Statement of Cash

Flows
ASC 230
 General Requirements
1

Contents
Information on Cash Flows
2
Statement of Cash Flows
3
Operating-Investing-Financing Activities
4
Specific Areas
5
Direct vs Indirect Method
6

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Objective and Scope

Objective of ASC 230

► ASC 230 provides guidance for reporting cash flows in general purpose financial statements
► The primary objective of a statement of cash flows is to provide relevant information about the
cash receipts and cash payments of an entity during a period. (ASC 230-10-10-1)

ASC 230 covers the following in scope:

► Guidance applies to all entities, including both business entities and not-for-profit entities
(NFPs)
► Business entity or NFP that provides a set of financial statements shall also provide a
statement of cash flows for each period

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Information on cash flows

ASC 230-10-10-2

The information provided in a statement of cash flows, if used with related disclosures and
information in the other financial statements, should help investors, creditors, and others
(including donors) to do all of the following:
a. Assess the entity’s ability to generate positive future net cash flows
b. Assess the entity’s ability to meet its obligations, its ability to pay dividends, and its needs for
external financing
c. Assess the reasons for differences between net income and associated cash receipts and
payments
d. Assess the effects on an entity’s financial position of both its cash and noncash investing and
financing transactions during the period

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Relationship with BS and IS

Profit and loss

BS at start Cash flow BS at end

A cash flow statement reflects both “profit related” and “non-profit related”
activities (investing and financing) with an impact on available cash over the
period covered in the profit and loss

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Definitions
Definitions

Cash comprises cash on Cash flows are inflows Cash equivalents are
hand and demand and outflows of cash and short-term, highly liquid
deposits. cash equivalents investments that are
readily convertible to
known amounts of cash
and so near their maturity
that they present
insignificant risk of
changes in value because
of changes in interest
rates

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Definitions

Operating activities Investing activities are Financing activities are

include all transactions the acquisition and activities that result in
and other events that are disposal of long-term changes in the size and
not defined as investing assets and other composition of the
or financing activities. investments not included contributed equity and
This generally involve in cash equivalents borrowings of the entity.
producing and delivering This includes obtaining
goods and providing resources from owners
services and providing them with a
return on their
investment

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Definitions
Cash and Cash Equivalents

► Held for the purpose of meeting short term cash commitments

► Includes Bank overdraft repayable on demand
► Does not include movements between items that constitute cash or cash equivalents
► Equity securities do not meet the definition of a cash equivalent because they do not have
stated maturities.

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Definitions
Example
Company has provided the following information regarding the various assets held by company on 31st March 20X1. Find out, which of the
following items will be part of cash and cash equivalents for the purpose of preparation of cash flow statement as per the guidance provided
in ASC 230:

S. No. Name of the Security Additional Information

5%, open ended, main purpose was to park the excess funds for temporary
1. Government Bonds
period

2. Fixed deposit with Bank 1 12%, 3 years maturity on 1st Jan 20X4

3. Fixed deposit with Bank 2 10%, original term was for 2 years, but due for maturity on 30.06.20X1

4. Redeemable Preference shares in ABC Inc The redemption is due on 30th April 20X1

5. Cash balances at various banks All branches of all banks in the US

6. Cash balances at various banks All international branches of the US Bank

7. Cash balances at various banks Branches of foreign banks outside US

8. Treasury Bills 90 days maturity

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Definitions
Example - Solution

S. No. Name of the Security Decision

1. Government Bonds Included as intention is not to hold long term

2. Fixed deposit with Bank 1 Not to be considered – long term

Exclude as original maturity is less than 90 days from the

3. Fixed deposit with Bank 2
date of acquisition

4. Redeemable Preference shares in ABC Inc Include as due within 90 days from the date of acquisition

5. Cash balances at various banks Include

6. Cash balances at various banks Include

7. Cash balances at various banks Include

9. Treasury Bills Include

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Outstanding checks and checks written but not yet released

► Checks that have been written, issued, and mailed or delivered to the payee by the end of an
accounting period are out of the control of the payor entity and should be deducted from that
entity’s balance sheet caption “cash.”

► Checks that have been written but not yet released (i.e., not mailed or delivered) by the end of
an accounting period remain under the control of the payor and thus should not be deducted
from the balance sheet caption “cash.” These checks would be classified in accounts payable
or a relevant liability.

