Statement of Cash flows- IAS 7

Part 1

Chapter 16

Lecture by: Rafaqat Hasnat, ACA

Introduction to Statement of Cash flows

• An integral part of financial statements

• Shows the ability of any entity to generate cash
• Prepared for a certain period (for the year)
• SCF was considered necessary as it is easier to understand
and difficult to manipulate
• Future cash flows are regarded as a prime determinant of the
worth of business
Objective of Statement of Cash flows

The objective of IAS 7 statement of cash flows is to:

vEnsure the provision of information about the historical changes in
cash and cash equivalents
vClassify cash flows during the period between those arising from
operating, investing and financing activities
• Standard headings ensure that significant components are highlighted and
facilitate comparison among different businesses
• The classification may require a particular transaction to be shown partly
under one heading and partly under another e.g.: repayment of a loan
 Classifications of SCFs
Operating activities
• Revenue producing activities
• Key indicator- Shows
whether operations can
generate enough cash
• Include cash receipts from
sale of goods/ services,
royalties & fees AND cash
payments to employees,
suppliers and tax authorities
Statement of Cash flows
Investing activities
• Acquisitions and disposals
of long term assets and other
investments
• Include transactions related
to PPE, intangibles,
equity/debt instruments
AND loans to other entities
Financing activities
• Change the size and
composition of the
contributing equity and
borrowings
• Include transactions related
to issuance/redemption of
new shares, loans/notes
AND finance lease
 Definitions

Cash and cash equivalents

Cash Cash equivalents

Cash on hand Demand deposits Short-term, Highly Liquid Investments

Including overdrafts
Current bank accounts • Convertible into known amount of cash
• Subject to an insignificant risk of
changes in value
• Maturity should be within 3 months
from date of acquisition
• Eg: government bonds
Analysis of cash & Cash Equivalents
 Statement of Cash flows- Format

add
 Statement of Cash flows

add

Interest Liability b/f

+ Finance cost (in SPL)
- Interest liability c/f
= Interest paid
 Statement of Cash flows

Balance b/f
+ Additions (bal. fig.)
Profit on disposal + Revaluations
= Proceeds ─ Carrying Value ─ Depreciation
─ Disposal
= Balance c/f

Movement in Share capital & Share premium accounts

Lease liability b/f (short-term+long-term)

+ Addition in lease finance
─ Payment of lease liability
─ Interest element of payment
= liability bal c/f
T accounts used to workout relevant figures
T-account for Non Current assets
 Approach

1. Read the requirements noting the year end dates (Bal. b/f and bal c/f)
2. Statements of cash flow headings
• Operating activities, Investing activities, Financing activities and Cash & Cash equivalents

3. Cash & cash equivalents (b/f, c/f and movements)

4. Additional Information
• Changes in PPE (disposal, additions)
• Non-cash items (depreciation, impairment etc)

5. Statement of Profit & Loss

• PBT => look up (finance costs & investment income) =>look down (tax paid) => dividend paid
6. Statement of Financial position
• Non-cash items (payables, provisions etc)
• Working capital changes
• Borrowings
• Share capital & Share premium