STATEMENT OF

CASHFLOWS IAS 7
IAS # 7
1.0 Introduction
Profits alone are inadequate to show the
performance of an entity
An entity’s ability to settle obligations
as and when they fall due is equally
important
IAS 7
Liquidity is equally important
Management of an entity has to
understand the importance of
controlling cash resources
IAS#7 OBJECTIVE OF IAS 7

•To provide information about an

entity’s ability to generate cash and
cash equivalents
•SOCFs provides historical information
IAS 7 OBJECTIVES OF IAS 7
about cash and cash equivalents which
users can make use of to make
predictions
•Entities are required to present a
SOCFs as an integral part of GPFS
IAS 7 BENEFITS OF SOCF
•Better insight into the financial structure
of an entity, including its liquidity and
solvency
•Enhanced information for the purposes of
evaluation of changes in assets, equity etc.
IAS 7 BENEFITS OF SOCF
•Enhances comparability of reporting
operating performance by diff entities
•Serves as an indicator of the amount,
timing and certainty of future cash
flows
IAS#7 DEFINITIONS
•Cash-cash on hand and demand
deposits with banks
•Cash equivalents-short term highly
liquid investments that are readily
convertible into known amts of cash
IAS#7 DEFINITIONS
•Operating activities-principal revenue
producing activities of the entity
•Investing activities-activities of the
entity that relate to acquisition and
disposal of long-lived assets and other
non-current assets [incl. investments]
IAS#7 DEFINITIONS
•Financing activities-activities that
result in changes in the size and
composition of the equity capital and
borrowings of the entity
IAS#7 CASH AND CASH EQUIVALENTS
•Significance of the term
Short-term in nature-held to meet short-
term commitments eg call deposits
Highly liquid investments readily
convertible to known amounts with
insignificant risk of changes in value
IAS#7 CASH AND CASH EQUIVALENTS
•Significance of the term
Maturity up to 90days
Loans and borrowings are financing
activities but bank O/D repayable on
demand are included as cash equivalents
IAS#7 CASH AND CASH EQUIVALENTS
•Significance of the term
Bank balance should fluctuate -/+during
the period for which the statement is being
prepared
Movements in cash and cash equivalents
are excluded from CFs
IAS#7 PRESENTATION OF THE SOCF
Classified into 3 components:-operating
activities; investing activities and financing
activities
Care should be taken to include
transactions under the appropriate category
IAS#7 PRESENTATION OF THE SOCF
Classifying in different categories
assists users in assessing the impact of
various activities on cash and cash
equivalents
IAS#7 PRESENTATION OF SOCF
•Operating activities:-it shows whether
and to what extent the entity generates
cash from its operating activities
•It is the same cash that can be used in
acquiring other assets
IAS#7 PRESENTATION OF SOCF
•Most of the components from operating
activities will be those items that
determine the net profit or loss of the
entity
•They relate to the main generating
activities of the entity
IAS#7 PRESENTATION OF SOCF
Examples of CFs from operating activities
Cash receipts from the sale of goods and
services
Cash receipts from fees, royalties,
commissions and other revenue
IAS#7 PRESENTATION OF SOCF
Examples of CFs from operating activities
Cash payments to suppliers for goods
and services
Cash payments to and on behalf of the
employees
IAS#7 PRESENTATION OF SOCF
Examples of CFs from operating
activities
Cash flows that do not meet the
criteria of investing or financing
activities
IAS #7 PRESENTATION OF SOCF
•Investing activities:-show the extent of new
investment in assets that will generate future profit
and cash flows
•Examples of investing activities
include the purchase and disposable of PPE and
other long term assets (incl. intangibles)
IAS#7 PRESENTATION OF SOCF
Cash receipts and payments to acquire
or dispose shares or loan capital of
other entities
Cash advances and loans to other
parties
IAS#7 PRESENTATION OF SOCF
Cash receipts from payment of loans
and advances to other parties
•Financing activities:-shows the amount
of cash which the capital owners have
claimed during the period
IAS # 7 PRESENTATION OF SOCF
Examples of financing activities
Proceeds from the issue of shares,
debentures and bank borrowings
Payment of dividends
Repayment of loans [principal]
IAS # 7 PRESENTATION OF SOCF
Cash payments to owners to acquire or
redeem the entity’s shares
IAS # 7 REPORTING CASHFLOWS
FROM OPERATING ACTIVITIES
•Two methods can be used:-
•Direct method:-disclose major classes
of gross receipts and payments
•Indirect method:-net profit or loss is
adjusted for the effects of transactions
IAS # 7 REPORTING CASHFLOWS
FROM OPERATING ACTIVITIES
of a non-cash nature and prepayments
and accruals of past or future operating
cash receipts or payments, and items of
income or expense classified as
investing and financing activities
IAS #7 REPORTING CASHFLOWS
FROM OPERATING ACTIVITIES
•Using the Direct Method
There are different ways in which the
information on gross receipts and payments
can be obtained
Most obvious way is to extract it from the
accounting records
IAS #7 USING THE DIRECT METHOD
•Proforma for the direct method
$$
Cash flows from operating activities
Cash receipts from customers xx
Cash paid to suppliers and employee (xx)
Cash generated from operationsxx
Interest paid (xx)
Income taxes paid (xx)
Net cash from operating activities XX
IAS #7 USING THE INDIRECT METHOD
Bhobhojani Ltd had the following transactions during the year:
(a) Purchases from suppliers were $19 500, of which $2550 was unpaid at the year
end. Brought forward payables were $1000.
(b) Wages and salaries amounted to $10 500, of which $750 was unpaid at the year
end. The accounts for the previous year showed an accrual for wages and
salaries of $1500.
(c) Interest of $2100 on a long-term loan was paid in the year.
(d) Sales revenue was $33 400, including $900 receivables at the year end. Brought
forward receivables were $400.
(e) Interest on cash deposits at the bank amounted to $75.
REQUIRED
Calculate the cash flow from operating activities using the direct method