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Presentation
of Cash Flow
Statement
Statement of Cash Flows

A company reports…

…cash flows during the period

categorised into

Cash flows from principal revenue-

operating activities producing activities

Cash flows from acquisition and disposal of

investing activities long-term assets

Cash flows from result in changes in size and composition

financing activities of owners’ capital and borrowings

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Cash Flow from Operating Activities

► Operating activities are primarily the revenue-generating activities of a company

► “Operating cash flow” is conceptually most near to “net profit”

► Examples
► Cash receipts from sale of goods and rendering of services
► Cash receipts from royalties, fees, commissions and other revenue
► Cash payments to suppliers for goods and services
► Cash payments to and on behalf of employees
► Cash receipts and cash payments of an insurance enterprise for premiums and claims, annuities and
other policy benefits

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Example

From the following transactions, identify which transactions will be qualified for the calculation of operating cash flows, if company is into the
business of trading of mobile phones

S. No. Nature of transaction

1 Receipt from sale of mobile phones
2 Purchases of mobile phones from various companies
3 Employees expenses paid
4 Advertisement expenses paid
5 Credit sales of mobile
6 Misc. charges received from customers for repairs of mobiles
7 Warranty claims received from the companies
8 Loss due to decrease in market value of the closing stock of old mobile phones
9 Payment to suppliers of mobile phones
10 Depreciation on furniture of sales showrooms
11 Interest paid on cash credit facility of the bank
12 Profit on sale of old computers and printers, in exchange of new laptop and printer
13 Advance received from customers
15 Proposed dividend for the current financial year

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Solution

S. No. Nature of transaction Included / Excluded with reason

1 Receipt from sale of mobile phones Include – main revenue generating activity
2 Purchases of mobile phones from various companies Include – expenses related to main operations of business
3 Employees expenses paid Include – expenses related to main operations of business
4 Advertisement expenses paid Include – expenses related to main operations of business
Do not include – Credit transaction will not be included in cash
5 Credit sales of mobile
flow (receipts from customers will be included)
6 Misc. charges received from customers for repairs of mobiles Include – supplementary revenue generating activity
7 Warranty claims received from the companies Include – supplementary revenue generating activity
Loss due to decrease in market value of the closing stock of old
8 Do not include - Non cash transaction
mobile phones
9 Payment to suppliers of mobile phones Include – cash outflow related to main operations of business
10 Depreciation on furniture of sales showrooms Do not include – non cash item
11 Interest paid on cash credit facility of the bank Do not include – cost of finance
Profit on sale of old computers and printers, in exchange of new
12 Do not include – non cash item
laptop and printer
13 Advance received from customers Include – Related to operations of business
15 Proposed dividend for the current financial year Do not include – cost of finance

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Cash Flow from Investing Activities

► Activities that relate to the acquisition and disposal of long-term tangible and intangible assets and other
investments that are not included in cash equivalents
► Cash flows from investing activities are an indication of the expansion or downsizing of operating capacity
► It represent the extent to which expenditures have been made for resources intended to generate future
income and cash flows
► Examples
► Cash payments to acquire fixed assets (including intangibles)
► Cash receipts from disposal of fixed assets (including intangibles)
► Cash payments to acquire shares, warrants or debt instruments of other enterprises
► Cash receipts from disposal of shares, warrants or debt instruments of other enterprises
► Cash advances and loans made to third parties

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Cash Flow from Investing Activities

► Cash receipts from / payments for futures contracts, forward contracts, option contracts and swap
contracts except when the contracts are held for dealing or trading purposes, or the receipts are classified
as financing activities.

► Cash payments to acquire / receipts to dispose property, plant and equipment, intangibles and other long-
term assets. These payments include those relating to capitalised development costs and self-constructed
property, plant and equipment;

► Cash payments to acquire equity or debt instruments of other entities and interests in joint ventures (other
than payments for those instruments considered to be cash equivalents or those held for dealing or
trading purposes);

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Cash Flow from Financing Activities

► Financing activities relate to changes in the size and composition of contributed capital and financial debt
of the company

► The separate disclosure of cash flows arising from financing activities is important because it is useful in
predicting claims on future cash flows by providers of capital to the entity

► Examples
► Cash proceeds from issuing shares or other equity instruments;
► Cash payments to owners to acquire or redeem the entity’s shares;
► Cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short-term or long-
term borrowings;
► Cash repayments of amounts borrowed; and
► Cash payments by a lessee for the reduction of the outstanding liability relating to a finance lease.

