Chapter 6

Statements of
cash flows

Objectives

• Differentiate between profit

and cash flow.
• Prepare statements of cash
flows.
• Identify the treatment of
given transactions in a
company’s statement of
cash flows.
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 1. IAS 7 Statement of cash
flows
Contents 2. Direct method
3. Indirect method

• The aim of IAS 7 is to

provide information for
IAS 7 users of financial statements
about:
Statement – Ability to generate cash
and cash equivalents.
of cash – Indicating the cash needs
of the entity.
flows
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 IAS 7 Statement of cash
flows
• Cash: cash on hand and demand deposits
• Cash equivalents: short-term, highly liquid
investments.
• Operating activities: principal revenue-producing
activities of the enterprise.
• Investing activities: the acquisition and disposal
of non-current assets and other investments.
• Financing activities: those that change the size
and structure of equity and borrowing.

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IAS 7 Statement of cash

flows
• IAS 7 offers a choice of method for reporting
cash flows:
– Direct method: disclose major classes of gross
cash receipts and gross cash payments.
– Indirect method: net profit or loss is adjusted for
non-cash transactions, deferrals or accruals, items
associated with investing or financing cash flows.

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 Direct method
Cash receipts from operating
X
activities
Cash paid to suppliers and
(X)
employees
Cash generated from operating X

Interest paid (X)

Income tax paid (X)

Net cash from operating activities X

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Direct method
• Example 1: Boggis Co had the following transactions
during the year:
– Purchases from suppliers were $19,500, of which $2,550
was unpaid at the year end. Brought forward payables
were $1,000.
– Wages and salaries amounted to $10,500, of which $750
was unpaid at the year end. Accrual for wages and salaries
for the previous year is $1,500.
– Interest of $2,100 was paid in the year.
– Sales revenue was $33,400, including $900 receivables at
the year end. Brought forward receivables were $400.
– Interest on cash deposits amounted to $75.

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 Indirect method
• The net profit or loss for the period is adjusted
for:
– Changes during the period in inventories,
operating receivables and payables.
– Non-cash items (depreciations, provisions, profit
or loss on the sales of assets).

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Indirect method
Profit before interest and tax X

Add depreciation X

Loss (profit) on sale of non-current assets X/(X)

(Increase)/decrease in inventories (X)/X

(Increase)/decrease in receivables (X)/X

Increase/(decrease) in payables X/(X)

Cash generated from operations X

Interest (paid)/received (X)/X

Income taxes paid (X)

Net cash flows from operating activities X

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