PAS 7 statement of cash flows

PAS 7

Shows the sources and uses of cash and cash equivalents during the period, following PFRS 18 Presentation and Disclosure in Financial Statements.

Cash

Cash on hand and cash in bank.

Cash Equivalents

Short-term, highly liquid investments convertible to known cash with insignificant risk of value change (maturity 3 months or less).

Cash Flows

Inflows (sources) and outflows (uses) of cash and cash equivalents.

Purpose of statement of cash flows

helps users assess the entity’s ability to:

1. generate cash

2. timing and certainty of cash flows

3. need to use those cash flows.

Quality of earnings indicator

shows if a company reports profit but has negative operating cash flow (e.g., trouble collecting receivables).

Comparability

improves comparison between entities because it is prepared on a cash basis, removing differences in accounting methods.

classification of cash flows

mnemonics: OFI

1. operating activities

2. financing activities

3. investing activities

Operating activities

Cash flows from the entity’s main revenue-producing activities

examples of cash flows - operating activities

• Cash received from sales/services

• Cash paid for goods and services

• Cash paid for operating expenses and income taxes

• Cash from trading/dealing contracts

special items included in operating activities

Certain transactions are classified as operating when they are part of the entity’s main revenue-generating activity, such as trading securities, renting and selling assets normally held for rental, and loan transactions of financial institutions (e.g., banks).

Investing Activities

Cash flows from buying or selling noncurrent assets, investments, and loans to others (excluding trading or cash equivalents) are investing activities.

Financing Activities

Cash flows from issuing or repaying equity and borrowings, including lease liabilities, are financing activities; operating liabilities are excluded.

operating activities - affect

operating profit or loss

investing activities - affect

non current assets and other investments

financing activities - affect

borrowings and Equity

Interest Paid

Classified as operating or financing cash flow depending on the accounting policy applied consistently.

Interest Received

Usually classified as operating or investing cash flow depending on the nature of the entity and its policy.

Dividends Received

Usually classified as operating or investing cash flow depending on the entity’s policy.

Dividends Paid

Classified as financing cash flow because it represents a return to owners.

Consistency Requirement

The classification of interest and dividends must be applied consistently from period to period.

income taxes

Income tax cash flows are shown under operating activities unless linked to financing or investing.

cash flows excluded from the activities sections

Cash-equivalent movements and offsettable overdrafts aren’t shown in activities; foreign cash flows use spot rates, and exchange effects are reported separately for reconciliation.

general concept in the preparation of statement of cash flows

The statement of cash flows uses cash basis: it reports only cash transactions, excluding non-cash items which are disclosed separately.

when preparing of statement of cash flows

Include only cash transactions; exclude non-cash ones like buying assets with notes, shares, or debt-to-equity conversions.

presentation

a. direct method

b. indirect method

Direct Method

shows each major class of gross cash receipts and gross cash payments

Indirect Method

profit or loss is adjusted for the effects of non-cash items and changes in operating assets and liabilities.

Preferred Method

PAS 7 encourages the use of the direct method for presenting operating cash flows.

changes in ownership interests in subsidiaries

Cash flows from buying or selling subsidiaries that change control = INVESTING; if control doesn’t change = FINANCING.

Disclosures

a. Changes in financing liabilities (cash & non-cash)

b. Supplier finance arrangements

c. Cash and cash equivalents policy and changes

d. Components of cash and reconciliation with financial position

e. Restricted significant cash and management commentary