ias 7 : statement of cash flows - wirc-icai.org1].pdf · how statement of cash flow is important ?...

IAS 7 : STATEMENT OF CASH FLOWS

COMPILED BY: MR. YAGNESH DESAI.

TERMINOLOGYCASH FLOWS :

Inflows and outflows of cash and cash equivalents.

CASH :Comprises cash on hand and demand deposits.

CASH EQUIVALENTS :Short-term, highly liquid investments which are

readily convertible to known amounts of cash subject to insignificant risk of value changes. Time ?


Bank Overdraft ???


Generally BOD not classified as Cash Equivalents .

Often bank Overdraft repayable on demand form integral part of an entity’s cash management.

Thus. Bank overdrafts are included as a component of cash & cash equivalent. (IAS 7.8)

Split


A single transaction may include cash flows that are classified differently.

For example, when the cash repayment of a loan includes both interest and capital, the interest element may be classified as an operating activity and the capital element is classified as a financing activity.

Gross or Net


An entity shall report separately major classes of gross cash receipts and gross cash payments arising from investing and financing activities,

Except

Para 22 Cash flows arising from the following operating, investing or financing activities may be reported on a net basis:

(a)cash receipts and payments on behalf of customers when the cash flows reflect the activities of the customer rather than those of the entity; and

(b) cash receipts and payments for items in which the turnover is quick, the amounts are large, and the maturities are short.

Examples Para 22 (a)


(a) the acceptance and repayment of demand deposits of a bank;

(b) funds held for customers by an investment entity; and

(c) rents collected on behalf of, and paid over to, the owners of properties.

Examples Para 22 (b)


(a) principal amounts relating to credit card customers;

(b) the purchase and sale of investments; and

(c) other short-term borrowings, for example, those which have a maturity period of three months or less.

Gross or Net ?


Cash flows arising from each of the following activities of a financial institution may be reported on a net basis:

(a) cash receipts and payments for the acceptance and repayment of deposits with a fixed maturity date;

(b) the placement of deposits with and withdrawal of deposits from other financial institutions; and

(c) cash advances and loans made to customers and the repayment of those advances and loans.

What about Unrealised gains or Losses ?


Please Answer & What about translation Effect ?

Answer To Slide


Unrealised gains and losses arising from changes in foreign currency exchange rates are not cash flows. However, the effect of exchange rate changes on cash and cash equivalents held or due in a foreign currency is reported in the statement of cash flows in order to reconcile cash and cash equivalents at the beginning and the end of the period.

FURTHER CLASSIFICATION

• The term cash and cash equivalents have been further classified :


Non Cash Transactions


To Be Excluded :(a) the acquisition of assets either by assuming directly related liabilities or by means of a finance lease;

(b) the acquisition of an entity by means of an equity issue; and

(c) the conversion of debt to equity.

How Statement of Cash Flow is Important ?


It also enhances the comparability of the reporting of operating performance by different entities because it eliminates the effects of using different accounting treatments for the same transactions andevents.

TYPES OF CASH FLOWSThe statement of cash flows shall report cash flows during the period classified by:

It allows users to assess the impact of those activities on the It allows users to assess the impact of those activities on the financial financial position of the entity and the amount of cash & its equivalents.position of the entity and the amount of cash & its equivalents.


OPERATING ACTIVITIES

• The principal revenue-producing activities of the entity and other activities that are not investing and financing.

• Operating activities generally involve producing and delivering goods and providing services.


ELEMENTS OF OPERATING CASH FLOW

DESCRIPTION OF ELEMENTS OF OPERATING CASH FLOWS IN IAS 7

Cash receipts from sale of goods and rendering services.

Cash receipts from royalty, fees, commissions and other revenue.

Cash payments to suppliers for goods and services.

Cash payments to and on behalf of employees.

Cash receipts and payments by an insurance enterprise for premiums and claims, annuities and other policy benefits.

Cash payments and refunds of income-taxes unless these are specifically identified as cash flow from financing or investment.

Cash receipts and payments relating to contracts held for dealing or trading purposes.

Cash flow arising from dealing in securities when an enterprise holds securities for such purposes.

Cash advances and loans made by financial institutions.

INVESTMENT ACTIVITIES

• The acquisition and disposal of long-term assets and other investments not included in cash equivalents. [ Para 6, IAS-7 ]


OPERATING CASH FLOWS

• Cash advances and loans made by financial institutions includes all contracts held for trading purposes.

• Profit or loss arising from trading is merged in the sale proceeds of the asset classified as cash flow from investment activities.

• However, assets taken or given on rent is part of operating activities.


ELEMENTS OF INVESTING CASH FLOW


ELEMENTS OF INVESTING CASH FLOW COVERED IN PARA 16 OF IAS 7

Cash payments to acquire long-term assets.

Cash receipts from long-term assets.

Cash payments for acquisition of equity and debt instruments of other enterprises and interest in joint ventures.

Cash advances and loans made to other parties.

Cash payments for future, forward, option and swap contracts.

