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IAS 7 CASH FLOW STATEMENT
What is a cash flow statement?
It is a financial statement that shows the changes in the cash position of a business over
a period of time. It shows the sources and uses of cash in a business.
The importance of statements of cash flow
They help users to assess liquidity and solvency an adequate cash position is essential
in the short term both to ensure the survival of the business and to enable debts and
dividends to be paid.
They help users to assess financial adaptability will the company be able to take
effective action to alter its cash flows in response to any unexpected events?
They help users assess future cash flows an adequate cash position in the longer
term is essential to enable asset replacement, repayment of debt and fund
further expansion.
Cash flow means survival a company may be profitable but, if it does not have an
adequate cash position, it may not be able to survive.
They help to highlight where cash is being generated – the statement of cash
flow will clearly detail cash that is being generated from the core activities of the
business and other non-operating activities.
Cash flows are objective a cash flow is a matter of fact whereas the calculation of
profit is subjective.
they help to indicate problems early.
The drawbacks of a statement of cash flows
The statement of cash flows is backward looking. Users of the accounts are
particularly interested in the future.
No interpretation of the statement of cash flows is provided within the accounts.
Users are required to draw their own conclusions as to the relevance of the
figures contained within it.
Non-cash transactions, e.g. a bonus issue of shares are not highlighted on the face of the
statement of cash flows (although they are disclosed elsewhere within the accounts).
These are of interest to users as they will impact future cash flows
This statement is required to be produced as part of a company’s financial statements.
The statement provides guidelines for the format of Cash Flow Statements. The
statement is divided into three categories:
1. Operating activities – the main revenue generating activities of the business,
together with the payment of interest and tax.
2. Investing activities – the acquisition and disposal of long term assets and other
investing activities.
3. Financing activities – receipts from the issue of new shares, payments for the
redemption of shares and changes in long term borrowings.
At the end of the statement the net increase in cash and cash equivalent is shown, both
at the start and end of the period under review. For this purpose:
Cash is defined as: cash on hand and demand deposits
Cash equivalents as: short term, highly liquid investments that can easily be converted
into cash. This is usually taken to mean money held in a term deposit account that can
be withdrawn within three months from the date of deposit.
Bank overdrafts - usually repayable on demand – are included as part of the cash and
cash equivalents.
Format of the Statement
1. Operating activities
The cash flow from operating activities is calculated as:
• Profit from operations (profit before deduction of tax and interest)
• Add: Depreciation charge for the year.
• Add: Loss on sale of non – current assets (or deduct gain on sale of non –
current assets).
• Less: Investment income
• Add or deduct changes in inventories, trade and other receivables or
payables
• Less: Interest paid
• Less: Taxes paid on income (usually corporation tax)
2. Investing activities This is calculated by including:
• Inflows from:
- proceeds from sale of non – current assets, both tangible and intangible,
together with other long – term non – current assets.
• Outflows from:
- cash used to purchase non – current assets, both tangible and intangible,
together with other long – term non – current assets.
• Interest received
• Dividends received
3. Financing activities
This is calculated by including:
• Inflows from:
- cash received from the issue of share capital
- raising or increasing loans
• Outflows from:
- repayment of share capital
- repayment of loans and finance lease liabilities.
• Dividends paid .
INDIRECT METHOD IAS 7
CASHFLOW FROM OPERATING ACTIVITIES $ $
Net profit before interest and tax/operating profit xxxx
Adjust for non cash item :
Depreciation + W2 xxx
Loss on disposal W4 / (profit) on disposalW3 xxx
Amortisation of assets/goodwill xxx xxxx
Cashflow before working capital changes xxx
(Increase)/decrease in inventories xxx
(Increase)/decrease in accounts receivable xxx
(Increase)/decrease in prepayments xxx
Increase/(decrease) in accounts payable xxx
Increase/(decrease) in accruals xxx xxx
xxx
Tax paid w6 xxx
Interest (paid w6) xxx
Dividend (paid w6) xxx
NET CASHFLOW FROM OPERATIONS A Xxxx
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from sale of property, plant & equipment (PPE) xxx
Purchase of PPE W1 (xxx)
NET CASH FLOW FROM INVESTING ACTIVITIES B XXX
CASHFLOW FROM FINANCING ACTIVITIES
Issues/(redemption) of shares xxx
Share premium xxx
(Redemption) /issues of debentures xxx
Drawing ( sole trader) (xxx)
NET CASH FLOW FROM FINANCING ACTIVITIES C XXX
Add cash and cash equivalents at start D XXX
CASH AND CASH EQUIVALENTS AT END (A+B+C+D=E) E XXX
NB () MEANS SUBTRACT
Allowable variations:
IAS 7 allows some flexibility in the way in which cash flow statements can be presented:
1. Cash flows from interest and dividends received and paid can be shown as
operating or investing or financing activities. Whichever is chosen must be
applied consistently.
2. Cash flows arising from taxes on income are always classified as operating
activities unless they can be specifically identified with financing and/or
investing activities
WORKINGS
Assets
Date Details $ Date Details $
Bal Bld XXX Disposal at cost XXX
Bank ( Purchase) W1 XXX Bal cld XX
XXX XXX
Provision for depreciation
Date Details $ Date Details $
Disposal XXX Bal bld XXX
Bal cld XXX Profit and loss XXX
W2
XXX XXX
Disposal Account
Date Details $ Date Details $
Asset XXX Provision XXX
Profit on disposal W3 XXX Cash/bank XXX
Loss on disposal W4 XXX
XXXX XXX
Tax/dividend/interest paid
Date Details $ Date Details $
Bank W6 XXX Bal bld XXX
Bal cld XXX Profit and loss XXX
XXX XXX
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