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STATEMENT OF CASH FLOWS – IAS 7

Chapter

13

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Provides information about the cash receipts and cash payments of a business entity

during the accounting period. Helps investors with questions about the

company’s: 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.

Purpose of the Statement of Cash Flows

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Outflows to: Suppliers of merchandise

and services. Employees. Lenders for interest. Governments for taxes.

Inflows from: Sales to customers. Interest and dividends

received. Cash Flows from

Operating Activities

+

_

Operating Activities

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Cash Flows from

Investing Activities

+

_

Inflows from: Selling investments and plant

assets. Collecting of principal on loans.

Outflows to: Payments to acquire

investments and plant assets. Purchase debt or equity

investments. Make loans.

Investing Activities

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+

_

Inflows from: Short-term and long-term

borrowing. Owners (for example, from

issuing stock).

Outflows to: Repayments of borrowed

funds. Owners for dividends. Purchase treasury stock.

Financing Activities

Cash Flows from

Financing Activities

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Cash Equivalents

CashCurrency

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

interest rate changes.

Cash and Cash Equivalents (1)

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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 MethodRevenues and expenses are adjusted to find the cash

received or paid for each item.

Cash Flows From Operating Activities:ReceiptsCollection from customersInterest receivedDividends received

Total cash receivedPaymentsTo suppliersTo employeesFor interestFor income taxes

Total paymentsNet cash provided by operating activities

xxxxxxxxxxxxxxx

xxxxx

xxxxxxxxxxxxxxxxxxxx

(xxxxx) xxxxxx

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2. Indirect MethodNet 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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i. 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.

ii. 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.

iii. 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.

iv. 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.

2. Indirect Method – cont’d

See class question