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Case Study

Case
► How should an entity present an acquisition of an asset when finance is incurred directly from the seller in
its cash flow statement (a) at the time of acquisition and (b) when the payments are subsequently made
to the supplier?

Solution
► An acquisition of an asset, when financing is provided by the seller of the asset, is similar to, and
therefore should logically follow, the treatment for finance leases. Therefore, the acquisition and financing
are treated as a non-cash transaction and disclosed accordingly. Consistent with the provisions of ASC
230, payments to the seller to reduce outstanding debt are treated as financing activities in the cash flow
statement

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Case Study

230-10-45-22
Certain cash receipts and payments may have aspects of more than one class of cash flows. For example, a
cash payment may pertain to an item that could be considered either inventory or a productive asset. If so,
the appropriate classification shall depend on the activity that is likely to be the predominant source of cash
flows for the item.

For example, the acquisition and sale of equipment to be used by the entity or rented to others generally are
investing activities. However, equipment sometimes is acquired or produced to be used by the entity or
rented to others for a short period and then sold.

In those circumstances, the acquisition or production and subsequent sale of those assets shall be
considered operating activities.

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Cash flow statement - Presentation

Particulars Amount

Cash flows from operating activities xxx

Cash flows from investing activities xxx

Cash flows from financing activities xxx

Net increase in cash and cash equivalents* xxx

Cash and cash equivalents at beginning of period xxx

Cash and cash equivalents at end of period* xxx

Cash equivalents are short term, highly liquid investments that are readily convertible into known
amounts of cash and which are subject to an insignificant risk of changes in value

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Cash flow statement - Presentation
Example

Particulars Amount (USD)

Cash flow from Operations Activities 10,000

Cash flow from Investing Activities (2,000)

Cash flow from Financing Activities (4,000)

Net Cash Generated during the year 4,000

Add: Cash and Cash Equivalents at the beginning of the year 13,000

Cash and Cash Equivalents at the end of the year (which will also tally with cash
17,000
and cash equivalents in balance sheet)

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Benefits of cash flow statement

► Provides information enabling evaluation of changes in net assets and financial structure
(Liquidity and solvency)
► Assesses the ability to manage the cash
► Assess and compare the present value of future cash flows
► Compares the efficiency of different entities

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Reporting of
Cash Flow
Statements
Reporting of Cash Flow Statements
Methods of Reporting

Methods of Reporting Operating

Activities

Direct Method Indirect Method

Major classes of gross cash Profit or loss is adjusted for

receipts and gross cash
payments are disclosed
the effects of transactions of
a non-cash nature, any
deferrals or accruals of past
or future operating cash
receipts or payments, and
items of income or expense
associated with investing or
financing cash flows.

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Reporting of Cash Flow Statements
Key considerations

Format of cash flow statement

As per ASC, an entity may use either indirect method or direct method to present the operating section
of the statement of cash flows, however, the standard encourages the use of direct method of presenting
operating section of cash flow and to report major classes of gross cash receipts and gross cash
payments for operating cash flows.

Gross v/s net cash presentation of cash flow

Generally, cash payments should not be presented net of cash receipts in the statement of cashflow.
Information about the gross amounts of cash receipts and payments is more relevant than information
about the net cash receipts and payments.

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Reporting of Cash Flow Statements
Direct method - Example

Cash receipts from customers 30,150

Cash paid to suppliers and employees (27,600)
Cash generated from main operations 2,550

Income taxes paid (1,170)

Net cash flow from operating activities 1,380

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Reporting of Cash Flow Statements
Indirect method - Example

Net profit before tax 3,350

Adjustments for:
Depreciation 490
Investment income (100)
3,740

Working capital changes:

Increase in trade and other receivables (500)
Decrease in inventories 1,050
Decrease in trade payables (1,740)
Cash generated from main operations 2,550
Income taxes paid (1170)
Net cash flow from operating activities 1,380
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Reporting of Cash Flow Statements
Changes in ownership interests in subsidiaries and other businesses

► Aggregate cash flows from acquisition or disposal of subsidiaries shall be presented as

investing activities
► Disclose the following:
► Total consideration paid or received;
► Portion of the consideration consisting of cash and cash equivalents;
► Amount of cash and cash equivalents in the subsidiaries over which control is obtained or
lost; and
► Amount of the assets and liabilities other than cash or cash equivalents in the subsidiaries
over which control is obtained or lost, summarised by each major category.

