PAS 7 STATEMENT OF CASH FLOWS  Under this method, information about major classes of gross cash

receipts and gross cash payments are presented.

Introduction
 Examples of cash flow from operating activities:
 The statement of cash flows provides information about the sources  Cash receipts from the sales of goods and the
and utilization (i.e., historical changes) of cash and cash equivalents rendering of services
during the period.  Cash receipts from royalties, fess, commissions, and
other revenue
DEFINITION OF TERMS:  Cash payments to suppliers for goods and services
 Cash- comprises cash on hand and cash in bank  Cash payments to and on behalf of employees
 Cash payments or refunds of income taxes unless
 Cash equivalents- are short term, highly liquid investments that are they can specifically identify with financing and
readily convertible to known amounts of cash and which are subject investing activities
to an insignificant risk of changes in value (PAS 7.6)  Cash receipts and payments from contracts held for
 Acquired within 3 months or less before maturity dealing or trading purposes
date.  Cash flows arising from the purchase and dealing or
Example: trading securities are classified as operating activities
1. 1-year treasury bill acquired 3 months before  Cash advances and loans made by financial
maturity date. institution are usually classified as operating
2. 3-month time deposit activities.
3. 90-day money market instrument or
commercial paper INVESTING ACTIVITIES

 Cash Flows- includes inflows (sources) and outflows (uses) of cash  Involve the acquisition and disposal of long-term (noncurrent) assets
and cash equivalents. and investments not included in cash equivalents.
 Investing activities includes:
CLASSIFICATION OF CASH FLOWS  Cash payments to acquire property, plant and equipment,
 Operating activities intangible and other long-term assets
 Investing activitiesyhh  Cash receipts from sales of property, plant, and equipment
 Financing activities intangible and other long-term assets.
 Cash payments to acquire equity or debt instruments of other
OPERATING ACTIVITIES: entities (current and long-term investments)
 Cash flows from operating activities primarily derived from the  Cash receipts from sales of equity or debt instruments of
principal revenue-producing activities of the entity. other entities
 Cash advances and loans to other parties other than advances
and loans made by financial institution

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  Cash receipts from repayment of advances and loans made to  The statement of cash flow is prepared using cash basis.
other parties  Under cash basis, income is recognized only when collected and
 Cash repayments for future contracts, forward contracts, expenses are recognized only when paid.
option contracts and swap contract  Accordingly, ONLY TRANSACTION THAT AFFECTED CASH
 Cash receipts from future contract, forward contract, option AND CASH EQUIVALENTS ARE REPORTED in the statement of
contract and swap contract cash flows.
 Statement of cash flows are strictly a cash concept.
FINANCING ACTIVITIES
 Financing activities are those that affect the entity’s equity capital  The following should be excluded:
and borrowing structure.
 Examples:  Acquisition of asset by assuming directly related liability
 Cash receipts from issuance of ordinary and preference  Acquisition of asset by issuing share capital
shares  Acquisition of asset by issuing bonds payable
 Cash payments to acquire treasury shares  Conversion of bonds payable into share capital
 Cash receipts from issuing debentures, loans, notes, bonds,  Conversion of preference shares into ordinary shares
mortgages, and other short or long-term borrowings
When preparing statement of cash flows:
 Cash payments for amounts borrowed
 Cash payments by a lessee for the reduction of the  INCLUDE only transaction that have affected cash and cash
outstanding principal lease liability equivalents (e.g., purchase of assets by paying cash).
 EXCLUDE transaction that have not affected cash and cash
Note: Cash payments settle such obligation as trade accounts and notes
equivalents (e.g., purchase of assets by issuing notes payable or
payable, income tax payable, accrued expenses are operating activities,
shares of stocks and conversion of debt to equity.
not financing activities.
INTEREST AND DIVIDENDS
PAS 7 paragraph 33, provides that interest paid and received shall be
Remember:
classified as operating cash flows because such items enter into
 OPERATING ACTIVITIES – affect profit or loss determination of net income or loss.
 INVESTING ACTIVITIES- affect non-current assets and other
ALTERNATIVELY, interested paid may be classified as financing cash
investments
flow because it is a cost of obtaining financial resources.
 FINANCING ACTIVITIES- affect borrowing and equity
ALTERNATIVELY, interest received may be classified as investing cash
flow because it is a return on investment
GENERAL CONCEPT IN THE PREPARATION OF STATEMENT OF
CASH FLOWS For a financial institution, interest paid and interest received are usually
classified as operating cash flows.

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 PAS 7 paragraph 33, provides that dividend received shall be classified as order to assist users in
operating cash flows because such items enter into determination of net assessing the entity’s ability
income. to pay dividends our of
operating cash flows.
ALTERNATIVELY, dividend received may be classified as investing cash
flow because it is a return on investment.
PAS 7 paragraph 34, provides that dividend paid shall be classified as
financing cash flow because it is a cost of obtaining financial resources.
 Only interest and dividends received or paid in cash are included in
ALTERNATIVELY, dividend paid may be classified as operating cash flow
the statement of cash flows.
in order to assists users to determine the ability of the entity to pay
 Only option 1 is available to financial institutions.
dividends our of operating cash flows.
 When answering CPA board questions wherein the problem is silent,
INCOME TAX it is presumed that the entity uses option 1.
PAS 7, paragraph 35. Provides that cash flows arising from income taxes PRESENTATION
shall be separately disclosed as cash flows from operating activities unless
Cash flow from operating activities may be presented using either:
they can be specifically identified with investing and financing activities.
a) DIRECT METHOD: shows each major class of gross cash
Tax cash flows are often difficult to match to the originating underlying receipts and gross cash payments; or
transaction, so most of the time all tax cash flows are classified as arising b) INDIRECT METHOD: profit or loss is adjusted for the
from operating activities. effects of non-cash items and changes in operating assets and
liabilities.
OPTION 1 OPTION 2
 Interest income, interest  Interest income and
expense, and dividend dividend income are
income are classified as classified as investing
operating activities because activities because they
they enter into the result from investments.
determination of profit or
loss (income and expensed)
 Dividend paid is classified  Interest expense is
as financing activity classified as financing
because it is a transaction activity because it results
with the owners and alters from borrowing
equity structure.
 Dividend paid is classified
as operating activity in

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