STATEMENT OF CASH

FLOWS
(IAS7)

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 Overview
• Purpose of a statement of cash flows
• Cash and cash equivalents
• Classification of cash flows by activity
• Operating activities
• Investing activities
• Financing activities
• Treatment of interest, dividends and taxes
• Direct method and indirect method
• Disclosures required by IAS7

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Purpose of a statement of cash
flows

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 Cash and cash equivalents

The total of cash and cash equivalents could be

negative if the business has a bank overdraft.

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Classification of cash flows by
activity
Cash flows should be classified by activity. IAS7
identifies three classes of activity:
• Operating activities are "the principal revenue-
producing activities of the entity".
• Investing activities consist of "the acquisition and
disposal of long-term assets and other investments
not included in cash equivalents".
• Financing activities are "activities that result in
changes in the size and composition of the
contributed equity and borrowings of the entity".
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 Operating activities
Cash flows arising from operating activities
include:
(a) cash receipts from the sale of goods and services
(b) cash receipts from royalties, fees, commissions
and other revenue
(c) cash payments to suppliers for goods and
services
(d) cash payments to and on behalf of employees
(e) cash payments or cash refunds of taxes unless
specifically identified with investing or financing
activities.
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 Investing activities
Cash flows arising from investing activities include:
(a) cash payments to acquire property, plant and
equipment or other long-term assets
(b) cash receipts from the sale of property, plant and
equipment or other long-term assets
(c) cash payments to acquire shares or debt instruments
of other entities
(d) cash receipts from the sale of equity or debt
instruments of other entities
(e) cash advances and loans made to other parties
(f) cash receipts from the repayment of advances and
loans made to other parties.
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 Financing activities
Cash flows arising from financing activities
include:
(a) cash proceeds from issuing shares
(b) cash payments to owners to acquire or redeem
the entity's own shares
(c) cash proceeds from issuing debentures, loans
and other borrowings
(d) cash repayments of amounts borrowed
(e) cash payments by a lessee for the reduction of
the outstanding liability relating to a finance
lease.
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 Interest, dividends and taxes
In general:

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 Reporting cash flows from
operating activities
Cash flows from operating activities may be reported
using either:
a) the DIRECT method, whereby major classes of
receipts and payments arising from operating
activities are disclosed individually, or

b) the INDIRECT method, which begins with the profit

or loss for the period (before tax) and then makes
a number of adjustments so as to calculate the total
amount of cash generated from operations.
Obviously, both methods will give the same bottom-line
result for cash generated from operations.
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 The direct method
Major classes of operating receipts and payments
are disclosed individually and are then aggregated
to give the total cash generated from operations.
Typically, a statement of cash flows prepared
using the direct method will disclose:
• total cash receipts from customers
• total cash paid to suppliers of goods and
services
• total cash paid to employees.

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 The indirect method
This method begins with the profit or loss before
tax and then makes the following adjustments:
• any non-cash expenses (e.g. depreciation, losses
on disposal of plant) are added back
• any non-cash income (e.g. a decrease in the
allowance for doubtful debts) is subtracted
• any increases or decreases in inventories, trade
receivables/payables, accruals/prepayments are
adjusted for

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Statement of Cash flows – PROFORMA

Cash from Operating Activities

Profit before tax x
Add Non- Cash Expenses (Dep &Interest Exp) x
Less Non-Cash Revenues (Profit on disposal) (x)
Less Increase In Current Assets (x)
Add Decrease In Current Assets x
Add Increase In Current Liabilities x
Less Decrease In Current Liabilities (x)
Cash Generated from operations x
Interest Paid (x)
Tax Paid (x)
Net Cash From Operating Activities x

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Statement of Cash flows – PROFORMA
(continued)
Cash flows from Investing Activities
Purchase of Non-Current Assets (x)
Sale of Non-Current Assets x
Interest Received x
Dividends Received x
Net Cash From Investing Activities x
Cash flows from Financing Activities
Proceeds from issue of shares x
Debenture Issue x
Repayment of debt (x)
Net Cash from Financing Activities x
Net Increase/(Decrease) in cash & cash equivalents x
Cash and cash equivalents at start x
Cash and cash equivalents at end x

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 Usefulness of cash flow statement to
users of accounting information
• It clearly shows how cash has been
generated and used in the business
• It illustrates movement in working capital
and it identifies areas where management
attention is required
• Users of account will be able to glance if the
company's future earning capacity is
guaranteed through investment in Non
Current Assets.
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 Disclosure requirements of
IAS7

• the amount of any undrawn borrowing facilities

• an analysis of cash flows by segment (where a
segment is a distinguishable component of a
business entity).
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