7/28/2019 IFRS Chapter_21 Statements of Cash Flows
1/35
Chapter 21
Statement of cash flowswww.xisu.edu.cn
http://www.xisu.edu.cn/http://www.xisu.edu.cn/7/28/2019 IFRS Chapter_21 Statements of Cash Flows
2/35
Contents
1. IAS 7 statement of cash flows
2. Preparing a statement of cash flows
3. Interpretation of statements of cash flows
7/28/2019 IFRS Chapter_21 Statements of Cash Flows
3/35
Accounting standards
Accounting standards: IAS 7
7/28/2019 IFRS Chapter_21 Statements of Cash Flows
4/35
IAS 7 Cash flow statements
Objective of IAS7
The objective of IAS7 is to ensure that allenterprises provide information about thehistorical changes in cash and cashequivalents by means of a cash flowstatement which classifies cash flows i.e.inflows and outflows of cash and cashequivalents during the period betweenthose arising from operating, investing
and financing activities.
7/28/2019 IFRS Chapter_21 Statements of Cash Flows
5/35
IAS 7 Cash flow statements
A cash flow statement demonstrates the
points that:
(a) Provides information on business activities
(b) Helps to assess the current liquidity of thebusiness
(c) Highlights the major cash inflows and outflowsof the business
(d) Helps the user to estimate future cash flows
(e) Distinguishes between trading cash flows andother types of cash flow
(f) Removes accrual accounting from financialinformation
7/28/2019 IFRS Chapter_21 Statements of Cash Flows
6/35
Key Definition
Cash comprises cash on hand anddemand deposits
Cash equivalents are short-term ,high
liquid investments that are readilyconvertible to known amounts of cashand which are subject to an insignificantrisk of changes in value.
Cash flows are inflows and outflows ofcash and cash equivalents.
7/28/2019 IFRS Chapter_21 Statements of Cash Flows
7/35
Key Definition
Operating activities are principalrevenue-producing activities of theentity and other activities that are notinvesting or financing activities.
Investing activities are the acquisitionand disposal of non-current assets andother investments not included in cashequivalents.
Financing activities are activities that
result in changes in the size andcomposition of the equity capital andborrowings of the entity.
7/28/2019 IFRS Chapter_21 Statements of Cash Flows
8/35
IAS 7 Cash flow statements
Operation activities
Cash flow from the operation activitieswill be those items which determine the
net profit or loss of the activities.
(a) cash receipts from the sale of goodsand the rendering of services
(b) cash payments to suppliers for goodsand services
7/28/2019 IFRS Chapter_21 Statements of Cash Flows
9/35
Investment activities
Investment activities show theinvestments in assets which will generatefuture profit and cash flows.
(a) cash payments to acquire shares or
debentures of other entities.(b) cash receipts from the repayment ofadvantages and loans made to otherparties.
(c) cash receipts from the repayment ofadvances and loans made to other parties.
7/28/2019 IFRS Chapter_21 Statements of Cash Flows
10/35
IAS 7 Cash flow statements
Financing activities
Financing activities is an indicator oflikely future interest and invest and
dividend payments.(a) cash proceeds from issuing shares .
(b) cash payments to owners to acquire or
redeem the entitys shares.(c) principal repayments of amountsborrowed under finance lease.
7/28/2019 IFRS Chapter_21 Statements of Cash Flows
11/35
IAS 7 Cash flow statements
Example :finance lease rental
The notes to the financial statements of Hayley Co. show thefollowing in respect of obligations under finance leases.
Year ended 30 June 20*5 20*4
000 000
Amounts payable within one year 12 8
Within two to five years 110 66
122 74
Less finance charges allocated to future periods (14) (8)
108 66
Interest paid on finance leases in the year to 30 June 20*5amounted to 6m.addions to tangible non-current assets
acquired under finance lease were shown in the non-current assetnote at 56,000
Required
Calculate the capital repayment to be shown in the statement of cashflows of Hayley Co. for the year to 30 June 20*5.
7/28/2019 IFRS Chapter_21 Statements of Cash Flows
12/35
IAS 7 Cash flow statements
Solution
obligations under finance leases
000
Capital repayment (bal fig) 14
Bal 30.6.*5 108122
000
Bal 1.7.*4 66
Additions 56122
7/28/2019 IFRS Chapter_21 Statements of Cash Flows
13/35
IAS 7 Cash flow statements
Reporting cash flow methods
The standard offers a choice of method for thispart of the statement of cash flows.
Direct method: disclose major classes of grosscash receipts and gross cash payments
Indirect method: net profit or loss is adjustedfor the effects of transactions of a non-cashpayments, and items of income or expenseassociated with investing or financing cash flows.
The direct method is the preferred methodbecause it discloses information , not availableelsewhere in the financial statements, whichcould be of use in estimating future cash flows.
7/28/2019 IFRS Chapter_21 Statements of Cash Flows
14/35
IAS 7 Cash flow statements
The indirect methodThe net profit or loss for the period is adjustedfor the following:
(a) Changes during the period in inventories,operating receivables and payables.
(b) Non-cash items, eg depreciation , provisions,profits/loss on the sales of assets.
