STATEMENT OF CASH FLOWS

Statement of Cash Flows Defined

• It is a component of financial statements summarizing the operating, investing and financing

activities of an entity.
• In simple language, it provides information about the cash receipts and cash payments of an
entity during a period.
• IAS 7 provides that an entity shall prepare statement of cash flows and shall present it as an
integral part of its financial statements for each period for which financial statements are
presented.
 Statement of Cash Flows – It’s Significance

• To provide relevant information about cash receipts and cash payments of an entity during a
period.
• It provides information that enables users to evaluate the changes in net assets of an entity,
its financial structure, liquidity and solvency.
• Cash flow information is useful in assessing the ability of the entity to generate cash and
cash equivalents.
• It also enhances the comparability of operating performance by different entities.
 Cash and Cash Equivalents

• The statement of cash flows is designed to provide information about the change in an
entity’s cash and cash equivalents.
• Cash includes currency, coins and amounts on deposit in bank checking accounts or savings
account; an item acceptable for deposit at face value by a bank or other financial institutions.
In a limited sense, it includes currency and coins and demand credit instruments that are
unrestricted and are immediately available for use in current operations.
• Cash equivalents are short-term, highly liquid investment assets that are readily convertible
into a known cash amount or sufficiently close to their maturity date (usually within 90 days)
so that the market value is not sensitive to interest rate changes.
 Classification of Cash Flows

Cash flows are classified into activities as:

• Operating activities
• Investing activities
• Financing activities
 Classification of Cash Flows Defined

Operating Activities - are the cash flows derived primarily from the principal revenue producing activities of
the entity.
Investing Activities - are the cash flows derived from the acquisition and disposal of long-term assets and other
investments not included in cash equivalents.
Financing Activities – are the cash flows derived from the equity capital and borrowings of the entity.
 Treatment of Interest, Dividends and Income Taxes in
the Statement of Cash Flows

Interest:
• IAS 7 provides that interest paid and interest received 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. Interest received may be classified as investing cash flow
because it is a return on investment.
Dividends:
• IAS 7 provides that dividend received shall be classified as operating cash flow because
it enters into the determination of net income.
• Alternatively, dividend received may be classified as investing cash flow because it is a
return on investment.
 Treatment of Interest, Dividends and Income
Taxes in the Statement of Cash Flows

Dividends:
• IAS 7 provides that dividend paid shall be classified as financing cash flow because it is a cost of
obtaining financial resources.
• Alternatively, dividend 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.
Income Taxes:
• 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.
 Treatment of Noncash Transactions in the
Statement of Cash Flows

• Investing and financing transactions that do not require use of cash or cash equivalents shall
be excluded from the statement of cash flows.
• Such transactions shall be disclosed elsewhere in the financial statements either in the notes
to financial statements or in a separate schedule.
 Methods of Presenting Cash Flows from
Operating Activities

Direct Method Indirect Method

• Means that the major classes of gross cash
receipts and gross cash payments are
disclosed.
• In other words, the direct method shows in
detail or itemizes the cash receipts and cash
payments.
• Means that the net income or loss is adjusted
for the effects of transactions of a noncash
nature, any deferrals or accruals of past or
future operating cash receipts and payments,
and items of income or expense associated
with investing and financing activities.

.
 Proforma of Presenting Cash Flows from Operating
Activities Using the Direct Method

Cash Flows From Operating Activities:

Cash receipts from customers PXX

Cash paid to suppliers and employees (XX)

Cash paid for other expenses (XX)

Cash generated from operations PXX

Interest paid (XX)

Income taxes paid (XX)

Net Cash Flows From Operations PXX

Supporting Schedules – Direct Method

Accrual Basis Adjustment Required Cash Basis

+ Accounts receivable, beg.
= Cash receipts from
Net Sales - Accounts receivable, end customers
- Customer advances, beg.
+ Customer advances, end

Accrual Basis Adjustment Required Cash Basis

+ Inventory, end
+ Accounts payable, beg. = Cash paid to
Cost of Sales suppliers
- Inventory, beg.
 Supporting Schedules – Direct Method

Accrual Basis Adjustment Required Cash Basis

+ Prepaid expense, end
Operating expense = Cash paid for operating
(e.g. insurance, wages) + Accrued expense, beg. expenses
- Prepaid expense, beg.
- Accrued expense, end

Accrual Basis Adjustment Required Cash Basis

+ Unearned income, end
Other income(e.g. rent, + Accrued income, beg. = Cash received from
commission) other income
- Unearned income, beg.
 Supporting Schedules – Direct Method

Accrual Basis Adjustment Required Cash Basis

+ Interest payable, beg.

Interest expense = Cash paid for interest

+ Amortization of premium on bonds payable

- Interest payable, end

- Amortization of discount on bonds payable

 Supporting Schedules – Direct Method

Accrual Basis Adjustment Required Cash Basis

+ Income tax payable, beg.

Income tax expense - Income tax payable, end = Cash paid for income tax

- Deferred tax asset, beg.

+ Deferred tax asset, end

+ Deferred tax liability, beg.

- Deferred tax liability, end

Proforma of Presenting Cash Flows From Operating Activities
using the Indirect Method

Cash Flows From Operating Activities

Profit before income tax PXX
Adjustments for:
Depreciation XX
Foreign exchange loss XX
Income from associates (XX)
Interest expense XX
Increase in trade and other receivables (XX)
Decrease in inventories XX
Decrease in trade payables (XX)
Cash generated from operations XX
Interest paid (XX)
General Guidelines for the Adjustments of Net Income to
Cash Basis – Indirect Method

• All increases in trade noncash current assets are deducted from net income
• All decreases in trade noncash current assets are added to net income
• All increases in trade current liabilities are added to net income
• All decreases in trade current liabilities are deducted from net income
• Depreciation, amortization, and other noncash expenses are added back to net income to eliminate the
effect they had on net income
• Any gain on disposal of property included in net income but it is a nonoperating item. Thus, this is
deducted from net income.
• Any loss on disposal of property is deducted from net income but this is nonoperating item. Thus, this
added back to net income.