TOPIC 8

CASH FLOW STATEMENT

 TOPIC OUTCOMES
• Apply the concepts and principles in assets, liabilities, and
equity
• Estimate and apply professional judgement:
• Initial recognition and measurement
• Subsequent measurement
• Derecognition.
• Presentation and Disclosure
Purpose of Statement of Cash Flow
• provides the basis for users to assess the ability of an
entity to generate cash and cash equivalents and the
needs of the entity to utilize them.
• provides information about the historical changes in
cash and cash equivalents of the entity that classifies
cash flow during the period as from operating, investing
and financing activities.
• gives ideas to users about the entity’s liquidity and
solvency.
Steps in Preparing SOCF
Calculate net increase or decrease in
cash

Calculate net cash in operating activities

Calculate net cash from investing

activities

Calculate net cash from financing

activities

Reconcile between the opening and the

closing balance of cash
 Operating activities
❑Operating activities refer to the main business activities of an entity.
❑Represent the main business activities and principal revenue-producing
activities, thus this group should be the main concern of the entity, and
other users of financial statements that have an interest in the entity.
❑Consequently, the activities under this classification will feature the
determination of the profit or loss of the entity.
❑Cash flows from operating activities include:
(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; and
(g)cash receipts and payments from contracts held for dealing or trading
purposes. [MFRS107.14]
 Investing activities
•An extent to which expenditures have been made for resources, with the intention to
generate future income and cash flows.
•Economic: accumulation of physical entities such as factories, machines and plants to
generate benefits.
•Finance: putting money in an asset in the hope of gaining profits from capital
appreciation, dividends and interest.
•Examples:
(a) cash payments to acquire 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;
 Investing activities

Examples:
(f) cash receipts from the repayment of advances and loans
made to other parties;
(g) cash payments for futures contracts, forward contracts,
option contracts and swap contracts except when the
contracts are held for dealing or trading purposes, or the
payments are classified as financing activities; and
(h) cash receipts from futures contracts, forward contracts,
option contracts and swap contracts except when the
contracts are held for dealing or trading purposes, or the
receipts are classified as financing activities. [MFRS107.16]
 Financing activities
•Activities that result in changes in the size and composition
of the equity and borrowings of an entity.
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-term 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.
 The effects of activities on
Financial Statements Items
The statement of cash flows reports cash flows by three types of activities:

1. Cash flows from operating activities – transactions that affect net profit.
2. Cash flows from investing activities – transactions that affect noncurrent
assets.
3. Cash flows from financing activities – transactions that affect equity and
debt of the entity.
 Increases in Cash Decreases in Cash

Operating Operating
(receipts from ordinary (payments for ordinary
business transaction) business transactions

Investing Investing
(receipts from sales of (payments for acquiring
non-current assets) non-current assets)

Financing Financing
(receipts from issuing (repayment of long-term borrowing)
equity and debt securities) dividends, and redemption of debt
securities)
 Methods in Preparing SOCF

Direct method
•Separates major items of operating cash receipts and major items of
operating cash payments, where the latter will be subtracted from
the former.
•Consequently, it adjusts items in the Statement of Profit or Loss and
Other Comprehensive Income from the accrual basis to cash basis.

Indirect method
•Reports income of the entity and adjusts it for those items that are
necessary to get the net cash.
 Methods in Preparing SOCF

• The statement of cash flows can be presented using either the

direct method or indirect method, where the difference between
the two exists only in operating activities.
• Entities are allowed to choose between the direct method and
indirect method, however MFRS 107 recommends direct method
while most entities prefer indirect method.
• Activities within any businesses are identified to be within three
groups, namely operating, investing and financing.
Sources to prepare SOCF

1. Comparative Statement of Financial Position

2. Statement of Profit or Loss

3. Statement of Changes in Equity

4.Notes to Accounts
Format of SOCF
3 Major Steps in Preparing SOCF
Indirect
Method
 Step 1: Operating Activities
• Determine net cash provided/used by operating activities by converting net
income from accrual basis to cash basis.
• Start with the accrual basis net income (shown in the SOPL, the Retained
Profits account, or the statement of changes in equity).
• Common adjustments to Net Income (Loss):
◆ Add back non-cash expenses (depreciation, amortization, or depletion
expense).
◆ Deduct gains and add losses.

◆ Any loss on sale is added to net profit in the operating section.

◆ Any gain on sale is deducted from net profit in the operating section.

◆ Changes in noncash current assets and current liabilities.

Summary of Conversion to Net Cash Provided
by Operating Activities—Indirect Method
Step 2: Investing and Financing Activities

• Changes in non-current assets, non-current liabilities & shareholder’s equity

• Analyse the SOPL to determine if there are any gains or losses from selling
investments, equipment, etc.

Step 3: Net Change in Cash

• Compare the net change in cash on the Statement of Cash Flows with
the change in the cash account reported on the SOFP to make sure the
amounts agree.
 Cash flows from operating activities:
Sample of Net income x
Adjustments to reconcile net income to net
Statement of Cash Flows cash provided by operating activities:
Depreciation expense x
(Indirect Method) Loss on sale of equipment x
Decrease in accounts receivable x
Increase in inventory x
Increase in prepaid expenses x
Increase in accounts payable x
Decrease in income taxes payable x
Net cash provided by operating
activities x
Cash flows from investing activities: x
Purchase of building x
Purchase of equipment x
Sale of equipment x
Net cash used by investing activities x
Cash flows from financing activities: x
Issuance of common stock x
Payment of cash dividends x
Net cash used by financing activities x
Net increase in cash x
Cash at beginning of period x
Cash at end of period x
 Direct Method
1. Compute net cash provided by operating activities by adjusting
each item in the SOPL from the accrual basis to the cash basis.

2. Companies report only major classes of operating cash receipts

and cash payments.

3. For these major classes, the difference between cash receipts

and cash payments is the net cash provided by operating
activities.
 Step 1: Operating Activities

1 2

4
 Direct Method Formulas
1

For employees &

Interest
Sample of
Statement of Cash Flows
(Direct Method)
Refer to Additional Notes – Statement of
Cash Flow for more examples