KAS 8 CASH FLOW STATEMENTS

EXPLANATORY NOTES
Explanatory Notes to Kosovo Accounting Standards are intended to provide additional
understanding of the Standards and technical guidance as to their use and application.
In case of any divergence between Explanatory Notes and Standards, the Standards
prevail.
1. The primary purpose of the Cash Flow Statement is to provide information about an
enterprises cash receipts and cash payments during the reporting period. A secondary
purpose is to provide insight into the enterprises investing and financing activities.
More specifically, the statement of cash flows should help investors and creditors
assess:
The enterprises ability to generate future positive cash flows;
The enterprises ability to meet obligations and pay dividends;
Reasons for differences between income and cash receipts and payments; and
Both cash and non-cash aspects of the enterprises investing and financing
transactions.
Presentation of the Cash Flow Statement
2. The Cash Flow Statement should report cash flows during the accounting period
classified by:
Operating activities;
Investing activities; and
Financing activities.
3. Kosovo Accounting Standards do not require a specific format for the Cash Flow
Statement, so an organization will classify and present activities in a way that is most
appropriate to its business. However, the classification and presentation of similar
activities must be consistent between reporting periods (KAS 8.5).
Operating Activities
4. The volume of cash flows arising from operating activities is a key indicator of the
organizations effectiveness in generating sufficient cash to repay loans, maintain the
entitys operating capability, pay dividends, and make new investments without
recourse to external sources of financing (KAS 8.7).
5.
Cash flows from operating activities are primarily derived from the principal
revenue-producing activities of the entity. Examples of the cash flows from operating
activities include:
Cash inflows
cash receipts from the sale of goods and
services
cash receipts from royalties (that is,
compensation for the use of patents,
copyrights, etc. by others), fees,
commissions and other revenue
decrease in inventories

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Cash outflows
cash payments to suppliers for goods and
services
cash payments to employees and for other
operating expenses
increase in inventories
payment of interest
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increase in current liabilities

payment of taxes
decrease in current liabilities

Investing Activities
6. The separate disclosure of cash flows arising from investing activities is important
because the cash flows represent the extent to which expenditures have been made for
resources intended to generate future income and cash flows (8.11). Examples of cash
flows arising from investing activities are:
Cash inflows
cash receipts from sales of land, plant and
equipment, intangibles and other longterm assets
cash receipts from sales of shares or debt
instruments of other enterprises (other
than payments for those instruments
classified as held for sale in accordance
with KAS 14)
cash receipts from repayment of advances
and loans made to entities
cash receipts for dividends and interest on
investments

Cash outflows
cash payments to acquire land, plant and
equipment, intangibles and other long-term
assets, payments related to capitalized
development costs, and also for selfconstructed plant and equipment
cash payments to acquire shares or debt
instruments of other enterprises (other
than payments for those instruments
classified as held for sale in accordance
with KAS 14, Financial Instruments)
cash advances and loans made to other
entities

Financing Activities
7. The separate disclosure of cash flows arising from financing activities is important
because it is useful in predicting claims on future cash flows by providers of capital to
the enterprise (8.12). Financing activities are activities that result in changes in the size
and composition of the reporting enterprises equity capital and borrowings. Examples
of cash flows arising from financing activities are:
Cash inflows
cash proceeds from issuing shares

Cash outflows
cash payments for redeeming the
enterprises shares
cash proceeds from issuing notes, bonds, repayment of loans (other than interest or
mortgages and other short or long-term creditor payments related to operating
borrowings
activities)
payments of dividends to shareholders
cash payments by a lessee for the
reduction of the outstanding liability
relating to a finance lease
Non-cash Transactions
8. Non-cash transactions that are of an investing or financing nature are not included
in the cash flow statement. These include the acquisition of fixed assets by long-term
credits or finance leases; settlement of accounts payable by non-cash means, such as
issuing and transferring additional shares to the creditors; or transfers between one
non-cash item and another.