Cash receipts for acquisition of equity and debt instruments of other enterprises and interest in joint ventures.

Cash receipts from loans and advances made to other parties.

Cash receipts from future, forward, option and swap contracts.

FINANCING ACTIVITIES

• Activities that result in changes in the size and composition of equity capital and borrowings of the enterprise.


ELEMENTS OF FINANCING CASH FLOW

ELEMENTS OF FINANCING CASH FLOW COVERED IN PARA 17 OF IAS 7

Cash proceeds from issuing shares or other equity instruments.

Cash payments to owners to acquire or redeem the entity’s shares.

Cash proceeds from issuing short-term and long-term borrowings.

Cash repayments of amounts borrowed.

Cash payments by a lease for the reduction of the outstanding liability relating to a finance lease.


CASH FLOW FROM OPERATING ACTIVITIES

Operating cash flow can be derived either in pursuance of :

1. Direct method.

2. Indirect method.


REPORTING• IAS 7 (Para 18) requires an entity to report cash

flows from OPERATING ACTIVITIES using either :


DIRECT METHODCASH RECEIPTS CASH PAYMENTS

Cash sales & cash collection = sales + opening balance of receivables – closing balance of receivables.

Cash purchase of raw materials= [raw material consumed + closing stock – opening stock] + opening creditors – closing creditors.

Cash purchase of finished goods= [goods sold+ closing stock – opening stock] + opening creditors – closing creditors.

Payment to & on behalf of employees = wages & salaries + closing o/s balance – opening o/sbalance.

Payment of expenses = expensesincurred + opening o/s balance -closing o/s balance.

INDIRECT METHODPROFIT BEFORE TAX AMOUNT

ADD : Depreciation & Amortization of non-cash item.Interest.Lease rental of financial lease.

LESS :Interest & dividend received.Lease rental received of financial lease.Advance tax paid.

ADD/LESS :

working capital adjustments COMPILED BY: MR. YAGNESH

DESAI.

ILLUSTRATION• Extracts from the draft financial statements of Delta for the year

ended 31st December 2007, are set out below :

Revenue 250,000

Cost of sales Opening inventory 30,000

Purchases 218,000

Closing inventory (52,000)

(196,000)

Gross profit 54,000

Other operating expenses (21,600)

Profit from operations 32400

STATEMENT OF COMPREHENSIVE INCOMESTATEMENT OF COMPREHENSIVE INCOME CUCU CUCU

ILLUSTRATIONSTATEMENT OF FINANCIAL POSITION EXTRACTS

31ST

December, 2007

31st

December, 2006

CU CUTrade receivables 68,000 23,000

Trade payables 21,600 42,800

ILLUSTRATION• Direct method :PARTICULARS CUCash from customer [250,000+(23,000 – 68,000)]

205,000

Cash to suppliers [218,000+(42,800-21,600)]

(239,200)

Other cash operating expenses (21,600 – 11,000)

(10,600)

Cash outflow from operating activities

(44,800)

ILLUSTRATION• Indirect method :

Profit from operating activity 32,400

Depreciation charge 11,000

Increase in inventory (52,000-30,000)

(22,000)

Increase in trade receivables(68,000-23,000)

(45,000)

Decrease in trade payables(21,600-42,800)

(21,200)

Cash outflow from operating activities.

(44,800)

INTEREST & DIVIDENDCLASSIFICATION :

o Para 31, IAS 7 requires that cash flows from interest and dividends received and paid shall each be disclosed separately. Para 32 – disclosure regardless of Capitalisation.

o Each shall be classified in a consistent manner from period to period as either operating, investing or financing activities.


Interest – Dividend


Interest Paid & Interest and dividend received – classified as Operating

Alternatively Interest Paid & Interest and dividend received may be classified as Financing cash Flows and Investing cash Flows Respectively.

Changes in ownership interests in subsidiaries and other businesses


The aggregate cash flows arising from obtaining and losing control of subsidiaries or other businesses shall be presented separately and classified as Investing Activities.

Cash flows arising from changes in ownership interests in a subsidiary that do NOT result in a loss of control shall be classified as cash flows from Financing Activities. Para 42A

TREATMENT OF TAXES ON INCOME

• Para 35 of IAS 7 requires an entity to classify cash flows from taxes on income as cash flows from operating activities and disclose separately unless they can be specifically identified with financing or investing.

• An entity has to disclose total amount of taxes paid when tax cash flows are allocated over more than one class of activity.


CASH FLOWS – Foreign Currency Transactions

AS per IAS 21 Transactions in Foreign Currency – Recorded in Entity’s Functional Currency by applying currency rate at the date of cash flow.


INVESTMENTS• ASSOCIATE OR SUBSIDUARY :

When an entity accounts for its investment in an associate or subsidiary applying equity or cost method, it shall only consider cash flows between itself and the investee.

Example : Dividends and Advances.


DISCLOSURES


ias 7 : statement of cash flows - wirc-icai.org1].pdf · how statement of cash flow is important ?...

Documents