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Statement of Cashflows

IAS 7: STATEMENT OF CASHFLOW

INTRODUCTION
IAS1-Presentation of Financial Statements, Revised makes it obligatory upon entities preparing financial statements under the International Financial Reporting Standards (IFRS) to present a cash flow statement as an integral part of the financial statement. IAS 7- Statement of Cash Flow, lays down the rules regarding the statement of cash flow preparation and reporting.

Introduction (cont)
The Statement of Cash Flows shows how cash flows have been generated and how cash has been spent for the period for Which the financial statements are presented.

Leaning Objectives
By the end of this session you should be able to: Discuss the usefulness of the information Prepare a statement of cash flows using either the direct or indirect method Preparing the of cash flow worksheet analysing changes in the Balance Sheet figures Differentiate between operating, investing and financing activities

OBJECTIVES OF THE STATEMENT OF CASH FLOWS

Ensure that entities provide information about the historical changes in cash and cash equivalent by means of a statement of cash flow during the period between those arising from operating, investing and financing activities.

Objectives (cont)

(i)

(ii)

Provide additional information to users of financial statements concerning: The financial structure of an enterprise including its liquidity and solvency, The financial adoptability and viability of the enterprise,

Objectives (cont)
(iii)

(iv)

(v)

Information for the purposes of evaluation of changes in assets, liabilities and equity of the enterprise, The statement enhances the comparability of reporting operating performance of entities, and Serves as an indicator of the amount, timing and certainty of future cash flows

KEY TERMS

Cash: consists of cash on hand and demand deposits with banks. Cash Equivalent: short term highly liquid investments that are readily convertible into known amount of cash and are subjected to an insignificant amount of risk of change in value.

Key Terms (cont)

Cash Flows: inflows and outflows of cash and cash equivalents

Operating Activities: principal revenue providing activities of the entity and other activities that are not investing or financial activities

Key Terms (cont)

Investing Activities: activities of the entity that relate to the acquisition and disposal of long-lived and other non-current asset (including investments) other than those included in cash equivalents. Financing Activities: activities that results in changes in the size and composition of the equity capital and borrowings of an entity.

PRESENTATION OF STATEMENT OF CASH FLOWS

IAS 7 requires that a Statement of Cash Flows should be classified into four (4) components

(i)
(ii) (iii) (iv)

Operating Activities Investing Activities Financing Activities Cash and Cash Equivalents

Presentation (cont)

Due care must be taken to include transactions under the appropriate category. Whatever classification chosen has to be applied consistently from year to year.

Presentation (cont)

A single transaction may include cash flows that are classified partially as one type of activity and partially as another category.

Operating Activities
(a)

(b)

(c)

Cash Inflows: Cash collections from customers for sale of goods and rendering of services Cash receipts from other revenues such as royalty fees and commissions. Cash refunds of income tax unless they can be specifically identified with financing or investing activities.

Operating Activities (cont)


(a)

(b)

(c)

Cash Outflows: Cash payments to suppliers of good and services Cash payments to or on behalf of employees Cash payments of income tax unless they can be specifically identified with financing or investing activities.

Investing Activities
(a)

(b)

(c)

Cash Inflows: Proceeds from disposal of property, plant and equipment Proceeds from disposal of debt instruments of other entity Proceeds from the sale of equity instruments of other entities

Investing Activities (cont)


(a)

(b)

(c)

Cash Outflows: Purchase of property, plant and equipment Acquisition of debt instruments of other entities Purchase of equity instruments of other entities (unless held for trade purposes or considered to be cash equivalents

Financing Activities
(a) (b)

(c)

Cash Inflows: Proceeds from share issue Proceeds from debenture issue Proceeds from bank borrowings

Financing Activities (cont)


(a) (b)

(c)

Cash Outflows: Payment of dividends to shareholders Prepayment of principal portion of debt, including finance lease obligation Prepayment of bank borrowings

Financing Activities (cont)

Non-cash Transaction: IAS 7 requires that non-cash investing and financing should be omitted from the Statement of Cash Flow and reported elsewhere in the financial statements, where all relevant information about those activities is disclosed. This implies disclosure in the notes to the financial statements

Financing Activities (cont)

Common examples of non-cash activities:

(a)

(b)

Conversion of debt (convertible debenture) to equity Issue of share capital to acquire property, plant and equipment

Presentation of Operating Expenses

There are two (2) acceptable methods of reporting cash flow operating activities. IAS 7 recommends the direct method of presenting net cash from operating activities.

Presentation of Operating Expenses (cont)


The Direct Method Shows operating cash receipts and payment including in particular: (a) Cash collections from customers (b) Cash payment to suppliers (c) Cash payment to and on behalf of employees (d) Cash paid for other operating expenses (e) Income tax paid (f) Interest paid

Presentation of Operating Expenses (cont)


The Indirect Method The indirect method is the more popular of the two method despite the recommendation of IAS 7. It presents the cash flow from operating activities using the direct method.

Indirect Method (cont)


Under the indirect method net cash from operating activities is presented using: (a) Net income/(loss) before tax for the year (b) Non cash items of revenues and expenses added or deducted to arrive at net cash provided by operating activities

DISCLOSURES

Required disclosures by IAS: An analysis of cash and cash equivalents is disclosed Amount of significant cash and cash equivalent balances held by and entity that are not available for use by the that group should be disclosed along with a comment by management.

(i)

(ii)

Disclosure (cont)

(a) (b)

Recommended Disclosure (unique to IAS7) Entities are encouraged to made these disclosures: Amount of un-drawn borrowing facilities, indicating restriction on their use, if any In case of instruments in joint ventures, which are accountable for using proportionate consolidation, the aggregate amount of cash flows from operating, investing and financing activities that are attributable to the joint venture.

Disclosure (cont)
c)

d)

Aggregate amount of cash flows that are attributable to the increase in operating capacity separately from those cash flows that are required to maintain operating capacity. Amount of cash flows segregated by reporting industry and geographical segment.

LIMITATION OF THE STATEMENT OF CASH FLOWS

Cash Flow Statements should normally be used in conjunction with income statements and balance sheets when making assessment of future cash flows.

Cash Flows Statements Limitation (cont)

Cash flow statements are based on historical information and therefore do not provide complete information for assessing future cash flows. There is scope for manipulation of cash flows. For example a business delay paying suppliers or assets may be sold and immediately repurchased.

Cash Flows Statement Limitation (cont)

Cash flow is necessary for survival in the short term, but in order to survive in the long term a business must be profitable. A large cash balance is not a sign of good stewardship if the cash could be invested elsewhere to generate profit.

IAS 7: STATEMENT OF CASHFLOW

THE END