Statement of Cashflow

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Statement of Cash Flow - IFRS

Transcript of Statement of Cashflow

Cash flow the presentation of information about the historical changes in cash and cash equivalents of an entity

Statement ofCash flow

According to IAS 7, cash flows are inflows and outflows of cash and cash equivalents. So, The Statement of Cash Flows analyses changes in cash and cash equivalents during a period. 1Evolution of the Statement of CashGAAP1971:Fund Statement: Reported resource provided and use of resource.Concept of Fund:Cash: Cash Reciept & Cash DisbursementWorking Capital: All material transaction that results in a change in working capital (current asset current liabilities) are reportedAll-financial Resource: Conjunction with another concept of fund (cash and working capital) an includes all items that affect the financing and investing activities

Ex. Financial Resource: Buying assets (investing) by issuing stock (financing)2Evolution of the Statement of Cash (Cont.)IAS1976Exposure draft E7 Statement of Source and application of fund1992IAS 7 (1992) Statement of Cash FlowStatement of Cash Flow is Necessary to Evaluate:LiquidityFirm abillity to convert asset to cash or to pay current liability.SolvencyFirms abillity to obtain for bussines operation (pay debt)Financial FlexibilityFirms abillity to take advantage of new investment opportunities or to react quickly on crisis situationNecessary to investor and creditor to predict the probability of the future return and evaluate risk4Cash and cash equivalentsCash on hand and on deposit and short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value

Steps in PreparationDetermine the change in cashThe difference between beginning and ending cash balance from examining its comparative statement of financial position

Analyzing income statement and comparative statement of financial position- Direct and Indirect Method

Determine net cash flow of investing and financing activitiesAnalyze all other change in the statement of financial position accounts to determine there effect on cash

Statement formatCash Flow from Operating ActivitiesOperating activities is the primary revenue producing activities and other activities of the entity that are not financing or investing activities

Cash Flow from Operating Activities(Cont.)InflowOutflowReceipt from sales of goods or services, royalti, and other incomeReceipt from rent and tax restitutionReceipt from bank and selling stock Cash payment to suppliersCash payment for employeeCash payment for insurance, purchase of stock and payment to creditorCash payment for operational costCash Flow from Operating Activities(Cont.)A company may convert net income to net cash flow from operting activities through two method, they are:Direct Indirect Cash Flow from Operating Activities(Cont.)Direct Method:Under the direct method, information about major classes of gross cash receipts and gross cash payments may be obtained either:(a) from the accounting records of the entity; or(b) by adjusting sales, cost of sales (interest and similar income and interest expense and similar charges for a financial institution) and other items in the statement of comprehensive income for:(i) changes during the period in inventories and operating receivables and payables;(ii) other non-cash items; and(iii) other items for which the cash effects are investing or financing cash flows.

