Learning Unit 10

Cash Flow
Statements

Open Rubric
 Why is it important?
Cash flow information involves the meaningful
presentation of the cash that the entity
generated and applied. We present this
information to the readers of financial
statements in the form of a cash flow statement.

A cash flow statement includes cash flows from

operations, investments and financing activities.
Components of a cash flow statement
• Operating activities are the principal income-
producing activities of the enterprise as well as
other activities which are not investing or
financing activities.
• Investing activities include the acquisition and
sale of non-current assets and other investments.
• Financing activities are activities that result in
changes in the size and composition of the equity
and borrowings of the enterprise.
Components of a cash flow statement
Operating activities
• Indicates the extent to which the operations of the
entity have generated sufficient cash to repay loans,
maintain the operating capability of the entity, pay
dividends and make new investments without
recourse to external financing.
• Derived primarily from the principal revenue-
producing activities of the entity, and generally result
from transactions and other events that determine
profit or loss.
Components of a cash flow statement
Investing activities
• Represents receipts and payments made for
investment purposes i.e. the extent to which
payments have been made for resources
intended to generate future receipts and cash
flows.
• Includes cash receipts and payments to
acquire property, plant and equipment and
other non-current assets.
Components of a cash flow statement
Financing activities
• Represents net flows of cash that are used to
fund the company.
• Financing activities include transactions
involving debt and equity.
• Includes proceeds on the issue and
redemption of shares, debentures, loans and
other types of borrowings.
Presentation of a cash flow statement
• Operating activities can be shown using the direct
or indirect method. Investing and financing
activities remain the same for each method.
• Amounts that are not in brackets represent the
inflow of cash and amounts in brackets represent
the outflow of cash.
• Formats on the direct and indirect method are
important. Study both the direct and indirect
method and do only the one that is required.
Direct Method
Indirect Method
Example: Ross Ltd in Learning Unit 10
Example: Ross Ltd in Learning Unit 10
Example: Ross Ltd in Learning Unit 10
Example: Ross Ltd in Learning Unit 10
 Example: Ross Ltd in Learning Unit 10

Using the direct method:

 Example: Ross Ltd in Learning Unit 10
Using the direct method:
 Example: Ross Ltd in Learning Unit 10
Using the direct method:
 Example: Ross Ltd in Learning Unit 10
Now that we’ve calculated cash generated from operations, we
move on to compute cash inflows or outflows from interest,
dividends and tax.
 Example: Ross Ltd in Learning Unit 10
We now draft the cash flow from operating activities using the
direct method:
 Example: Ross Ltd in Learning Unit 10
• If we use the indirect method, the only
difference is the disclosure. The end result of
cash flow from operating activities should be
the same.
• Adjust profit before tax for non-cash items and
then incorporate changes to working capital.
• Include dividends, interest and taxation paid or
received in calculating cash flow from
operating activities
 Example: Ross Ltd in Learning Unit 10
Using the indirect method:
 Example: Ross Ltd in Learning Unit 10

We now move onto investing activities:

Example: Ross Ltd in Learning Unit 10
 Example: Ross Ltd in Learning Unit 10
Look at acquisition and sale of non-current assets:
 Example: Ross Ltd in Learning Unit 10
Look at acquisition and sale of non-current assets:
 Example: Ross Ltd in Learning Unit 10
Look at acquisition and sale of non-current assets:
Example: Ross Ltd in Learning Unit 10
 Example: Ross Ltd in Learning Unit 10
We now move onto financing activities:

• As we’ve said, financing activities include

transactions involving debt and equity.
• This section of the cash flow statement is the same
for both the direct and indirect method.
• Debt and equity is disclosed in SOFP, so we look for
movements in these balances to identify any
proceeds on the issue and redemption of shares,
debentures, loans and other types of borrowings.
 Example: Ross Ltd in Learning Unit 10
Upon inspection of SOFP, we note the following balances:

We now prepare the cash flow from financing activities section:

 Example: Ross Ltd in Learning Unit 10
We now complete the end of the cash flow statement to ensure
that all movements and calculations reconcile to the closing
balance of cash as shown in the SOFP.