that are readily convertible to known
equivalent amounts of cash and which are subject to an insignificant risk of changes in value.
Cash are inflows and outflows of cash and cash equivalents.
flows
Operating are the principal revenue producing activities of the entity and other activities that
activities are not investing or financing activities.
Investing are the acquisition and disposal of long term assets and other investments not
activities included in cash equivalents.
Financing are activities that result in changes in the size and composition of the contributed
activities equity and borrowings of the entity.

CASH EQUIVALENT
An investment normally qualifies as a cash equivalent only when it has a short
maturity of, say, three months or less from the date of acquisition. Investment in
Investments
equity shares is not included in cash and cash equivalents, however, investment in
redeemable shares may be included if specific redemption date is very close.
If the balance of bank overdraft fluctuates normally from positive to negative or
Bank vice versa, it is included in cash and cash equivalent. However, if in substance, the
overdraft entity is using bank overdraft as short term loan, it should be included in financing
activities.
Movement Movement within cash and cash equivalent are not presented as cash flows.

Page 1 of 14 (kashifadeel.com)
IAS 7 Summary Notes

EXAMPLE 7A
Calculate the cash and cash equivalents from the following information:
$
Cash in hand 200,000
Cash at bank 140,000
Short term investments (1 month) in government 40,000
treasury bills
Trade debts 40,000
Investment in prize bonds 80,000
Other receivables 40,000
Bank overdraft 20,000

EXAMPLE 7B
What would be the effect on statement of cash flows of the following transactions?
$
Cash deposited in bank account 100,000
Sale of prize bonds 500,000
Investment in treasury bills of government with 60 days 800,000
maturity

Page 2 of 14 (kashifadeel.com)
IAS 7 Summary Notes

PRESENTATION

The statement of cash flows shall report cash flows during the period classified by operating,
investing and financing activities.
They generally result from the transactions and other events that enter into the
determination of profit or loss. Examples of cash flows from operating activities are:
(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 of suppliers for goods and services;
(d) Cash payments to and on behalf of employees;
Operating
(e) Cash receipts and cash payments of an insurance;
Activities
(f) Cash payments or refunds of income taxes unless they can be specially
identified with financing and investing activities; and

Some transactions, such as the sale of an item of plant, may give rise to a gain or
loss which is included in the determination of profit or loss. However, the cash flows
relating to such transactions are cash flows from investing activities.
The separate disclosure of cash flows arising from investing activities is important
because the cash flows represent the extent to which expenditures have been made
for resources intended to generate future income and cash flows. Examples of cash
flows arising from investing activities are:
Investing (a) Cash payments to acquire PPE, intangibles and other long-term assets
Activities including development costs and self-constructed PPE.
(b) Cash receipts from sales of PPE, intangibles and other long-term assets;
(c) Cash payments to acquire equity or debt instruments of other;
(d) Cash receipts from sales of equity or debt instruments of other entities;
(e) Cash advances and loans made to other parties.
The separate discloser of cash flows arising from financing activities is important
because it is useful in predicting claims on future cash flows by providers of capital to
the entity. Examples of cash flows arising from financing activities are:
(a) cash proceeds from issuing shares or other equity instruments;
Financing
(b) cash payment to owners to acquire or redeem the entity’s shares;
Activities
(c) cash proceed from issuing debentures, loans, notes, bonds, and other short or
long term borrowings;
(d) cash repayment of amounts borrowed, and
(e) cash payments by lessee for liability under finance lease.

Page 3 of 14 (kashifadeel.com)
IAS 7 Summary Notes

EXAMPLE 7C
Identify the following transactions as operating, investing, financing or otherwise:
TRANSACTION ANSWER
1. Cash received from customers
2. Cash sales
3. Cash proceeds from disposal of PPE
4. Right issue of shares
5. Repayment of loan
6. Dividend received by stock market broker
7. Dividend paid
8. Salaries paid to employees
9. Interest on debentures paid
10. Interest received by a trading entity on some investment
11. Interest received by a bank on loans advanced
12. Taxes paid
13. Purchase of a patent and software
14. Advance paid to supplier
15. Depreciation
16. Bonus issue of shares
17. Impairment loss on a plant

Page 4 of 14 (kashifadeel.com)
IAS 7 Summary Notes

REPORTING CASH FLOWS

OPERATING CASH FLOWS

An entity shall report cash flows from operating activities using either:
Direct whereby major classes of gross cash receipts and gross cash payments are
method disclosed; or
whereby profit or loss is adjusted for the effects of transactions of a non cash nature,
Indirect
any deferrals or accruals of past or future operating cash receipts or payments, and
method
items of income or expense associated with investing or financing cash flows.