10Cash Flow from Operating Activities(Cont.)Indirect MethodUnder the indirect method, the net cash flow from operating activities is determined by adjusting profit or loss for the effects of:(a) changes during the period in inventories and operating receivables and payables;(b) non-cash items such as depreciation, provisions, deferred taxes, unrealised foreign currency gains and losses, undistributed profits of associates, and non-controlling interests; and(c) all other items for which the cash effects are investing or financing cash flows.Statement Format (Cont.)Cash Flow from Investing ActivitiesInvesting activities is the acquisition and disposal of long term asset and other assets that are not cash equivalentCash Flow from Investing Activities(Cont.)InflowsOutflowsCash receipt from sales of fix assets, intangible assets, and other long term assetsCash receipts from sales of property, plant and equipment, intangibles and other long-term assetsCash receipts from sales of equity or debt instruments of other entities and interests in joint venturesCash payments to acquire property, plant and equipment, intangibles and other long-term assetsCash payments to acquire equity or debt instruments of other entities and interests in joint venturesCash receipts from the repayment of advances and loans made to other partiesStatement Format (Cont.)Cash Flow from Financing ActivitiesAcquisition and disposal of long term asset and other investments that are not cash equivalentCash Flow from Financing Activities(Cont.)InflowsOutflowsCash receipt from isusuing stockCash receipt from debt instrumentsCash payment to owners to buy back stock issuedRepayment of amount borrowedCash payment from lessee to deduct the balance of liabilities related tofinance leaseThe examples of Cash Flows statement by applying the direct or indirect method Direct Method (IAS 7.18(a))Indirect Method (IAS 7.18(b))Cash flows from operating activitiesCash flows from operating activitiesCash receipts from customers xxProfit before taxation XXCash paid to suppliers and employees xxAdjustments for:Cash generated from operations xxDepreciation xxInterest received xxForeign exchange loss xxDividends receivedxxInvestment income xxInterest expense xxIncrease in trade and other receivables xxDecrease in inventories xxDecrease in trade payables xxCash generated from operations xxInterest paid xxIncome taxes paid xxNet cash from operating activitiesXXNet cash from operating activities XXCash flows from investing activitiesCash flows from investing activitiesPurchase of property, plant and equipment xxPurchase of property, plant and equipment xxProceeds from sale of equipment xxProceeds from sale of equipment xxInterest received xxInterest received xxDividends receivedxxDividends received xxNet cash used in investing activities XXNet cash used in investing activities XXCash flows from financing activitiesCash flows from financing activitiesProceeds from issue of share capital xxProceeds from issue of share capital xxProceeds from long-term borrowings xxProceeds from long-term borrowings xxPayment of finance lease liabilities xxPayment of finance lease liabilities xxDividends paid xxDividends paid xxNet cash used in financing activities XXNet cash used in financing activities XXNet increase in cash and cash equivalents XXNet increase in cash and cash equivalents XXCash and cash equivalents at beginning of periodXXCash and cash equivalents at beginning of period XXCash and cash equivalents at end of period XXCash and cash equivalents at end of period XXCash flows are presented in three classifications: operating, investing and financing activities. The totals from the three activities (operating, investing, financing) are summed and this balance is reconciled with the beginning and ending cash (and cash equivalents) balances. SimilarOperating, investing and financing activities are specifically defined.Similar, except for some differences explained on a later slide.IFRSUS GAAPBoth the direct and indirect method of presenting cash flows from operations are allowed. SimilarSimilarEntities must disclose their policy for determining which items are cash equivalents. SimilarContent, format and classificationDifferences in US GAAP and IFRSIFRSPermits an entity: (a) to classify interest and dividends paid or received as operating cash flows; or (b) to classify interest and dividends paid as financing cash flows and interest and dividends received as investing cash flows. However, interest and dividends must be classified in a consistent manner from period to period. US GAAPRequires that interest paid and interest and dividends received be classified as operating cash flows. Dividends paid are a financing cash flow because they are considered a cost of obtaining resources. Content, format and classificationInterest and dividendsContent, format and classificationInterest and dividends (Cont.)In practice, there may be little practical significance to this difference because IAS 7 requires separate disclosure of interest paid and received and of dividends paid and received.

Summary of treatment of interest and dividends:

Cash flow classificationTransactionIFRSUS GAAPInterest paid Operating or financingOperatingInterest receivedOperating or investingOperatingDividends paidOperating or financingFinancingDividends receivedOperating or investingOperatingContent, format and classificationIncome taxesIFRSRequires that cash payments or refunds of income taxes be classified as operating activities unless they can be specifically identified with financing or investing activities. In that case, the tax cash flows may be classified as financing or investing activities, as appropriate. Statements would not necessarily result in a loss of comparability with US GAAP since IFRS requires disclosure of the total amount of income taxes paid. US GAAPRequires that income taxes paid be classified as an operating cash flow. Content, format and classificationIndirect methodIFRSThe particular income line item that must begin the reconciliation is not specified. Thus, an entity could begin the reconciliation under IFRS with operating income. US GAAPWhen using the indirect method of presenting operating cash flows, the reconciliation from income to cash flows must begin with net income.Content, format and classificationDirect methodIFRSThis reconciliation is not required.US GAAPASC 230-10-45-30 requires that an entity using the direct method of reporting ne