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9. As examples, a company may acquire land and buildings by borrowing under a

long-term mortgage, or it can convert long-term bonds into common stock. These
transactions present rather common investing and financing activities, but they are not
reflected in the cash flow statement because they do not involve any movements in the
company's cash or cash equivalents. Instead, significant non-cash transactions such
as these should be disclosed separately elsewhere in the financial statements in a way
that provides all the relevant information about these investing and financing activities
(8.26).
Presentation Method
10. An enterprise should report cash flows from operating activities using the direct
method.
That is, by disclosing the major classes of gross cash receipts and gross cash
payments (8.13). Such information may be obtained either from the accounting records
or by adjusting sale proceeds, cost of sales, and other income statement items for:
a) changes that occurred in the reporting period in the balances of
inventories and operating receivables and payables; and/or
b) non-cash-items; and/or
c) other items that are reported as investing or financing cash flows, such as
interest income on investments.
Reporting on a Net Basis
11. An entity should report separately its major classes of gross cash receipts and
gross cash payments arising from its investing and financing activities, except in the
circumstances, described below, when they are reported on a net basis (8.16).
Reporting on a net basis means reporting only the calculated difference between cash
receipts and cash payments.
12. Cash flows resulted from operating, investing and financing activities are reported
on a net basis if these are cash receipts and payments (8.17):
a) on behalf of customers, such as when the cash flows reflect the activities of
the customer rather than those of the entity. For example the receipt and
payment of customer balances in a demand deposit account for a bank, or
rents collected on behalf of, and paid over to, the owners of the property;
b) for items in which the turnover is quick, the amount are large, and the
maturities are short. For example, the purchase and sale of very short-term
investments, and other short-term borrowings that have maturity periods of
three months or less.
Illustration of Cash flow Statement Preparation
13. Following is an illustration of the preparation of a cash flow statement based on
the balance sheet, income statement, and additional transaction information provided.
Balance Sheet
as of December 31, XXX1
Company A
31/12/X0

31/12/X1

Difference

Assets
Current assets:
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Cash
Accounts receivable
Inventory
Prepaid expense
Total current assets
Financial investments
Fixed assets
Accumulated Depreciation
Total fixed assets
Total assets

15,000
55,000
110,000
5,000
185,000
127,000
505,000
-68,000
437,000
749,000

Liabilities
Current liabilities:
Accounts payable
43,000
Accrued liabilities
9,000
Taxes payable
5,000
Total current liabilities
57,000
Long-term liabilities:
Bonds payable
245,000
Total liabilities
302,000
Equity :
Ordinary shares, 5 euro par 200,000
value
Paid in capital in excess of par 115,000
value
Retained earnings
132,000
Total equity
447,000
Total liabilities and equity
749,000

46,000
47,000
144,000
1,000
238,000
115,000
715,000
-103,000
612,000
965,000

31,000
-8,000
34,000
-4,000
53,000
-12,000
210,000
-35,000
175,000
216,000

Increase
Decrease
Increase
Decrease

50,000
12,000
3,000
65,000

7,000
3,000
-2,000
8,000

Increase
Increase
Decrease

295,000
360,000

50,000
58,000

Increase

276,000

76,000

Increase

189,000

74,000

Increase

140,000
60,500
965,000

8,000
158,000
216,000

Increase

Income Statement
for the year ended December 31, XXX1
Company A
Net sales
Cost of goods sold
Gross margin
Operation expenses (including depreciation of fixed assets
37,000 euro
Profit from ordinary activities
Other income and expenses from non-operating activities:
Interest expense
Interest income
Gain on sale of securities
Loss on sale of fixed assets
Total other income and expenses
Profit before taxes
Income taxes
Net profit

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Decrease
Increase
Increase

698,000
520,000
178,000
147,000
31,000
23,000
6,000
12,000
3,000
(8,000)
23,000
7,000
16,000

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The following other transactions, which are not related to operating activities, occurred
during the reporting period:
1. Purchased securities for a total amount of 78,000
2. Sold securities for 102,000. Book value for those securities was 90,000.
3. Purchased fixed assets in the amount of 120,000.
4. Sold fixed assets for 5,000. Original cost was 10,000, accumulated depreciation
totaled 2,000.
5. Issued 100,000 of bonds in a non-cash exchange for fixed assets.
6. Repaid 50,000 of bonds at maturity.
7. Issued 15,200 shares of 5 par value common shares for 150,000.
8. Paid dividends in the amount of 8,000.
Determining Cash flows from Operating Activities Using the Direct Method
14. The income statement does not disclose cash inflows and outflows because it is
prepared according to the accrual concept. Under accrual accounting, income is
recognized when earned, regardless of cash inflows, and expenses are recognized
when incurred, regardless of whether payment has been made.
15. To identify cash flows from operating activities it is necessary to convert items in
the income statement from the accrual basis to the cash basis. These calculated
adjustments recognize income only if it was received in cash, and recognizes expenses
only if they were paid.
1. Cash receipts from sale
Cash receipts from sales are reflected in the following formula:
Cash
receipts
from sales

Sales
(from the
Statement)

