Statement of Cash flows

Three financial statements

• Statement of Profit and Loss
• Balance sheet
• Statement of Cash flows

• Statement of Profit and loss and Balance sheet

• Accrual accounting
• Revenue recognition, Matching the expenses and conservatism concept
Bird’s eye view

Recognizing the
sales and Provisions

Caution
Depreciation CASH FLOW
Methods STATEMENT

Valuation of stock
inventory
Statement of cash flows
· Cash flow associated with an entity’s operating, investing, and financing activities during a
period.

· Reconciles changes in cash account on balance sheet (i.e., beginning balance to ending
balance).

· Eliminates judgments and estimates involved with accrual accounting as on income

statement and balance sheet

· Numbers on cash flow statement are objective (i.e., cash is cash).

Definition of Cash
· Cash.
· Cash equivalents.
· Short-term investments.
· Highly liquid.
· Convertible to known amounts of cash.
· Mature in no more than 90 days (GAAP).
· Subject to insignificant risk of changes in value (IASB).

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Statement of Cash Flows:
· Sources ( Inflows)
· Activities that generate cash.

· Uses( Outflows)
· Activities that involve spending cash.

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Organization of the Statement of Cash Flows
1. Operating activities
2. Investing activities.
3. Financing activities.

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Operating Activities
· Cash inflows associated with sales revenues.
· Cash outflows associated with operating activities (e.g., payments to
suppliers, employees and taxes).

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Investing Activities
· Outflows:
· Acquiring long-lived assets (e.g., property, plant, equipment).
· Making investments in securities (i.e., other than cash
equivalents).
· Lending money.
· Inflows:
· Disposing of long-lived assets (e.g., property, plant, equipment).
· Disposing of investments in securities (i.e., other than cash
equivalents).
· Collecting loans.
· Interest income
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Financing Activities
· Inflows:
· Borrowing of cash.
· Issuance of equity securities.
· Outflows:
· Repaying loans.
· Retiring equity securities.
· Payment of dividends.

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 Equity share

Financing Preference shares

Debentures
Clarity on Interest and dividends
• Cash flows from interest and dividends received and paid shall each
be disclosed separately.
• Cash flows arising from interest paid and interest and dividends
received in the case of a financial institution should be classified as
cash flows arising from operating activities.
• In the case of other entities, cash flows arising from interest paid
should be classified as cash flows from financing activities
• while interest and dividends received should be classified as cash
flows from investing activities. Dividends paid should be classified as
cash flows from financing activities.
Classification of Activities
• Paid bonus to employees
• Paid suppliers
• Received Dividend from an associate
• Sold investments at gain
• Purchasing copyrights for cash
• Converted debentures into equity shares
• Received payments from customer
• Paid instalments for the purchase of inventories
Classification of Activities
• Purchased 60 day certificate of deposit of cash
• Paid advance to a supplier of equipment
• Sold 90 day Treasury bill
• Collected instalment payment for the sale of an old plant
• Disposed of equipment on a gain
• Sold equipment for cash
• Issued convertible debentures for cash
Operating Activities:
· Direct method.
· Inflows (i.e. cash provided by operating activities).
· Outflows (i.e. cash disbursed for operating activities).
· Net cash flow (i.e. inflows - outflows).
· Indirect method.
· Reconciliation of period’s net income and the period’s net
cash flow from operations.
· More difficult to understand.

· Note: Cash flow from operating activities will be

the same under either method.
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