EXAMPLE 7D
The following are extracts from the financial statements of Oxygen Limited for the year ended
June 30, 2012 and 2011.
2012 2011
SFP (extracts) $ $
Inventories 230,000 185,000
Prepayments 14,000 16,000
Trade receivables 52,000 30,000
Cash 15,000 38,000
Trade payables 39,000 44,000
Income tax payable 5,000 4,000

SPL (extracts)
Revenue 500,000
Cost of sales (includes depreciation of $ 6,000) (310,000)
Gross profit 190,000
Operating expenses (includes depreciation of $ 6,000) (80,000)
Finance costs (21,000)
Profit before tax 89,000
Taxation (30,000)
Profit after tax 59,000

Required:
What will be the net cash flow from operating activities under:
(a) Indirect method
(b) Direct method

Page 5 of 14 (kashifadeel.com)
IAS 7 Summary Notes

Investing and Financing Cash Flows

An entity shall report separately major classes of gross cash receipts and gross
Generally cash payments arising from investing and financing activities, except to the extent
that cash flows described as follows are reported on a net basis.
Cash flows arising from the following operating, investing or financing activities may
be reported on a net basis:
On net (a) cash receipts and payments on behalf of customers when the cash flows
basis reflect the activities of the customer rather than those of the entity; and
(b) cash receipts and payments for items in which the turnover is quick, the
amounts are large, and the maturities are short.

EXAMPLE 7E
The following are extracts from the financial statements of Nitrogen Limited for the year ended
June 30, 2012 and 2011.
2012 2011
SFP (extracts) $ $
Property, plant and equipment 850,000 800,000
Intangible assets 0 200,000

Share capital 600,000 500,000

Share premium 200,000 150,000
Long term loans 500,000 0
Debentures 100,000 400,000

Additional information:
During the year, right issue of shares was made.
Depreciation for the year was $ 200,000. There was no disposal of PPE during the year
Intangible asset (patent) was sold at beginning of the year equal to its carrying amount.

Required:
Present the above transactions in the statement of cash flows.

Page 6 of 14 (kashifadeel.com)
IAS 7 Summary Notes

EXAMPLE 7F
The following information relates to running finance of ABC Limited.
$
Balance at beginning of month 47,000
Payments
6 January 10,000
18 January 25,000
28 January 17,000 52,000

Receipts
2 January 7,000
14 January 18,000
26 January 30,000 55,000

Balance at end of month 44,000

Required:
How the above transactions should be treated in statement of cash flows.

Page 7 of 14 (kashifadeel.com)
IAS 7 Summary Notes

INTEREST, DIVIDENDS AND TAXES ON INCOME

Interest paid and interest and dividends received are usually classified as
Classification operating cash flows for a financial institution. However, there is no consensus on
the classification of these cash flows for other entities.
Cash flows from interest and dividends received and paid shall each be disclosed
Consistency separately. Each shall be classified in a consistent manner from period to period
as operating, investing or financing activities.
Cash flows arising from taxes on income shall be separately disclosed and shall
Taxes be classified as cash flows from operating activities unless they can be specifically
identified with financing and investing activities.

NON CASH TRANSACTIONS

Investing and financing transaction that do not require the use of cash or cash
equivalent shall be excluded from a statement of cash flows. Such transaction shall
Requirement
be disclosed elsewhere in the financial statements in a way that provides all the
relevant information about these investing and financing activities.
 Gain on revaluation
 Assets acquired under finance lease
Examples  Depreciation, amortisation and impairment losses
 Bonus issue of shares
 Conversion of convertible bonds in shares

DISCLOSURE

Components An entity shall disclose the components of cash and cash equivalents and shall
of cash and present a reconciliation of the amounts in its statement of cash flows with the
cash equivalent items reported in the SFP.
equivalents
An entity shall disclose, together with a commentary by management, the amount
Other
of significant cash and cash equivalent balance held by the entity that are not
disclosures
available for use by the group.