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Reporting of Cash Flow Statements
Non-cash transactions

► Investing and financing transactions that do not require the use of cash or cash equivalents
shall be excluded from a statement of cash flows.
► Such transactions shall be disclosed elsewhere in the financial statements in a way that
provides all the relevant information about these investing and financing activities
► Examples of non-cash transactions are:
► the acquisition of assets either by assuming directly related liabilities or by means of a
finance lease;
► the acquisition of an entity by means of an equity issue; and
► the conversion of debt to equity.

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Reporting of Cash Flow Statements
Non-cash transactions

Case study
► Should the cash flows incurred in connection with the purchase of an asset on deferred terms
be classified under investing activities or within financing activities?

Solution
► The length of the period between the acquisition of an asset and the following payment should
determine the classification of the cash flows.
► Where an entity acquires an asset under a finance lease, the length of the period between the
acquisition of the asset and the following payment is significant, the acquisition of the asset is a
non-cash transaction, and the payments to reduce the outstanding liability relating to a finance
lease are financing cash flows.

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Example

Example:
X Limited acquires fixed asset of USD 1,000,000 from Y Limited by accepting the liabilities of
USD 800,000 of Y Limited and balance amount is paid in cash. How X Limited will treat all those
items in its cash flow statements?

Solution:
Investing and financing transactions that do not require the use of cash and cash equivalents
shall be excluded from a statement of cash flows. X Limited should classify cash payment of USD
200,000 under investing activities. The non-cash transactions – liabilities and asset should be
disclosed in the notes to the financial statements.

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Lease Arrangements

► The recognition of a right-of-use asset and lease liability at commencement of an operating or finance
lease following the adoption of ASC 842 has no statement of cash flow implications (unless there is a
lease prepayment) and is disclosed as a noncash investing and financing transaction (ASC 842-20-50-
4(g)(2)). In addition to the noncash disclosures for the initial recognition of a new lease, a lessee should
also make disclosures for other noncash changes to lease balances (e.g., an increase in the right-of-use
asset resulting from a reassessment event).

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Business Combinations

► Cash flows for purchases and from sales of productive assets, including the acquisition or sale of a
business, are presented as investing activities. Changes in assets and liabilities that are typically
presented in the operating or financing activities sections of the statement of cash flows, but that result
from the purchase or sale of a business, are presented as an investing activity. The statement of cash
flows should reflect, as a single line item, cash paid to purchase a business (net of cash acquired) or cash
received from the sale of a business (net of cash sold).

► When the contingent consideration is paid or settled, the portion of the contingent consideration
arrangement that is included as part of the consideration transferred (i.e., acquisition-date fair value)
represents a financing activity, as the arrangement is a method of financing the arrangement.

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Case Study

► On 1 January 20X1, Acquirer acquires Target from Seller. The acquisition agreement includes contingent consideration
in the form of a royalty based on a percentage of Target’s sales for a two-year period in excess of a specified baseline.
Any amounts due are payable at the end of the two-year period (i.e., 31 December 20X2). As part of the purchase
accounting, the fair value of this contingent consideration arrangement was determined to be $100.
► At the end of 20X1, Acquirer determined that the fair value of the contingent consideration arrangement increased to
$125 and recorded an accrual and an income statement charge for the $25 increase. Acquirer uses the indirect method
for reporting cash flows from operating activities and presented the $25 fair value increase as an adjustment to
reconcile net income to cash flows from operating activities.
► At the end of 20X2, Acquirer determined the actual amount of contingent royalty owed to Seller was $150 and made
the payment on 31 December 20X2. Acquirer prepared its statement of cash flows for year 20X2 and presented the
initial amount of contingent consideration recognized in purchase accounting for the Target acquisition of $100 as a
cash outflow from financing activities, and the $50 balance of the payment, which resulted from changes in the fair
value of the contingent consideration arrangement between the date of acquisition and the settlement of the contingent
consideration arrangement, was reported as a cash outflow from operating activities.
► Because Acquirer uses the indirect method to report cash flows from operating activities, $25 of the $50 balance would
reduce operating activity cash flows by reducing 20X2 net income, and the remaining $25 would be reported as an
accrual reduction.

