1 STATEMENT OF CASH FLOWS – IAS 7 Chapter 13

2 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: l Ability to generate positive cash flows. l Ability to meet its obligations and to pay dividends. l Need for external financing. l Investing and financing transactions for the period. Helps investors with questions about the company’s: l Ability to generate positive cash flows. l Ability to meet its obligations and to pay dividends. l Need for external financing. l Investing and financing transactions for the period. Purpose of the Statement of Cash Flows

3

4 Outflows to: l Suppliers of merchandise and services. l Employees. l Lenders for interest. l Governments for taxes. Outflows to: l Suppliers of merchandise and services. l Employees. l Lenders for interest. l Governments for taxes. Inflows from: l Sales to customers. l Interest and dividends received. Inflows from: l Sales to customers. l Interest and dividends received. Cash Flows from Operating Activities + _ Operating Activities

5 Cash Flows from Investing Activities + _ Inflows from: l Selling investments and plant assets. l Collecting of principal on loans. Inflows from: l Selling investments and plant assets. l Collecting of principal on loans. Outflows to: l Payments to acquire investments and plant assets. l Purchase debt or equity investments. l Make loans. Outflows to: l Payments to acquire investments and plant assets. l Purchase debt or equity investments. l Make loans. Investing Activities

6 + _ Inflows from: l Short-term and long-term borrowing. l Owners (for example, from issuing stock). Inflows from: l Short-term and long-term borrowing. l Owners (for example, from issuing stock). Outflows to: l Repayments of borrowed funds. l Owners for dividends. l Purchase treasury stock. Outflows to: l Repayments of borrowed funds. l Owners for dividends. l Purchase treasury stock. Financing Activities Cash Flows from Financing Activities

7 Cash Equivalents Cash Currency l Short-term, highly liquid investments. l Readily convertible into cash. l So near maturity that market value is unaffected by interest rate changes. l Short-term, highly liquid investments. l Readily convertible into cash. l So near maturity that market value is unaffected by interest rate changes. Cash and Cash Equivalents (1)

8 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).

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

10 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) xxxxxx

11 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

12 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