Statement of Cash Flows

Cash and Cash Equivalents

The basis recommended by the IASB for the statement of

cash flows is actually “cash and cash equivalents.” Cash
equivalents are short-term, highly liquid investments that are
both:
 Readily convertible to known amounts of cash, and
 So near their maturity that they present insignificant risk of
changes value in (e.g., due to changes in interest rates).

Generally, only investments with original maturities of three

months or less qualify under this definition.

LO 2
PREPARATION OF STATEMENT OF CASH
FLOWS

Primary purpose:
To provide information about a company’s cash receipts and
cash payments during a period.

Secondary objective:
To provide cash-basis information about the company’s
operating, investing, and financing activities.

LO 1
• Why cash is so important??

• Cash is King (like blood for company)

PREPARATION OF STATEMENT

Classification of Cash Flows

Operating Investing Financing

Activities Activities Activities

Income Changes in Changes in

Statement Items Investments Equity and
and Non- Non-Current
Current Asset Liability Items
Items

LO 2
 Classification of Cash Flows Income
Statement
Items

• Inflows
• Cash Collected from Customer
• Interest and Dividend Received

• Outflows
• Cash Paid to Suppliers
• Cash Paid for operating Expenses
• Cash Paid for interest and taxes

LO 2
Classification of Cash Flows

Generally
Investments
and Non-
Current Asset
Items

Generally
Equity and
Non-Current
Liability Items

LO 2
Format of the Statement of Cash Flows

Presentation:
1. Operating activities. Direct Method

2. Investing activities. Indirect Method

3. Financing activities.

Report inflows and outflows from investing and financing

activities separately.

LO 2
Steps in Preparation

Three Sources of Information:

1. Comparative statements of financial position.
2. Current income statement data.
3. Selected transaction data.

LO 2
Cash Collected From Customers
Interest and Dividend Receipts
Cash Paid to Suppliers
Cash Paid For Operating Expenses
Cash Paid for Interest and Taxes
Cash Flow From Operating Activities
Cash Collected From Customers 2,113
Interest and Dividend Receipts 0
Cash Paid to Suppliers (1425)
Cash Paid For Operating Expenses (378)
Cash Paid for Interest 0
Cash Paid for Taxes (33) 0000
Cash Flow from operating activities 277
Classification of Cash Flows

Generally
Investments
and Non-
Current Asset
Items

Generally
Equity and
Non-Current
Liability Items

LO 2
Purchase and Sale of Long Term Asset
• Change in Asset Account
• Increase depicts the Purchase Decrease depicts the sell
• Cash Used for Purchase of Asset
Increase in Asset Account less any portion financed through debt

• Cash Proceeds from the sale of Asset

Decrease in Asset Account + Gain on Sale of Asset
or – Loss on the Sale of Asset
Purchase and Sale of Debt or Equity
Securities
• Change in Book Value
• Cash Used for Purchase of Securities
Change in Book Value less any portion financed through debt

• Cash Proceeds from the sale of Securities

Change in book Value + Gain on Sale of Securities
or – Loss on the Sale of Securities
Long Term Loans
• Asset Side

• Increase in Book Value = Outflow

• Decrease in Book Value= Inflow

Remember interest earned is part of Operating / Investing Act

Financing Activity
• Change in Equity Accounts
• Increase defines the Inflow of cash

• Decrease depicts the outflow of Cash

• Change in Liabilities Accounts

• Increase depicts the inflow of cash

• Decrease depicts the outflow of cash

Direct Method
In-Direct Method for Operating Activities
• Net income is adjusted for non cash expense, non operating Activities
and differences because of accrual basis of Accounting
Net Income
Add Deduct
Non Cash Expenses
Gain on sale of Long term Assets Loss on sale of Long term Assets
Decrease in Operating Assets Other than Cash Increase in Operating Assets Other than Cash
Increase in Operating Liabilities Decrease in Operating Liabilities
Summary