CASH FLOW STATEMENT

CASH FLOW STATEMENT

The statement purpose is to reveal

1. Ability of firm to generate cash flows

from operations.
2. Trends in cash flow components i.e.
company’s cash receipts and payments
during an accounting period.
3. To provide information about company’s
operating, investing and financing
activities during an accounting period
Uses of cash flow statement
1. Mgt uses the statement to assess liquidity, to
determine dividend policy, and evaluate the effects
of major policy decisions involving investments and
financing
2. Investors and creditors use the statement to assess
a company’s ability to manage cash flows, to
generate positive cash flows, to pay its liabilities, to
pay dividends and interest and to anticipate its
need for additional financing
 CASHFLOW STATEMENT
Cash flow statement classifies sources and application of
cash flows into
 Cash flow from operating activities
 Cash flow from investing activities. I.e. sale and
acquisition of fixed assets, investment etc
 Cash flow from financing activities i.e. cash flows
resulting to withdrawal and injection of capital to the
firm.
1. Operating activities involve the cash flows from
activities that enter into determination of net income.
Cash inflows include cash receipts from sale of goods
and services and from trading securities – are
marketable security that a company buys and sells for
the purpose a making profit. cash inflows also include
interest and dividends received on loans and
investments. Outflows include payment for inventory,
expenses, taxes and interest
2. Investing activities involve the acquisition
and sale of property, plant and equipment and
other long term assets including long-term
investments. making and collecting long term
loans are also investing activities
3. Financing activities involve obtaining
resources from equity holders and giving them a
return as well as obtaining funds from debt
providers together with repayments – cash
repayment of loan
Specifically, financing activities include dividends
payments, issues and redemption of shares
transactions, issue and repayment of long term
debts etc
These activities affects capital structure
CASH AND CASH EQUIVALENTS

They comprise cash on hand and demand deposits,

together with short term highly liquid investments
that are readily convertible to known amount of cash
and are subject to insignificant risk of changes in
values

Under IAS 7, Bank overdraft and marketable

securities are shown as cash equivalent where its
customary to use them as part of cash management
programmes.
IAS GAAP on Interest and Dividend

Under IAS 7, interest paid is shown either as CFO or CFF (preferably

CFO).

Under IAS 7, dividend paid is either as CFO or CFF (preferably CFF).

Under US GAAP both interest and dividend received are shown under
CFO while under IAS 7 both are shown either as CFO or CFI.

Under IFRS taxes paid are identified with financing or investing

activities and classified appropriately
NON CASH INVESTING AND FINANCING
TRANSACTIONS
SCF captures only cash related transactions.
Significant noncash transaction such as
exchange of shares for land or settlement of
long term liability with property are disclosed
separately in separate schedule or as notes to
the financial statements. These transactions
later affect future cash flows
 Preparation of cash flow statement
Cash flow from operating activities can be presented
using
• Indirect method. Net income (after tax) is adjusted
to obtain cash flow from operations
• Direct method. Adjust income statement items from
accrual basis to cash basis
Class discussions on preparation and interpretation to
follow.

Under IFRS both direct and indirect method are

allowed. However, direct method is preferred . if indirect
method is used, a reconciliation of net income with
operating cash flow must be provided.
Cash flow statement format (indirect method)
Cash flows from operating activities Ksh.
Profit before interest and income taxes (PBIT) xx
Non-cash adjustments
Add: depreciation expense for the period xx
Add: amortisation of goodwill xx
Add: loss on disposal of non current assets and
xx
investments
Less: profit on disposal of non-current assets and
(xx)
investments
Less: decrease in provisions (xx)
Add: increase in provisions (xx)
Changes in working capital items
Less: increase in current asset items (xx)
Add: decrease in current asset items xx
Less: decrease in current liability items (xx)
Add: increase in current liability items xx
Return of investments and
Ksh
servicing of finance
Add: dividends received xx
Microsoft Office
Less: dividends paid (xx) Word 97 - 2003 Document

Add: interest received xx

Less: Interest paid (xx)
Net cash from returns on
investments and servicing of xx
finance

Income taxes paid (xx)

Cash flows for investing activities Ksh.

Less: acquisition cost of non-current

(xx)
assets
Less: acquisition cost of marketable
(xx)
securities
Add: sale / disposal proceeds of non-
xx
current assets
Add: sale / disposal proceeds of non-
xx
current assets

Net cash flow from investing activities xxx

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Cash flows for financing activities Ksh.

Less: repayment of loans (xx)

Less: purchase / redemption of shares

(xx)
and debentures

Add: borrowing of loans xx

Add: sale / issue of shares and

xx
debentures

Net cash flow from financing activities xxx

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Summary
Increase / decrease in cash Ksh.
Add: Net cash flow from operating
xx
activities
Add: Net cash flow from returns on
xx
investments and servicing of finance
Less: income tax paid (xx)
Add: Net cash flow from investing
xx
activities
Add: Net cash flow from financing
xx
activities
Increase / decrease in cash
xxx

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