(c) The cash flows from which should be classifiedunder investing or financing activities.
The direct method is encouraged where thenecessary information is not too costly toobtain ,but IAS7 does not require it, in practicethe indirect method is more commonly used,since it is quicker and easier.
7/28/2019 IFRS Chapter_21 Statements of Cash Flows
15/35
IAS 7 Cash flow statements
Cash flow from operating activities (indirect method)
Cash flow from operating activities Profit before taxation Adjustment for :Depreciation Foreign exchange loss Investment income ()Interest expense
Increase in trade and other receivables ()Decrease in inventories Decrease in trade payables ()
Cash generated from operations Interest paid ()Income taxes paid ()Net cash from operating activities
7/28/2019 IFRS Chapter_21 Statements of Cash Flows
16/35
Why certain items are added and others
subtracted .(a) depreciation is not a cash expense, but isdeducted in arriving at profit, it makes sense,therefore, to eliminate it by adding it back
(b) by the same logic , a loss on a disposal of a
non-current asset (arising through underprovision of depreciation) needs to be added backand a profit deducted.
(c) an increase in inventories means less cash-youhave spent cash on buying inventory.
(d) an increase in receivables means the companysdebtors have not paid as much, and thereforethere is less cash.
(e) if we pay off payables, causing the figure todecrease, again we have less cash.
IAS 7 Cash flow statements
7/28/2019 IFRS Chapter_21 Statements of Cash Flows
17/35
IAS 7 Cash flow statements
Interest and dividendsCash flows from interest and dividendsreceived and paid should each bedisclosed separately.
Dividends paid by the entity can beclassified in one or two ways:(a) as a financing cash flow, showing thecost of obtaining financial resources.
(b) as a component of cash flows fromoperating activities so that users canassess the entitys ability to pay dividendsout of operating cash flows.
7/28/2019 IFRS Chapter_21 Statements of Cash Flows
18/35
IAS 7 Cash flow statements
Taxes on income
Cash flows arising from taxes on incomeshould be separately disclosed and shouldbe classified as cash flows from operating
activities unless they can be specificallyidentified with financing and investingactivities.
7/28/2019 IFRS Chapter_21 Statements of Cash Flows
19/35
IAS 7 Cash flow statements
Components of cash and cash
equivalents
The components of cash and cashequivalents should be closed and a
reconciliation should be present, showingthe amounts in the statement of cashflows reconciled with the equivalent itemsreported in the statement of financial
position
7/28/2019 IFRS Chapter_21 Statements of Cash Flows
20/35
IAS 7 Cash flow statements
Other disclosures
All entities should disclose, together with acommentary by management ,any otherinformation likely to be of importance, forexample:
(a) restrictions on the use of or access to any partof cash equivalents
(b) the amount of undrawn borrowing facilitieswhich are available
(c) cash flows which increased operating capacity
compared to cash flows which merely maintainedoperating capacity
(d) cash flows arising from each reported industryand geographical segment.
7/28/2019 IFRS Chapter_21 Statements of Cash Flows
21/35
IAS 7 Cash flow statements
Cash flow statements (direct method)
STATEMENT OF CASH FLOWS (DIRECT METHOD)YEAR ENDED 31 DECEMBER 20*7m m
Cash flows from operating activitiesCash receipts from customers 30,330Cash paid to suppliers and employees (27,600)
Cash generated from operations 2,730Interest paid (270)Income taxes paid (900)Net cash from operating activities 1,560Cash flows from investing activitiesPurchase of property, plant and equipment (900)
Proceeds from sales of equipment 20Interest received 200Dividends received 200Net cash used in investing activities (480)
7/28/2019 IFRS Chapter_21 Statements of Cash Flows
22/35
IAS 7 Cash flow statements
m m
Cash flows from financing activitiesProceeds from issue of share capital 250
Proceeds from long-term borrows 250
Dividend paid (1290)
Net cash used in financing activities (790)
Net increased in cash and cash equivalents 290Cash and cash equivalents at beginning of period (Note) 120
Cash and cash equivalents at end of period (Note) 410
7/28/2019 IFRS Chapter_21 Statements of Cash Flows
23/35
IAS 7 Cash flow statements
Cash flow statements (indirect method)
STATEMENT OF CASH FLOWS (INDIRECT METHOD)YEAR ENDED 31 DECEMBER 20*7Cash flows from operating activities m mProfit before taxation 3,570Adjustments for:Depreciation 450
Investments income (500)Interest expense 400
3920Increase in trade and other receivables (500)Decrease in inventories 1050Decrease in trade payables (1740)
Cash generated from operations 2730Interest paid (270)Income taxes paid (900)Net cash from operating activities 1560
7/28/2019 IFRS Chapter_21 Statements of Cash Flows
24/35
IAS 7 Cash flow statements
m m
Cash flows from investing activitiesPurchase of property, plant and equipment (900)
Proceeds from sale of equipment 20
Interest received 200
Dividends received 200
Net cash used in investing activities (480)Cash flows from financing activities
Proceeds from issue of share capital 250
Proceeds from long-term borrowings 250
Dividends paid (1290)
Net cash used in financing activities (790)Net increase in cash and cash equivalents 290
Cash and cash equivalents at beginning of period 120
Cash and cash equivalents at beginning of period 410
7/28/2019 IFRS Chapter_21 Statements of Cash Flows
25/35
Preparing a statement of cashflows
We should learn the format and apply the steps
noted in the example .note that the followingitems are treated in a way that might seemconfusing, but the treatment is logical if youthink in terms of cash.
