CHAPTER 7

Presentation of cash flows

 LEARNING OBJECTIVES
By the end of this section of the course, you should be
able to:
1. explain what is included in the terms ‘cash’ and ‘cash
equivalents’
2. explain internal control procedures for cash, and why they are
important
3. explain the main purpose of a statement of cash flows
4. discuss what is meant by the concept of cash flows of operating,
investing and financing activities
5. identify cash flows from operating activities, and explain the
difference between operating cash flows and profit
6. identify cash flows from investing and financing activities.
 WHY IS CASH IMPORTANT?

• Class to contribute thoughts.

 CASH AND CASH EQUIVALENTS (LO 1)

• AASB 107 Statement of cash flows defines cash as:

‘cash on hand and cash equivalents.

• What are ‘cash’ and ‘cash equivalents’ in the

statement of cash flows?
CASH AND CASH EQUIVALENTS (CONT.)
INTERNAL CONTROL OF CASH (LO 2)
• Separation of duties:
– receiving and paying cash
– recording cash receipts from cash payments
– handling cash and recording cash movements in the
accounting records.
• Individual responsibilities:
– depositing all cash receipts on a daily basis
– different individuals ordering and approving
payments of goods and services
– approving cash payment and the actual signing of
the transfer of cash
– regular bank reconciliation.
 THE STATEMENT OF CASH FLOWS
(LO 3)
• Different from the balance sheet and the statement of
comprehensive income, which use the accrual basis.

Purpose
• To inform about an entity’s cash receipts (sources) and cash
payments (use) during a period
• To answer questions:
 Did the entity’s operations produce sufficient cash for
shareholders?
 How did the entity get their financing?
 Did the entity purchase new assets and how did it pay?
WHAT DOES A STATEMENT OF CASH
FLOWS SHOW? (LO 4)
Basic information
• How much cash was generated and where did it
come from?
• How much cash was used and where did it go?
• How much cash does the entity have at the end
of the year?
 WHAT DOES A STATEMENT OF
CASH FLOWS SHOW? (CONT.)
• How was cash obtained to pay off non-current
liabilities and to acquire new fixed assets during
the period?
• How was the entity able to pay for non-current
assets when it reported a loss for the period?
• How were the cash proceeds from a new issue
of shares used?
• Why has the cash position of the company
decreased when the company reported a profit
for the period?
 WHAT DOES A STATEMENT OF
CASH FLOWS SHOW? (CONT.)
The cash flow statement shows a business’ cash flows in
three subheadings based on the type of activity that
caused the increase or decrease in cash:
1. cash flows from operating activities

2. cash flows from investing activities

3. cash flows from financing activities.

 WHAT DOES A STATEMENT OF CASH
FLOWS SHOW? (CONT.)
Inflows into the business Outflows from the business

Obtain financing Repay financing

Investing
Investing
CASH
Operate the Operate the
business business
WHAT DOES A STATEMENT OF CASH
FLOWS SHOW? (CONT.)
CASH FLOW FROM OPERATING
ACTIVITIES (LO 5)
 OPERATING CASH FLOW VS.
PROFIT
• Net cash flow from operating activity related
to, but not the same as, profit
• Profit measured on accrual basis – income
and expense items may be recognised in a
different period to cash flow.

Key to reconciling from profit to operating cash flow:

Understanding the relationship between the
statement of cash flows, the statement of
comprehensive income and the balance sheet.
SALES, ACCOUNTS RECEIVABLE
AND CASH RECEIVED
Converting sales to cash received from
customers:

Cash received from customers =

Sales
+ Opening accounts receivable
– Closing accounts receivable
PURCHASES, ACCOUNTS PAYABLE
AND CASH PAID
Converting purchases to cash paid to
suppliers:

Cash paid to suppliers =

Purchases
+ Opening accounts payable
– Closing accounts payable
 PAYMENTS FOR EXPENSES
Converting expenses to cash expenses:

Cash expenses =
Expenses
– Depreciation expenses
– Any other non-cash expenses
PROFIT, ACCOUNTS RECEIVABLE AND
NET CASH FLOWS FROM OPERATION
Converting profit to net cash flow from
operating activities:
Net cash flow from operating activities =
Profit
– Increase in accounts receivable
+ Decrease in accounts receivable
PROFIT, ACCOUNTS PAYABLE AND NET
CASH FLOWS FROM OPERATION
Converting profit to net cash flow from
operating activities:
Net cash flow from operating activities =
Profit
+ Increase in accounts payable
– Decrease in accounts receivable
 PROFIT, DEPRECIATION AND NET
CASH FLOW FROM OPERATION
Converting profit to net cash flow from
operating activities:

Net cash flow from operating activities =

Profit
+ Depreciation and amortisation expenses
 PROFIT, INVENTORY AND NET
CASH FLOW FROM OPERATION
Converting profit to net cash flow from
operating activities:
Net cash flow from operating activities =
Profit
– Increase in inventory
+ Decrease in inventory
 CASH FLOW FROM INVESTING
ACTIVITIES (LO 6)
Two types of cash flow from investing
activities:
1. relates to non-current assets:
 cash outflows – purchase of non-current assets
 cash inflows – sale of non-current assets
2. relates to shares in other companies and
similar investments:
 cash outflows – purchases shares in another
business or acquires a total business
 cash inflows – sells some securities.
CASH FLOW FROM INVESTING
ACTIVITIES (CONT.)
CASH FLOW FROM FINANCING
ACTIVITIES
 INTEREST, DIVIDENDS AND
INCOME TAX
Accounting standards require the
following to be disclosed separately:
• payments for interest and dividends
• payments received for interest and dividends.

The final figure shown on the statement of cash flows:

Increase or decrease in cash in the period =
The increase or decrease cash amount in the balance sheet.
 SUMMARY
• Effective internal control of cash requires separation of
duties.
• In the statement of cash flows, cash includes both cash
and cash equivalents.
• The statement of cash flows identifies cash flows from
operating, investing and financing activities.
• These categories enable us to determine where the
entity is generating cash and where that cash is being
spent.
• Cash flow information enables users to assess the
ability of the entity to distribute cash in the future – to
meet financial commitments or, perhaps, to pay
dividends.