Statement ofCash flow

Evolution of the Statement of Cash GAAP

1971: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 reported

All-financial Resource: Conjunction with another concept of fund (cash and working capital) an includes all items that affect the financing and investing activities

Evolution of the Statement of Cash (Cont.)IAS

1976Exposure draft E7 Statement of Source

and application of fund1992

IAS 7 (1992) Statement of Cash Flow

Statement of Cash Flow is Necessary to Evaluate:1. Liquidity

Firm abillity to convert asset to cash or to pay current liability.2. Solvency

Firms abillity to obtain for bussines operation (pay debt)

3. Financial FlexibilityFirms abillity to take advantage of new

investment opportunities or to react quickly on crisis situation

Cash 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 cash

The 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 Activities

Operating 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.)

Inflow OutflowReceipt from sales

of goods or services, royalti, and other income

Receipt from rent and tax restitution

Receipt from bank and selling stock

Cash payment to suppliers

Cash payment for employee

Cash payment for insurance, purchase of stock and payment to creditor

Cash payment for operational cost

Cash 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.

Cash 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 Activities

Investing activities is the acquisition and disposal of long term asset and other assets that are not cash equivalent

Cash Flow from Investing Activities(Cont.)

Inflows OutflowsCash receipt from sales of

fix assets, intangible assets, and other long term assets

Cash receipts from sales of property, plant and equipment, intangibles and other long-term assets

Cash receipts from sales of equity or debt instruments of other entities and interests in joint ventures

Cash payments to acquire property, plant and equipment, intangibles and other long-term assets

Cash payments to acquire equity or debt instruments of other entities and interests in joint ventures

Cash receipts from the repayment of advances and loans made to other parties

Statement Format (Cont.)Cash Flow from Financing Activities

Acquisition and disposal of long term asset and other investments that are not cash equivalent

Cash Flow from Financing Activities(Cont.)

Inflows OutflowsCash receipt from

isusuing stockCash receipt from

debt instruments

Cash payment to owners to buy back stock issued

Repayment of amount borrowed

Cash payment from lessee to deduct the balance of liabilities related tofinance lease

The 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 activities    Cash flows from operating activities    

Cash receipts from customers  xx   Profit before taxation  XX

Cash paid to suppliers and employees  xx   Adjustments for:  Cash generated from operations  xx   Depreciation  xx  Interest received  xx   Foreign exchange loss  xx  Dividends received xx   Investment income  xx      Interest expense  xx  

    Increase in trade and other receivables  xx      Decrease in inventories  xx      Decrease in trade payables  xx  

    Cash generated from operations  xx      Interest paid  xx      Income taxes paid  xx  

Net cash from operating activities   XX Net cash from operating activities   XX           

Cash flows from investing activities  Cash flows from investing activities  

Purchase of property, plant and equipment  xx   Purchase of property, plant and equipment  xx  

Proceeds from sale of equipment  xx   Proceeds from sale of equipment  xx  Interest received  xx   Interest received  xx  Dividends received xx   Dividends received  xx  

Net cash used in investing activities   XX Net cash used in investing activities   XX           

Cash flows from financing activities  Cash flows from financing activities  

Proceeds from issue of share capital  xx   Proceeds from issue of share capital  xx  

Proceeds from long-term borrowings  xx   Proceeds from long-term borrowings  xx  

Payment of finance lease liabilities  xx   Payment of finance lease liabilities  xx  Dividends paid  xx   Dividends paid  xx  

Net cash used in financing activities    XX Net cash used in financing activities   XX

Net increase in cash and cash equivalents    XXNet increase in cash and cash equivalents    XX

Cash and cash equivalents at beginning of period   XXCash and cash equivalents at beginning of period    XX

Cash and cash equivalents at end of period    XXCash and cash equivalents at end of period    XX

Cash 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.

Similar

Operating, investing and financing activities are specifically defined.

Similar, except for some differences explained on a later slide.

IFRSUS GAAP

Both the direct and indirect method of presenting cash flows from operations are allowed.

Similar

SimilarEntities must disclose their policy for determining which items are cash equivalents.

Similar

Content, format and classificationDifferences in US GAAP and IFRS

IFRS► Permits 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 GAAP► Requires 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 dividends

Content, 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 classificationTransaction IFRS US GAAP

Interest paid Operating or financing Operating

Interest received Operating or investing Operating

Dividends paid Operating or financing Financing

Dividends received Operating or investing Operating

Content, format and classificationIncome taxes

IFRS► Requires 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 GAAP► Requires that

income taxes paid be classified as an operating cash flow.

Content, format and classificationIndirect method

IFRS► The 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 GAAP► When 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 method

IFRS► This

reconciliation is not required.

US GAAP► ASC 230-10-45-30 requires that an entity

using the direct method of reporting net cash flows from operating activities must provide (in a separate schedule) a reconciliation of net income to net cash flows from operating activities.

► This has little practical significance, however, because few enterprises in the United States use the direct method. The AICPA Accounting Trends and Techniques – 2010 reports that 495 companies of the 500 surveyed in 2009 used the indirect method of presenting operating cash flows.

Content, format and classificationComponents of cash and cash equivalents

IFRS► Required disclosure of the components of cash

and cash equivalents.► The total cash and cash equivalents presented

in the statement of cash flows does not need to agree to a single line item in the statement of financial position.

► Entities must disclose a reconciliation of the components of cash and cash equivalents to the amounts presented on the statement of financial position.

► Thus, while users of a statement of cash flows prepared might not be able to trace changes in cash and cash equivalents directly between the statement of financial position and the statement of cash flows, this difference from US GAAP has little practical significance.

US GAAP► No required disclosure

of the components of cash and cash equivalents.

► Requires that the cash and cash equivalents line item in the statement of cash flows equals the cash and cash equivalents in the statement of financial position.

Disclosures

IFRS► Does not have

restrictions on the disclosure of cash flows per share.

US GAAP► Prohibits disclosure of

cash flows per share.

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