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Accrued Capital Expenditure

► Entity A is a calendar-year public business entity that maintains an accrued capital expenditures account to track
capital expenditures that it has received, but for which it has not yet paid. The balance in Entity A’s accrued capital
expenditures account was $300 on 31 December 20X0. Entity A remits payment for the accrued capital expenditures
on 15 January 20X1.
► On 15 March 20X1, Entity A receives capital equipment of $100 that it recognizes as an asset on its balance sheet.
Entity A also recognizes an accrued capital expenditures liability of the same amount. There were no other purchases
of capital equipment during the three-month period ended 31 March 20X1. Entity A remits payment for the equipment
on 15 April 20X1.

► Analysis:
► Entity A discloses receipt of $100 of equipment as noncash investing activity in its financial statements for the three-
month period ended 31 March 20X1 because it received the equipment during the reporting period but has not yet paid
for it. Entity A also includes $300 of investing cash outflows in its statement of cash flows for the three-month period
ended 31 March 20X1 because it paid for the previously accrued capital expenditures during the reporting period.
► Assuming no other capital expenditures are made during the six-month period ended 30 June 20X1, Entity A would
include $400 of investing cash outflows in its statement of cash flows for the six-month period ended 30 June 20X1 for
payments made during the reporting period related to the acquisition of capital equipment.

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Cash Flows from Discontinued Operations (1/2)

► An entity shall disclose all of the following in the notes to financial statements:
► a. The pre-tax profit or loss of the discontinued operation for the periods in which the results of operations of the
discontinued operation are presented in the statement where net income is reported.
► b. The major classes of line items constituting the pre-tax profit or loss of the discontinued operation (for example,
revenue, cost of sales, depreciation and amortization, and interest expense) for the periods in which the results of
operations of the discontinued operation are presented in the statement where net income is reported.
► c. Either of the following:
► 1. The total operating and investing cash flows of the discontinued operation for the periods in which the results of operations of the
discontinued operation are presented in the statement where net income is reported
► 2. The depreciation, amortization, capital expenditures, and significant operating and investing non-cash items of the discontinued
operation for the periods in which the results of operations of the discontinued operation are presented in the statement where net
income is reported.

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Cash Flows from Discontinued Operations (2/2)

► d. If the discontinued operation includes a NCI, the pre-tax profit or loss attributable to the parent for the periods in
which the results of operations of the discontinued operation are presented in the statement where net
► income is reported.
► e. The carrying amount(s) of the major classes of assets and liabilities included as part of a discontinued operation
classified as held for sale for the period in which the discontinued operation is classified as held for sale and all prior
periods presented in the statement of financial position. Any loss recognized on the discontinued operation classified
as held for sale in accordance with paragraphs 205-20-45-3B through 45-3C shall not be allocated to the major classes
of assets and liabilities of the discontinued operation.

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Disclosure
Disclosures

Disclosures

► Components of cash and cash equivalents

► Present a reconciliation of the amounts in the statement of cash flow
► Policy which it adopts in determining the composition of cash and cash equivalents
► Disclose, together with a commentary by management, the amount of significant cash
and cash equivalent balances held by the entity that are not available for use by the
group

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Disclosures

Disclosures

Additional information may be relevant to users in understanding the financial position and
liquidity of an entity
► Amount of undrawn borrowing facilities that may be available for future operating
activities and to settle capital commitments, indicating any restrictions on the use of
these facilities;
► Aggregate amounts of the cash flows activities related to interests in joint ventures
reported using proportionate consolidation
► Aggregate amount of cash flows that represent increases in operating capacity separately
from those cash flows that are required to maintain operating capacity; and
► Amount of the cash flows arising from the operating, investing and financing activities of
each reportable segment

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Thank You