Statement of cash flows (IAS7) - W5

Explain what a net cash flow is?

It is the difference between total cash coming in and the cash going out over a period.

Why does IAS7 require companies to produce a statement of cash flows?

The users of financial statements need to see that the business has generated positive cash flows during the year.

What is an example of a statement of cash flows?

What is the IAS7 definition for cash?

Cash on hand and demand deposits

What is the IAS7 definition for cash equivalents?

Short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to insignificant risk of changes in value.

What are the 3 activities cash flows are classified into?

1. Operating activities

2. Investing activities

3. Financing activities

What are operating activities?

Revenue producing activities

• The companys core business activities

What are some examples of operating activities?

• Receipts from the sale of goods and services

• Cash receipts from royalties, fees, commissions and other revenue

• Cash payments to suppliers for goods and services

• Cash payments to and on behalf of employees

• Cash payments or cash refunds of taxes unless specifically identified with investing or financing activities

What are investing activities?

They consist of the acquisition and disposal of long term assets and other investments not included in cash equivalents

• Aka non current assets ( long term)

What are some examples of investing activities?

• Cash payments to acquire PPE or other long-term assets

• Cash receipts from the sale of PPE or other long-term assets

• Cash payments to acquire shares or debt instruments of other entities

• Cash receipts from the sale of shares or debt instruments of other entities

• Cash advances and loans made to other parties

• Cash receipts from the repayment of advances and loans made to other parties

What are financing activities?

activities that result in changes in the size and composition of the contributed equity and borrowings of the entity

• Aka how the company funds have been raised ( equity vs debt financing)

What are some examples of financing activities?

• Cash proceeds from issuing shares

• Cash payments to owners to acquire or redeem the entity’s own shares

• Cash proceeds from issuing debentures, loans and other borrowings

• Cash repayments of amounts borrowed

• Cash payments by a lessee for the reduction of the outstanding liability relating to a lease

What is the standard layout for a statement of cash flow?

How can we report cash flows from operating activities?

• Direct method

• Indirect method

What is the direct method

Major classes of receipts and payments arising from operating activities are disclosed individually

What is the indirect method?

1. Begins with the profit or loss for the period (before tax)

2. then makes several adjustments to calculate the total amount of cash generated from operations

What are the 4 steps to the indirect method of operating activities?

1. Start off with profit before tax

2. Then account for the impact of transactions of a non cash nature ( + non cash expenses , - non cash expenses)

3. Account for changes in working capitals ( inventory, receivables,payables)

4. Account for income or expense which are not derived from operating activities

Are increase in payables good or bad?

• ADD any increase in payables

Are increases in receivables good or bad?

BAD

• ADD any decrease in receivables, because customers have paid up, so it is a source of funds

• DEDUCT any increase in receivables

Are increases in inventory good or bad?

BAD

• ADD any decrease in inventory, because inventory has been sold meaning more money in the bank

• DEDUCT any increase in inventory, because money has been paid for the items & remains tied up within them.

What is the basic structure for operating activities using the indirect method?