Page 8 of 14 (kashifadeel.com)
IAS 7 Summary Notes

INTERPRETATION OF STATEMENT OF CASH FLOWS

The figure should be compared to the operating profit. The reconciliation

Cash generation
note to the SCF is useful in this regard. Overtrading may be indicated by:
from trading
 High profits and low cash generation
operations
 Large increases in inventory, receivables and payables
These can be compared to cash generated from trading operations to see
Dividends and
whether the normal operations can sustain such payments. In most years
interest payouts
they should.
The nature and scale of a company’s investment in non – current assets is
clearly shown. A simple test may be to compare investment and
depreciation.
Capital  If investment is > depreciation, the company is investing at a greater rate
expenditure and than its current assets are wearing out – this suggests expansion.
financial  If investment = depreciation, the company is investing in new assets as
investment existing ones wear out. The company appears stable.
 If investment < depreciation, the non – current asset base of the company
is not being maintained. This is potentially worrying as non – current
assets are generators of profit.
The changes in financing (in pure cash terms) are clearly shown. There may
be a note to the statement of cash flows which links the inflows/outflows with
Management of
the movement in the statement of financial position. There may be significant
financing
non – cash flow changes in the capital structure of business. Gearing can be
considered at this point.
The statement clearly shows the end result in cash terms of the company’s
operations in the year. Do not overstate the importance of this figure alone,
however. A decrease in cash in the year may be for very sound reasons
Cash flow (e.g. there were surplus cash last year) or may be mainly the result of timing
(e.g. a new loan was raised just after the end of accounting period). To help
in determining the future cash position, other areas of the published
accounts should also be considered.
Cash return on Cash generated from operations x 100%
capital employed Total assets less current liabilities
Cash generated Cash generated from operations
to total debt Total debt
Operating cash to Net cash from operating activities x 100%
capital exp. Net capital expenditure

Page 9 of 14 (kashifadeel.com)
IAS 7 Summary Notes

FORMAT AND GUIDANCE

[Entity Name]
Statement of cash flows
For the year ended [date here]

Cash flows from operating activities: <Direct method> $’000

Cash receipts from customers Note 1 XXX
Cash paid to suppliers, employees and for expenses Note 2 (XXX)
Cash generated from operations XXX
Interest paid (XX)
Pension benefits paid (XX)
Income tax paid (XX)
Net cash from (used in) operating activities A XXX

Cash flows from operating activities: <Indirect method> $’000

Profit before tax Note 3 XXX

Adjustments for: Note 4

[non-cash income and expenses included in SPL] XX/(XX)
[items of income and expenses relating to investing or financing
activity but included in SPL] XX/(XX)
[post-employment benefit expense, finance income and
expense] XX/(XX)
Operating profit before working capital changes XXX
[increase on decrease in current assets and liabilities] Note 5 XX/(XX)
Cash generated from operations XXX
Interest paid (XX)
Pension benefits paid (XX)
Income tax paid (XX)
Net cash from (used in) operating activities A XXX

Cash flows from investing activities:

Purchase of non-current assets or short term investment (on cash basis) (XXX)
Disposal of non-current assets or short term investment (on cash basis) XX
Investment income (on cash basis) XX
Net cash from (used in) investing activities B (XXX)

Cash flows from financing activities:

Cash proceeds from share issue, loan issue and borrowings XXX
Cash paid for share re-purchase, loan and borrowings repayment (XX)
Interest paid on borrowings/Dividend paid (XX)
Net cash from financing activities C XXX

Net decrease in cash and cash equivalents A+B+C XXX

Cash and cash equivalents at beginning of the year SFP XX
Cash and cash equivalents at end of the year SFP XX

Page 10 of 14 (kashifadeel.com)
IAS 7 Summary Notes

NOTE 1
$
Revenue (Cash + Credit) XXX
(Increase)/decrease in trade receivables XX/(XX)
XXX

NOTE 2
$
All expenses and incomes in SPL for profit before tax excluding revenue (XXX)
[non-cash income and expenses included in SPL] XX/(XX)
[items of income and expenses relating to investing or financing activity but
included in SPL] XX/(XX)
[post-employment benefit expense, finance income and expense] XX/(XX)
[increase on decrease in current assets and liabilities excluding trade receivables] XX/(XXX)
(XXX)

NOTE 3
If profit in not given in the question (for indirect method), it is usually determined by reconciling
retained earnings. Profit before tax is to be taken for starting statement of cash flows under
indirect method.

