10/20/2022

PAS 7:
STATEMENT OF CASH FLOWS
CONCEPTS AND APPLICATION

OBJECTIVES
• DESCRIBE THE STATEMENT OF CASH FLOWS
• DIFFERENTIATING BETWEEN: OPERATING,
INVESTING AND FINANCING ACTIVITIES
• STATE THE CLASSIFICATIONS OF THE FOLLOWING
IN A STATEMENT OF CASH FLOWS: INTEREST
RECEIVED AND PAID, DIVIDENDS RECEIVED AND
PAID

INTRODUCTION

• PAS 7 prescribes the requirements in the presentation of statement of cash flows.

• It is a component of financial statements summarizing the operating, investing and
financing activities of an entity.
• Primary Purpose: Provide relevant information about cash receipts and cash
payments of an entity during a period.

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INTRODUCTION

• When use in conjunction with the rest of the financial statements, the statement of
cash flows helps users assess an entity’s:
o Ability to generate cash and cash equivalents
o Timing and certainty of the generation of cash flows, and
o Needs of the entity to utilize those cash flows
• Provide information on the quality of earnings of an entity. (E.g. Profit under accrual
basis but negative cash flows from its operating activities = Indication of difficulty in
collecting AR ~ Increase in default risk.

CASH AND CASH EQUIVALENT: CONCEPT

• Statement of Cash Flows is designed to provide information about the change in an

entity’s cash and cash equivalent:
• Cash – comprises cash on hand and demand deposits
• Cash equivalents – short-term highly liquid investments that are readily
convertible to known amount of cash and which are subject to an insignificant
risk of change in value
• PAS 7, paragraph 7: investment normally classifies as a cash equivalent only when
it has a short maturity of three months or less from date of acquisition.

CASH EQUIVALENT: EXAMPLES

• Three-month BSP Treasury Bill

• Three-year BSP Treasury Bill purchased three months before date of maturity
• Three-month time deposit
• Three-month money market instrument or commercial paper

• Equity securities cannot qualify as cash equivalents because shares do not have a
maturity date
• Bank overdrafts that cannot be offset to cash are presented as financing activities.
• Bank overdrafts that can be offset to cash (or are part of an entity’s cash
management) forms part of the balance of cash and cash equivalents and therefore
not presented separately in the activities sections.

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CASH FLOW CLASSIFICATIONS: GENERAL

• Cash flows are inflows and outflows of cash and cash equivalents
• Classifications:
1. Operating Cash Flows
2. Investing Cash Flows
3. Financing Cash Flows

Operating Cash Flows: Concept

• Operating Cash Flows: cash flows derived primarily from the principal revenue
producing activities of the entity.
o In other words, operating activities generally result from transactions and other
events that enter into the determination of net income or loss (i.e. included in the
income statement)

Operating Cash Flows: Examples

1. Cash receipts from sale of goods and rendering of services

2. Cash receipts from royalties, rentals, fees, commissions and other revenue
3. Cash Payments to suppliers for goods and services
4. Cash payments for selling, administrative and other expenses
5. Cash receipts and payments of an insurance enterprise for premiums and claims,
annuities and other policy benefits
6. Cash payments or refunds of income taxes unless they can be specifically identified
with financing and investing activities
7. Cash receipts and payments for securities held for dealing or trading purposes
-cash advances and loans made by a financial institution are usually classified as
operating activities

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Investing Cash Flows: Concept

• Investing Cash Flows: cash flows derived from the acquisition and disposal of long-
term assets and other investments not included in cash equivalent.
o Includes cash flows from transactions involving non-operating assets.

Investing Cash Flows: Examples

1. Cash payments to acquire property, plant and equipment, intangibles and other
long-term assets.
2. Cash receipts from sales of property, plant and equipment, intangibles and other
long-term assets.
3. Cash payments to acquire equity or debt instruments of other entities and interests
in joint venture.
4. Cash receipts from sales of equity or debt instruments of other entities and interests
in joint venture.
5. Cash advances and loans to other parties other than advances and loans made by
financial institution.
6. Cash receipts from repayment of advances and loans made to other parties.
7. Cash payments and/or receipt from future contract, forward contract, option
contract and swap contract.

Financing Cash Flows: Concept

• Investing Cash Flows: cash flows derived from the equity capital and borrowings of
the entity.
• In other words, financing activities are the cash flows that result from transactions:
a. Between the entity and the owners – equity financing
b. Between the entity and the creditors – debt financing
• Financing activities include the cash flows from transactions involving nontrade
liabilities and equity.

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Financing Cash Flows: Examples

1. Cash receipts from issuing shares or other equity instruments for example,
issuance of ordinary and preference shares.
2. Cash payments to owners to acquire or redeem the enterprise’s shares, for
example, payment for treasury shares.
3. Cash receipts from issuing debentures, loans, notes, bonds, mortgages, and other
short or long term borrowings.
4. Cash payments for amounts borrowed.
5. Cash payments by a lessee for the reduction of the outstanding principal lease
liability

Non-Cash Transactions

PAS 7, P.43, provide that investing and financing transactions that do not require use of
cash or cash equivalents shall be excluded from the statement of cash flows.
Statement of cash flows is strictly a cash concept.
Non-cash transactions shall be disclosed elsewhere in the financial statements either
in the notes to financial statements or in a separate schedule or in a way that provides
all relevant information about these transactions.
1. Acquisition of asset by assuming directly related liability
2. Acquisition of asset by means of issuing share capital
3. Conversion of bonds payable to share capital
4. Conversion of preference share to ordinary share

Interest and Dividends

CASH FLOWS OPTION 1 OPTION 2

Interest Income Received Operating Activity Investing Activity
Interest Income Paid Operating Activity Financing Activity
Dividend Income Received Operating Activity Investing Activity
Dividend Income Paid Financing Activity Operating Activity

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Operating Activities: Direct Method

• PAS 7, P18, provides that an entity shall report cash flows from operating activities
using either the direct or indirect method.
• The Direct Method shows in detail or itemizes the major classes of gross cash
receipts and gross cash payments .
• It is tantamount to the cash basis income statement.

Operating Activities: Indirect Method

• Indirect method means that net income or loss is adjusted for the effects of
transactions of a noncash nature, any deferrals or accruals of past or future
operating cash receipts and payments, and items of income or expenses associated
with investing and financing activities.
• It starts with the accrual basis net income and applies a series of adjustments to
convert the income to a cash basis.

Operating Activities: Indirect Method

Adjustment(s):
• All increases in trade noncash current assets are deducted from net income.
• All decreases in trade noncash current assets are added to net income.
• All increases in trade current liabilities are added to net income.
• All decreases in trade current liabilities are deducted from net income.
• Depreciation, amortization and other noncash expenses are added back to net income to eliminate
the effect on net income
• Any gain on disposal of property or gain on early retirement of nontrade liabilities is included in net
income but it is a non-operating item. Thus, this is deducted from net income.
• Any loss on disposal of property or loss on early retirement of nontrade liabilities is deducted from net
income but this is a non-operating items. Thus, this is added back to net income.
• Other noncash income or gain is deducted from net income and other noncash expense or loss is
added to net income to eliminate the effect on net income.

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Operating Activities: Basis of Illustration

Operating Activities: Basis of Illustration

Operating Activities: Basis of Illustration

• Compute for the Cash flow Operating Activities using the Direct and
Indirect Method.

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