Income

+ Decrease in accounts receivable

or
- Increase in accounts receivable

Referring to the balance sheets and income statement for Company A, note that sales
were 698,000 and that accounts receivable decreased by 8,000. Thus, cash received
from sales is 698,000 + 8,000 = 706,000.
2. Cash receipts from interest and dividends
Cash receipts from interest and dividends are classified as cash flows from investing
activities (8.24), because they are returns on investments.
Based on the income statement, interest income equals 6,000. Because there is no
interest receivable shown on the latest Balance Sheet, 6,000 is the amount of interest
received in cash .
3. Cash payments for purchases
The amount of cash payments for purchases is calculated
formula:
+ Increase
in +
Cash
Cost
Inventory
Payments
= of Goods
or
for
Sold
- Decrease
in Purchases
(Income
Inventory
Statement)
(Balance Sheet)

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based on the following

Decrease in Accounts
Payable
or
Increase in Accounts
Payable
(Balance Sheet)

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Based on the financial statements, cost of goods sold is 520,000, inventory increased
by 34,000, and accounts payable increased by 7,000. Thus, cash payments for
purchases are: 520,000 + 34,000 - 7,000 = 547,000.
4. Cash payments for operating expenses
Cash payments for operating expenses are calculated using the following formula:
Cash
Payments
for
Operating
Expenses

Operating
Expenses
(Income
= Statement)

+ Increase in + Decrease
in
Prepaid
accrued
and
Expenses
current
or
liabilities
or
- Decrease
- Increase
in in Prepaid
Accrued
and
Expenses
other
current
liabilities
(Balance
Sheet)

(Balance
Sheet)

Depreciation
and other noncash
expenses

(Income
Statement)

According to the income statement, operating expenses (including depreciation of

37,000) were 147,000. On the balance sheet, prepaid expenses decreased by
4,000; and accrued liabilities increased by 3,000. Cash payments for operating
expenses are:
147,000 - 37,000 - 4,000 - 3,000 = 103,000
5. Cash payments for interest
Cash payments for interest are classified as operating activities. Based on the income
statement, interest payments are 23,000. Because there is no interest payable shown
on the latest Balance Sheet, 23,000 is the amount of interest paid in cash.
6. Cash payments for income taxes
The amount of cash payments for income taxes is calculated based on the following
formula:

Cash
=
payments
for
Income
Taxes

Income
Taxes
(Income
Statement)

+
-

Decrease in Income
Taxes
or
Increase in Income
Taxes
Payable
(Balance Sheet)

According to the income statement, income taxes for the reporting period were 7,000,
and according to the balance sheet, income taxes payable decreased by 2,000. Cash
payments for income taxes are calculated as follows: 7,000 + 2,000 = 9,000.
Cash flows arising from taxes on income should be separately disclosed and classified
as cash flows from operating activities unless they can be specifically identified with
financing or investing activities (8.25).
Determining Cash flows from Investing Activities
16. Investing activities are usually reflected in the balance sheet, in the "Long-term
Assets" section. Transactions that affect short- term investments are reflected in the
"Current Assets" section. Gains and losses from the sale of securities and fixed assets
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are reflected in the income statement. Not all of the information needed to calculate
cash flows from investing activities can be found directly in the income statement and
balance sheet but may be in the list of other transactions not related to ordinary
activities.
1. Investments
Additional information about other transactions, not related to ordinary activities, shows
that, during the reporting period, Company A purchased securities in the amount of
78,000. This was a cash outflow. Company A sold securities that cost 90,000 for
102,000, which resulted in a cash inflow of 102,000.
The decrease of 12,000 shown in the balance sheet under "Financial Investments",
can be reconciled as follows:
Financial Investments
Beginning balance
Purchases
Sales
Closing balance

127,000
78,000
(90,000)
115,000

2. Fixed assets
In the case of fixed assets, it is necessary to analyze both asset accounts and the
related accumulated depreciation accounts. Three items listed in the schedule of other
transactions affect fixed assets:
Purchase of fixed assets in the amount of 120,000 results in a cash outflow
Sale of a fixed asset that cost 10,000 with accumulated depreciation of
2,000 for 5,000 results in a cash inflow of 5,000.
Issuance of 100,000 in bonds in a non-cash exchange for fixed assets:
Although this transaction does not involve an inflow or outflow of cash, it is a
significant transaction involving an investing activity (the purchase of fixed
assets) and a financing activity (the issue of bonds payable). This transaction
is disclosed in the notes to the financial statements (8.26).
Increases of 210,000 and 35,000 are shown in the balance sheet under "Fixed
Assets" and "Accumulated Depreciation" and are reconciled as follows:
Fixed Assets
Beginning balance
Purchases
Non-cash purchases
Sale
Ending balance