IAS #7 USING THE INDIRECT METHOD
Solution $ $
Cash flows from operating activities
Cash received from customers
($400 + $33 400 – $900) 32 900
Cash paid to suppliers
($1000 + $19 500 – $2550) (17 950)
Cash paid to employees
($1500 + $10 500 – $750) (11 250)
Interest paid (2 100)
Interest received 75
Net cash flow from operating activities 1 675
IAS #7 USING THE INDIRECT METHOD
The profit or loss from operations for the period
is adjusted for the following:
(a) non-cash items, e.g. depreciation, provisions,
profits/losses on the sales of assets
(b) changes during the period in inventories,
operating receivables and payables
IAS #7 USING THE INDIRECT METHOD
A proforma of such a calculation is as follows: $
Profit before tax (statement of profit or loss) X
Add depreciation X
Finance expense 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 (X)
Dividends paid (X)
Income taxes paid (X)
Net cash flow from operating activities X
IAS#7 USING THE INDIRECT METHOD
NOTES ON THE ADJUSTMENTS
(a) Depreciation is not a cash expense, but is deducted in
arriving at the profit figure in the statement of profit
or loss and other comprehensive income. It makes
sense, therefore, to eliminate it by adding it back.
(b) By the same logic, a loss on a disposal of a non-
current asset (arising through underprovision of
depreciation) needs to be added back and a profit
deducted.
IAS#7 USING THE INDIRECT METHOD
NOTES ON THE ADJUSTMENTS
(c) An increase in inventories means less cash – you
have spent cash on buying inventory.
(d) An increase in receivables means the company's
customers have not paid as much, and therefore
there is less cash.
(e) If we pay off payables, causing the figure to
decrease, again, we have less cash.
IAS#7 INTEREST AND DIVIDENDS
Interest and dividends are disclosed separately, and
classified consistently as either operating, investing or
financing activities. In other words there is a choice of
classification.
Generally a financial institution will classify interest paid
and interest and dividends received as operating cash
flows.
There is, however, no consensus of opinion on the
classification of such cash flows for other entities.
IAS#7 INTEREST AND DIVIDENDS
 Interest paid and interest and dividends received may be
classified as operating cash flows on the basis that these
amounts enter into the determination of profit or loss.
 Interest paid may be classified as a financing cash flow
on the basis that this is the cost of obtaining finance.
Interest and dividends received may be classified as
investing cash flows on the basis that these amounts are
returns on investments.
IAS#7 INTEREST AND DIVIDENDS
Dividends paid may be classified as:
financing cash flows on the basis that they represent
the cost of obtaining finance; or
 cash flows from operating activities in order to
assist users to determine the ability of an entity to
pay dividends from operating cash flows.
IAS#7 TAXES ON INCOME
Cash flows arising from taxes on income are
separately disclosed and classified as cash flows
from operating activities unless they can be
specifically identified with financing and investing
activities.
Taxation cash flows are often difficult to match to
the originating underlying transaction, so usually tax
cash flows are classified as arising from operating
activities.
IAS#7 SOCF EXAMPLE
STATEMENT OF CASH FLOWS (DIRECT METHOD) FOR THE YEAR ENDED 31 DECEMBER 2019
$m $m
Cash flows from operating activities
Receipts from customers 30 330
Cash paid to suppliers and employees (27 600)
Cash generated from operations 2 730
Interest paid (270)
Income taxes paid (900)
Net cash from operating activities 1 560
Cash flows from investing activities
Purchase of property, plant and equipment (900)
Proceeds from sale of equipment 20
Interest received 200
Dividends received 200
Net cash used in investing activities (480)
Cash flows from financing activities
Proceeds from issuance of share capital 250
Proceeds from long-term borrowings 250
Dividends paid (1 290)
Net cash used in financing activities (790)
Net increase in cash and cash equivalents 290
Cash and cash equivalents at beginning of period (Note) 120
Cash and cash equivalents at end of period (Note) 410
IAS#7 SOCF EXAMPLE
STATEMENT OF CASH FLOWS (INDIRECT METHOD) FOR THE YEAR ENDED 31 DECEMBER 2019
$m $m
Cash flows from operating activities
Profit before taxation 3 570
Adjustments for: Depreciation 450
Investment income (500)
Finance expense 400
Operating profit before working capital changes 3 920
Increase in trade and other receivables (500)
Decrease in inventories 1 050
Decrease in trade payables (1 740)
Cash generated from operations 2 730
Interest paid (270)
Income taxes paid (900)
Net cash from operating activities 1 560
Cash flows from investing activities
Purchase of property, plant and equipment (900)
Proceeds from sale of equipment 20
Interest received 200
Dividends received 200
Net cash used in investing activities (480)
Cash flows from financing activities
Proceeds from issuance of share capital 250
Proceeds from long-term borrowings 250
Dividends paid (1 290)
Net cash used in financing activities (790)
Net increase in cash and cash equivalents 290
Cash and cash equivalents at beginning of period (Note) 120
Cash and cash equivalents at end of period (Note) 410
IAS#7 CASH AND CASH EQUIVALENTS
COMPONENTS OF CASH AND CASH EQUIVALENTS
• Components of cash and cash equivalents are disclosed and
a reconciliation presented, showing the amounts in the
statement of cash flows reconciled with the equivalent
items reported in the statement of financial position.
• Accounting policy used to decide the items included in
cash and cash equivalents, is disclosed as per IAS1
IAS#7 NON-CASH TRANSACTIONS
• Many investing and financing transactions do not have a
direct effect on cash flows, even though they change the
capital (equity) and assets of an entity
• Investing and financing transactions that do not generate or
use cash or cash equivalents are
excluded from the statement of cash flows.
• These transactions are disclosed in the notes to the
financial statements.
IAS#7 OTHER DISCLOSURES