(a) increase in inventory is treated as negative
(in brackets). This is because it represents a cashoutflow; cash is being spent on inventory.
(b) an increase in receivable would be tread asnegative for the same reasons; more receivables
means less cash. (c) by contrast an increase in payable is
positive because cash is being retained and notused to settle accounts payable. There istherefore more of it.
7/28/2019 IFRS Chapter_21 Statements of Cash Flows
26/35
7/28/2019 IFRS Chapter_21 Statements of Cash Flows
27/35
Preparation of a statement of cashflows
Example: KANE CO
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER20*2 20*1000 000
Non-current assets 1,596 1,560Cost (318) (224)Depreciation 1,278 1,336
Current assets 24 20Inventory 76 58Trade receivables 48 56Bank 148 134
Total assets 1,426 1,470Equity and liabilities
Equity 360 340Share capital 36 24Share premium 716 514Retained earnings 1,112 878
7/28/2019 IFRS Chapter_21 Statements of Cash Flows
28/35
Preparation of a statement of cashflows
Example :
Non-current liabilities 200 500Long-term loans
Current liabilities 12 6
Trade payables 102 86
Taxation 114 92
1,426 1,470
Total equity and liabilities
Dividends paid were 66,000
During the year, the company paid 90,000 for a new piece ofmachinery
Required
Prepare a statement of cash flows for Kane Co for the year ended
31 December 20*2 in accordance with the requirements of IAS7,using the indirect method.
7/28/2019 IFRS Chapter_21 Statements of Cash Flows
29/35
Preparation of a statement of cashflows
Step to solve the problem
STEP 1 set out the Performa statement of cashflows with the headings required by IAS7.
STEP2 begin with the cash flows from operatingactivities as far as possible.
STEP3 calculate the cash flow figures forpurchase or sale of non-current assets, issue ofshares and repayment of loans if these are notalready given to you .
STEP4 if you are not given the profit figure, open
up a working for profit or loss. STEP5 you will be now be able to complete the
statement by slotting in the figures given orcalculated.
7/28/2019 IFRS Chapter_21 Statements of Cash Flows
30/35
Preparation of a statement of cashflows
Solution:KANE CO
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER20*2000 000
Cash flows from operating activitiesProfit before tax 392Depreciation charges 118
Loss on sale of tangible non-current assets 18Interest expense 28Increase in inventories (4)Increase in receivables (18)Increase in payables 6Cash generated from operations 540
Interest paid (28)Dividends paid (66)Tax paid (86+124-102) (108)Net cash from operating activities 338Cash flows from investing activities
7/28/2019 IFRS Chapter_21 Statements of Cash Flows
31/35
Preparation of a statement of cashflows
Payments to acquire tangible non-current assets (90)
Receipts from sales of tangible non-current assets (w) 12Net cash used in investing activities (78)
Cash flows from financing activities
Issues of share capital(360+36-340-24) 32
Long-term loans repaid(500-200) 300
Net cash used in financing activities (268)Decrease in cash and cash equivalents (8)
Cash and cash equivalents at 1.1*2 56
Cash and cash equivalents at 21.12*2 48
7/28/2019 IFRS Chapter_21 Statements of Cash Flows
32/35
Preparation of a statement of cashflows
Working: non-current asset disposals
cost000 000
At 1.1.*2 1,560 At 31.12.*2 1,596
Purchases 90 Disposals (balance) 54
1,650 1.650At 31.12*2 318 At 1.1*2 224
Depreciation on
disposals (balance) 24 Charge for year 118
342 342
NBV of disposals 30Net loss reported (18)
Proceeds of disposals 12
i f f
7/28/2019 IFRS Chapter_21 Statements of Cash Flows
33/35
Interpretation of statements ofcash flows
What kind of information does the
statement of cash flows ,along with itsnotes, provide?
(a) the relationships between profit andcash can be seen clearly and analyzed
accordingly(b) cash equivalents are highlighted, give a
better picture of the liquidity of thecompany
(c) financing inflows and outflows must beshown, rather than simply passed throughreserves.
i f f
7/28/2019 IFRS Chapter_21 Statements of Cash Flows
34/35
Interpretation of statements ofcash flows
The advantages of cash flow accounting
Survival in business depends on the ability to generate cash
Cash flow is more comprehensive than profit which isdependent on accounting conventions and concept
Creditorsare more interested in an entitys ability to repay
them than in its profitability Cash flow reporting provides a better means ofcomparing
the results of different companies than traditional profitreporting
Cash flow reporting satisfies the needs of all users better
Cash flow forecasts are easier to prepare, as well as moreuseful the profit forecasts
7/28/2019 IFRS Chapter_21 Statements of Cash Flows
35/35
www.xisu.edu.cn
Top Related