505,000
120,000
100,000
-10,000
715,000

Accumulated Depreciation
Beginning balance
Depreciation expenses
Acc depreciation on asset sold
Ending balance

-68,000
-37,000
2,000
-103,000

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Determining Cash flows from Financing Activities

17. This section of the cash flow statement includes cash flows related to long-term
liabilities and stockholder's equity accounts, as well as information about the dividends
that have been paid.
1.
Bonds payable
The balance sheet shows that bonds payable increased by 50,000. This account is
affected by transactions 5 and 6 from the schedule of other transactions:
Issuance of bonds in a non-cash exchange for fixed assets;
Repayment of 50,000 of bonds at maturity results in an outflow of cash.
The increased of 50,000 in the balance sheet under "Bonds Payable" may be
reconciled as follows:
Bonds Payable
Beginning balance
Non-cash issue
Repayment
Ending balance

245,000
100,000
-50,000
295,000

2.
Common shares
According to the balance sheet, the account "Common Shares" increased by 76,000,
and "Paid-in Capital in Excess of Par Value" by 74,000 during the reporting period.
These changes are explained by transaction 7 from the schedule of other transactions,
in which Company A issued 15,200 shares of stock at a par value of 5 and sold them
for 150,000. This corresponds to changes in the equity accounts of the balance sheet:
(150,000 =76,000 + 74,000)
3. Retained earnings
A decrease of 8,000 is reflected in the balance sheet under "Retained Earnings". This
change is the result of two factors: net profit of 16,000, shown on the income
statement, and dividend payments of 8,000, per transaction 8 from the schedule of
other transactions.
The dividend payment is reflected in the cash flow statement as a cash outflow of
8,000. The interrelationship between the balance sheet, income statement and cash
flow statement relating to the "Retained Earnings" account may be demonstrated as
follows:
Retained Earnings
Beginning balance
Net income
Dividends
Ending balance

132,000
16,000
-8,000
140,000

Company A
Cash Flow Statement
For the year ended December 31, XXX1
Cash flows from operating activities
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Cash inflows:
Sales
Total receipts
Cash outflows:
Cash payments for purchases
Operating expenses
Interest paid
Income taxes
Total outflows
Net cash flows from operating activities
Cash flows from investing activities
Interest and dividends
Purchase of securities
Sale of securities
Purchase of fixed assets
Sale of fixed assets
Net cash flows used in investing activities
Cash flows from financing activities
Repayment of bonds
Issue of common shares
Dividends paid
Net cash flows from financing activities
Net increase (decrease) in cash
Cash at the beginning of year
Cash at the end of year

706,000
706,000
547,000
103,000
23,000
9,000
682,000
24,000
6,000
-78,000
102,000
-120,000
5,000
-85,000
-50,000
150,000
-8,000
92,000
31,000
15,000
46,000

Analysis
18. The enterprise generated net cash flows of 24,000 from operating activities and
92,000 from financing activities but used net cash flows of 85,000 in investing
activities. Referring back to paragraph 8.7, the amount of cash flows arising from
operating activities (24,000) did not generate sufficient cash flows to repay loans
(50,000), and make new investments (net amount of 96,000) without the need to rely
on external sources of financing (150,000).
Foreign Currency Cash Flows
19. Cash flows arising from transactions in a foreign currency should be recorded in an
enterprises reporting currency, using the exchange rate at the date of the cash flow
(8.19). Cash flows denominated in a foreign currency are reported in a manner
consistent with KAS 11, The Effect of Changes in Foreign Exchange Rates, which
permits the use of an exchange rate, for example a weighted average rate, that
approximates the actual rate (8.20).
Unrealized Gains and Losses
20. Unrealized gains and losses arising from changes in foreign currency exchange
rates are not cash flows (8.21). However, the effects of exchange rate changes on
cash and cash equivalents held or due in a foreign currency is reported in the cash flow
statement in order to reconcile cash and cash equivalents at the beginning and end of
the period. This amount is presented separately from cash flows from operating,
investing, and financing activities and includes the difference, if any, had those cash
flows been reported at end of period exchange rates.
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Extraordinary items
21. The cash flows associated with extraordinary items should be classified as arising
from operating, financing, or investing activities, as appropriate, and separately
disclosed (8.22). This is to enable users to understand their nature and effect on the
enterprises present and future cash flows and are in addition to the separate
disclosures of the nature and amount of extraordinary items required by KAS 5, Net
Profit or Loss for the Period, Fundamental Errors, and Changes in Accounting Policies.

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