All entities should disclose, together with a commentary by

management, any other information likely to be of importance, for
example:
(a) restrictions on the use of or access to any part of cash and cash
equivalents;
(b)the amount of undrawn borrowing facilities which are available;
(c) cash flows which increased operating capacity compared to cash
flows which merely maintained operating capacity.
IAS#7 PREPARING THE SOCF
Step 1 Set out the proforma statement of cash flows with the headings required
by IAS 7.
Step 2
Begin with the reconciliation of profit before tax to net cash from operating
activities as far as possible.
When preparing the statement from statements of financial position, you will
usually have to calculate such items as depreciation, profit or loss on sale of
noncurrent assets, profit for the year and tax paid (see Step 4).
Note that you may not be given the tax charge in the statement of profit or loss.
You will then have to assume that the tax paid in the year is last year's year-end
liability and calculate the charge as the balancing figure.
IAS#7 PREPARATION OF SOCF
Step 3
Calculate the cash flow figures for dividends paid, purchase or sale of non-
current assets,
issue of shares and repayment of loans if these are not already given to you (as
they may be)
Step 4
If you are not given the profit figure, you will need to calculate this amount.
Using opening and closing retained earnings, the taxation charge and dividends
paid, you will be able to calculate profit for the year as the balancing figure to put
in the net profit to net cash flow from operating activities section.
IAS#7 PREPARING SOCF
Step 5
You will now be able to complete the
statement by correctly inserting the
figures given or
calculated above.
THE ADVANTAGES OF CASH FLOW ACCOUNTING

• Survival in business depends on the ability to

generate cash. Cash flow accounting directs attention
towards this critical issue.
• Cash flow is less subjective than 'profit' which is
dependent on accounting conventions and concepts.
• Creditors are more interested in an entity's ability to
repay them than in its
THE ADVANTAGES OF CASH FLOW ACCOUNTING

• Whereas 'profits' might indicate that cash is

likely to be available, cash flow accounting is
more direct with its message.
• Cash flow reporting provides a better means of
comparing the results of different companies
than traditional profit reporting.
ADVANTAGES OF CFA
Cash flow reporting satisfies the needs of all users better.

(i) For management, it provides the sort of information on

which decisions should be taken
(ii) For shareholders and auditors, cash flow accounting can
provide a satisfactory basis for stewardship accounting.
(iii) As described previously, the information needs of
creditors and employees will be better served by cash flow
accounting.
ADVANTAGES OF CFA
• Cash flow forecasts are easier to prepare, as well as
more useful, than profit forecasts.
• Cash flow reporting can in some respects be audited
more easily than accounts based on the
accruals concept.
• The accruals concept is confusing, and cash flows
are more easily understood.