NOTE 4
Expenses add back in profit
Incomes less back from profit

NOTE 5
Include increase/decrease in
 inventory,
 prepayments,
 advances,
 receivables,
 trade payables,
 Accrued expenses.

Exclude
 Cash,
 Investment,
 borrowings,
 interest payable,
 tax payable, and
 bank overdraft.
Cash inflow  increase in liability, decrease in asset
Cash outflow  increase in asset, decrease in liability

ADDITIONAL NOTE 6
Some T accounts should be combined like:
 Share capital and Share premium
 Liabilities classified under current and non-current elements
 Deferred tax and current tax

Page 11 of 14 (kashifadeel.com)
IAS 7 Summary Notes

ANSWER 7A

$
Cash in hand 200,000
Cash at bank 140,000
Short term investments (1 month) in government 40,000
treasury bills
Investment in prize bond 80,000
Bank overdraft (20,000)
440,000

ANSWER 7B
There will be no particular effect on statement of cash flows because these are movements within
the statement of cash flows.

ANSWER 7C
Identify the following transactions as operating, investing, financing or otherwise:
TRANSACTION ANSWER
1. Cash received from customers Operating
2. Cash sales Operating
3. Cash proceeds from disposal of PPE Investing
4. Right issue of shares Financing
5. Repayment of loan Financing
6. Dividend received by stock market broker Operating
7. Dividend paid Financing
8. Salaries paid to employees Operating
9. Interest on debentures paid Financing
10. Interest received by a trading entity on some investment Investing
11. Interest received by a bank on loans advanced Operating
12. Taxes paid Operating
13. Purchase of a patent and software Investing
14. Advance paid to supplier Operating
15. Depreciation Non-cash
16. Bonus issue of shares Non-cash
17. Impairment loss on a plant Non-cash

Page 12 of 14 (kashifadeel.com)
IAS 7 Summary Notes

ANSWER 7D
Part (a)
Oxygen Limited
Statement of cash flows
For the year ended June 30, 2012
Cash flows from operating activities $
Profit before tax 89,000
Adjustments:
Depreciation 12,000
Finance costs 21,000
Operating capital before working capital changes 122,000
Increase in inventory (230,000 – 185,000) (45,000)
Decrease in prepayments (14,000 – 16,000) 2,000
Increase in trade receivables (52,000 – 30,000) (22,000)
Increase in trade payables (39,000 – 44,000) (5,000)
Cash generated from operations 52,000
Interest paid (21,000)
Income tax paid (b/f 4,000 + PL 30,000 – c/f 5,000) (29,000)
Net cash from operating activities 2,000
Part (b)
Oxygen Limited
Statement of cash flows
For the year ended June 30, 2012
Cash flows from operating activities $
Cash received from customers (500,000 revenue – 22,000 increase in 478,000
receivables)
Cash paid to suppliers and employees (W1) (426,000)
Cash generated from operations 52,000
Interest paid (21,000)
Income tax paid (b/f 4,000 + PL 30,000 – c/f 5,000) (29,000)
Net cash from operating activities 2,000

W1 $
Cost of sales (310,000)
Operating expenses (80,000)
Finance costs (21,000)
(411,000)
Adjustments:
Depreciation 12,000
Finance costs 21,000
Operating capital before working capital changes (378,000)
Increase in inventory (230,000 – 185,000) (45,000)
Decrease in prepayments (14,000 – 16,000) 2,000
Increase in trade payables (39,000 – 44,000) (5,000)
Cash paid to suppliers and employees (426,000)

Page 13 of 14 (kashifadeel.com)
IAS 7 Summary Notes

ANSWER 7E
Nitrogen Limited
Statement of cash flows
For the year ended June 30, 2012
Cash flows from investing activities $
Cash paid to acquire PPE (b/f 800,000 – 200,000 dep. – c/f 850,000) (250,000)
Sale proceeds of intangible assets 200,000
Net cash used in investing activities (50,000)

Cash flows from financing activities

Issue of shares (b/f 500,000 + 150,000 – c/f 600,000 + 200,000) 250,000
Long term loan obtained 500,000
Redemption of debentures (100,000 – 400,000) (300,000)
Net cash from financing activities 450,000

ANSWER 7F
The repayment of running finance of $ 3,000 (i.e. 47,000 – 44,000) should be presented in
financing activities.

Dated: 13 August 2016

Page 14 of 14 (kashifadeel.com)