PAS 7 – Statement of Cash Flows

Objectives
1. Understand the benefits of cash flow information

2. Define cash and cash equivalents

3. Understand the preparation of statement of cash flows and disclosures

4. Learn how to classify various cash flows as cash flows from operating,
investing and financing activities
What is the purpose of cash flow?
It provides:

Information that enables users to evaluate the changes in net assets of an

entity (Including its liquidity & solvency)

Information useful in assessing the ability of the entity to generate cash &
cash equivalents

Information that enhances the comparability of operating performance by

different entities
What are cash and cash equivalent
Cash comprises:
Cash on hand and demand deposits

Cash equivalents:
Short term, highly liquid investments that are convertible
It is for meeting short-term cash commitments
Investments qualifies as a cash equivalent only when it has a short maturity
(3 months or less)
Bank overdrafts which are repayable on demand are included
How is a statement of a Cash Flows being presented?

It shall report cash flows during the period classified by operating,

investing and financing activities
Classification provides information that allows users to assess the financial
position, and the amount of cash and cash equivalent
Two methods: Direct and Indirect
Cash flows from operating activities
It is a key indicator of the ability of the entity’s operations to generate cash
flows:
To repay loans
To maintain the operating capability of the entity
To pay dividends
To make new investments

Information about operating cash flows is useful in forecasting future

operating cash flows
Cash flows from operating activities
Operating cash flows are primarily derived from the principal revenue-
producing and supporting activities of the entity

Classification of cash flows as cash flows from operating activities depends

on the industry and business model of the entity

For example: Cash flows from sale of securities are treated as investing cash
flows in a real estate company but may be treated as operating cash flows in a
bank’s financial statements.
Cash flows from operating activities
Examples:

Cash receipts from the sale of goods

Cash payments to suppliers for goods and services
Cash payments to and on behalf of employees
Cash receipts and payments from contracts held for dealing or trading
purposes
Cash flows from investing activities
Is important because it represent the extent to which expenditures have
been made for resources intended to generate future income and cash flows

Examples:

Cash payments to acquire property, plant and equipment

Cash receipts from sales of property, plant and equipment
Cash advances and loans made to other parties
Cash flows from financing activities
is important because it is useful in predicting claims on future cash flows
by providers of capital to the entity.

Examples:

Cash proceeds from issuing shares or other equity instruments

Cash payments to owners to acquire or redeem the entity’s shares
Cash repayments of amounts borrowed
Two ways of reporting and presenting a Statement of
Cash Flows
Direct Method
Whereby major classes of gross cash receipts and gross cash payments are
disclosed

Indirect Method
whereby profit or loss is adjusted for the effects of transactions of a non-
cash nature, any deferrals or accruals
Direct Method
Entities are encouraged to report cash flows from operating activities using
the direct method

It provides information which may be useful in estimating future cash

flows and which is not available under the indirect method

Information about major classes of gross cash receipts and gross cash
payments may be obtained either:
1. from the accounting records of the entity
2. by adjusting sales, cost of sales and other items in the statement of
comprehensive income
Indirect Method
Under this method, the net cash flow from operating activities is
determined by adjusting profit or loss for the effects of:
1. changes during the period in inventories and operating receivables and
payables
2. non-cash items such as depreciation, provisions, deferred taxes, unrealized
foreign currency gains and losses, and undistributed profits of associates
3. all other items for which the cash effects are investing or financing cash
flows