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IAS 7 Statement of Cash Flows

The statement of cash flows summarizes the inflows and outflows of cash and cash equivalents during a specific period, detailing cash flows from operating, investing, and financing activities. It includes cash in hand and cash equivalents like short-term investments, while outlining methods for calculating cash flows, including adjustments for non-cash items and working capital changes. Key classifications for cash flows are provided, including how to handle interest and dividends paid or received.

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9 views2 pages

IAS 7 Statement of Cash Flows

The statement of cash flows summarizes the inflows and outflows of cash and cash equivalents during a specific period, detailing cash flows from operating, investing, and financing activities. It includes cash in hand and cash equivalents like short-term investments, while outlining methods for calculating cash flows, including adjustments for non-cash items and working capital changes. Key classifications for cash flows are provided, including how to handle interest and dividends paid or received.

Uploaded by

Mahad Farid
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Statement of cash flows:

Statement of cash flows reports inflows and outflows of cash during the period.
Statement of cash flows reports change in amount of cash and cash equivalents held by the business
during the period.
Cash includes cash in hand. (+)
Cash equivalents:
Cash equivalents are short-term, highly liquid investments that are readily convertible to cash and are
subject to an insignificant risk of changes in value.
Examples:

• Bank deposit (+)


• Short-term investments with a maturity of three months or less (+)
Bank overdrafts, which are repayable on demand, are part of cash and cash equivalents. (-)

Sections of statement of cash flows:

1) Cash flows from operating activities


2) Cash flows from investing activities
3) Cash flows from financing activities

Operating activities are normal trading activities of the entity.

Investing activities are defined as the purchase and disposal of non-current assets and investments
that are no included in cash equivalents.

Financing activities result in changes in the size of equity and borrowings of the entity.

Cash flows from operating activities: (Indirect method)

Profit before tax (after deducting interest expense from PBIT) xx


Adjustments for non-cash/non-operating items:
Depreciation and amortization xx
Loss/gain on disposal xx/(xx)
Bad debts xx/(xx)
Interest expense xx
Profit before working capital changes xx
Working capital changes:
(Increase)/decrease in current assets
Trade receivables (Gross) (xx)/xx
Inventory (xx)/xx
Prepaid rent (xx)/xx
Increase/(decrease) in current liabilities
Trade payables xx/(xx)
Insurance payable xx/(xx)
Cash generated from operations xx
Interest paid (xx)
Tax paid (xx)
Net cash inflow/(outflow) from operating activities xx/(xx)
Important:

• There are two ways to deal with Provision for bad debts:
1) Gross receivables (Adjust profit for movement in provision in non-cash items and
adjust profit for movement in receivables using gross in working capital changes)
2) Net receivables (Deduct opening provision from opening receivables and closing
provision from closing receivables, then adjust profit for movement in receivables
using net amounts in working capital changes)
• Classification of:
1) Interest paid (Shown as an outflow either in operating activities or in financing
activities, suggested approach is to show in operating activities)
2) Dividend paid (Shown as an outflow either in financing activities or in operating
activities, suggested approach is to show in financing activities)
3) Interest/dividend received (Shown as an outflow either in investing activities or in
operating activities, suggested approach is to show in investing activities)
4) Tax paid (Shown as an outflow in operating activities)
• Movement of interest payable & tax payable are excluded from working capital changes,
because they are dealt separately in statement of cash flows

Cash flows from operating activities: (Direct method)

Cash received from customers (cash sales + cash from credit sales) xx
Cash paid for purchases (cash purchases + cash paid for credit purchases) (xx)
Cash paid for wages and salaries (xx)
Cash paid for other operating expenses (xx)
Cash generated from operations xx
Interest paid (xx)
Tax paid (xx)
Net cash inflow/outflow from operating activities xx/(xx)

Cash flows from investing activities

Cash paid for purchase of non-current assets (xx)


Cash received from sale of non-current assets xx
Dividend received xx
Cash paid for purchase of investments (xx)
Cash received from sale of investments xx
Net cash inflow/(outflow) from investing activities xx/(xx)

Cash flows from financing activities

Cash received from issue of shares (including share premium) xx


Cash from new loan xx
Repayment of loan (xx)
Dividend paid (xx)
Net cash inflow/(outflow) from financing activities xx/(xx)

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