STATEMENT OF CASH FLOWS

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Chapter13
STATEMENT OF CASH FLOWS IAS 7
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Purpose of the Statement of Cash Flows
Provides information about the cash receipts and
cash payments of a business entity during the
accounting period.

• Helps investors with questions about the
  companys
• Ability to generate positive cash flows.
• Ability to meet its obligations and to pay
  dividends.
• Need for external financing.
• Investing and financing transactions for the
  period.

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Operating Activities

• Inflows from
• Sales to customers.
• Interest and dividends received.

Cash Flows from Operating Activities

• Outflows to
• Suppliers of merchandise and services.
• Employees.
• Lenders for interest.
• Governments for taxes.

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Investing Activities

• Inflows from
• Selling investments and plant assets.
• Collecting of principal on loans.

Cash Flows from Investing Activities

• Outflows to
• Payments to acquire investments and plant assets.
• Purchase debt or equity investments.
• Make loans.

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Financing Activities

• Inflows from
• Short-term and long-term borrowing.
• Owners (for example, from issuing stock).

Cash Flows from Financing Activities

• Outflows to
• Repayments of borrowed funds.
• Owners for dividends.
• Purchase treasury stock.

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Cash and Cash Equivalents (1)
Cash

• Short-term, highly liquid investments.
• Readily convertible into cash.
• So near maturity that market value is unaffected
  by interest rate changes.

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Cash and Cash Equivalents (2)

• The sum of the cash generated or used by each of
  the three activities should be equal to the
  difference between the beginning and ending cash
  balances on the cash account.
• To prepare a statement of cash flows the
  following statements are needed
• Balance sheets for the beginning and end of the
  period
• Income statement for the period
• The movement in the retained earnings for the
  period (optional).

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The operating cash flows section can be prepared
using either the direct method or the indirect
method.
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1. Direct Method

• Revenues and expenses are adjusted to find the
  cash received or paid for each item.

Cash Flows From Operating Activities Receipts Collection from customers Interest received Dividends received Total cash received Payments To suppliers To employees For interest For income taxes Total payments Net cash provided by operating activities xxxxx xxxxx xxxxx xxxxx xxxxx xxxxx xxxxx xxxxx (xxxxx) xxxxxx
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2. Indirect Method

• Net income is adjusted to arrive at the net cash
  flows generated from operations

Cash Flows From Operating Activities Net Income Depreciation Loss on disposal of L-T assets Gain on sale of L-T assets Decrease in CA Increase in CA Increase in CL Decrease in CL Net cash provided by operating activities xxxxx xxxxx xxxxx (xxxxx) xxxxx xxxxx (xxxxx) xxxxx (xxxxx) xxxxx xxxxx
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2. Indirect Method contd

• A decrease in CA implies an increase in cash. A
  decrease in receivables implies that cash was
  collected, hence a decrease in receivables is
  added to NI.
• An increase in CA implies a decrease in cash, as
  it takes cash to acquire assets. An increase in
  current assets is therefore deducted from NI.
• Decrease in CL means decrease in cash. Payment of
  current liabilities results in a decrease in
  cash, hence decrease in CL is deducted from NI.
• Increase in CL means increase in cash, as it
  means that we either borrowed money or received
  some credit. Hence we have more cash or saved
  cash . An increase in CL is therefore added to NI.

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