ifrs chapter_21 statements of cash flows

7/28/2019 IFRS Chapter_21 Statements of Cash Flows

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Chapter 21

Statement of cash flowswww.xisu.edu.cn
http://www.xisu.edu.cn/http://www.xisu.edu.cn/


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Contents

1. IAS 7 statement of cash flows

2. Preparing a statement of cash flows

3. Interpretation of statements of cash flows


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Accounting standards

Accounting standards: IAS 7


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IAS 7 Cash flow statements

Objective of IAS7

The objective of IAS7 is to ensure that allenterprises provide information about thehistorical changes in cash and cashequivalents by means of a cash flowstatement which classifies cash flows i.e.inflows and outflows of cash and cashequivalents during the period betweenthose arising from operating, investing

and financing activities.


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A cash flow statement demonstrates the

points that:

(a) Provides information on business activities

(b) Helps to assess the current liquidity of thebusiness

(c) Highlights the major cash inflows and outflowsof the business

(d) Helps the user to estimate future cash flows

(e) Distinguishes between trading cash flows andother types of cash flow

(f) Removes accrual accounting from financialinformation


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Key Definition

Cash comprises cash on hand anddemand deposits

Cash equivalents are short-term ,high

liquid investments that are readilyconvertible to known amounts of cashand which are subject to an insignificantrisk of changes in value.

Cash flows are inflows and outflows ofcash and cash equivalents.


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Key Definition

Operating activities are principalrevenue-producing activities of theentity and other activities that are notinvesting or financing activities.

Investing activities are the acquisitionand disposal of non-current assets andother investments not included in cashequivalents.

Financing activities are activities that

result in changes in the size andcomposition of the equity capital andborrowings of the entity.


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Operation activities

Cash flow from the operation activitieswill be those items which determine the

net profit or loss of the activities.

(a) cash receipts from the sale of goodsand the rendering of services

(b) cash payments to suppliers for goodsand services


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Investment activities

Investment activities show theinvestments in assets which will generatefuture profit and cash flows.

(a) cash payments to acquire shares or

debentures of other entities.(b) cash receipts from the repayment ofadvantages and loans made to otherparties.

(c) cash receipts from the repayment ofadvances and loans made to other parties.


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Financing activities

Financing activities is an indicator oflikely future interest and invest and

dividend payments.(a) cash proceeds from issuing shares .

(b) cash payments to owners to acquire or

redeem the entitys shares.(c) principal repayments of amountsborrowed under finance lease.


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Example :finance lease rental

The notes to the financial statements of Hayley Co. show thefollowing in respect of obligations under finance leases.

Year ended 30 June 20*5 20*4

000 000

Amounts payable within one year 12 8

Within two to five years 110 66

122 74

Less finance charges allocated to future periods (14) (8)

108 66

Interest paid on finance leases in the year to 30 June 20*5amounted to 6m.addions to tangible non-current assets

acquired under finance lease were shown in the non-current assetnote at 56,000

Required

Calculate the capital repayment to be shown in the statement of cashflows of Hayley Co. for the year to 30 June 20*5.


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Solution

obligations under finance leases

000

Capital repayment (bal fig) 14

Bal 30.6.*5 108122

000

Bal 1.7.*4 66

Additions 56122


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Reporting cash flow methods

The standard offers a choice of method for thispart of the statement of cash flows.

Direct method: disclose major classes of grosscash receipts and gross cash payments

Indirect method: net profit or loss is adjustedfor the effects of transactions of a non-cashpayments, and items of income or expenseassociated with investing or financing cash flows.

The direct method is the preferred methodbecause it discloses information , not availableelsewhere in the financial statements, whichcould be of use in estimating future cash flows.


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The indirect methodThe net profit or loss for the period is adjustedfor the following:

(a) Changes during the period in inventories,operating receivables and payables.

(b) Non-cash items, eg depreciation , provisions,profits/loss on the sales of assets.

(c) The cash flows from which should be classifiedunder investing or financing activities.

The direct method is encouraged where thenecessary information is not too costly toobtain ,but IAS7 does not require it, in practicethe indirect method is more commonly used,since it is quicker and easier.


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Cash flow from operating activities (indirect method)

Cash flow from operating activities Profit before taxation Adjustment for :Depreciation Foreign exchange loss Investment income ()Interest expense

Increase in trade and other receivables ()Decrease in inventories Decrease in trade payables ()

Cash generated from operations Interest paid ()Income taxes paid ()Net cash from operating activities


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Why certain items are added and others

subtracted .(a) depreciation is not a cash expense, but isdeducted in arriving at profit, it makes sense,therefore, to eliminate it by adding it back

(b) by the same logic , a loss on a disposal of a

non-current asset (arising through underprovision of depreciation) needs to be added backand a profit deducted.

(c) an increase in inventories means less cash-youhave spent cash on buying inventory.

(d) an increase in receivables means the companysdebtors have not paid as much, and thereforethere is less cash.

(e) if we pay off payables, causing the figure todecrease, again we have less cash.



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Interest and dividendsCash flows from interest and dividendsreceived and paid should each bedisclosed separately.

Dividends paid by the entity can beclassified in one or two ways:(a) as a financing cash flow, showing thecost of obtaining financial resources.

(b) as a component of cash flows fromoperating activities so that users canassess the entitys ability to pay dividendsout of operating cash flows.


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Taxes on income

Cash flows arising from taxes on incomeshould be separately disclosed and shouldbe classified as cash flows from operating

activities unless they can be specificallyidentified with financing and investingactivities.


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Components of cash and cash

equivalents

The components of cash and cashequivalents should be closed and a

reconciliation should be present, showingthe amounts in the statement of cashflows reconciled with the equivalent itemsreported in the statement of financial

position


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Other disclosures

All entities should disclose, together with acommentary by management ,any otherinformation likely to be of importance, forexample:

(a) restrictions on the use of or access to any partof cash equivalents

(b) the amount of undrawn borrowing facilitieswhich are available

(c) cash flows which increased operating capacity

compared to cash flows which merely maintainedoperating capacity

(d) cash flows arising from each reported industryand geographical segment.


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Cash flow statements (direct method)

STATEMENT OF CASH FLOWS (DIRECT METHOD)YEAR ENDED 31 DECEMBER 20*7m m

Cash flows from operating activitiesCash receipts from customers 30,330Cash paid to suppliers and employees (27,600)

Cash generated from operations 2,730Interest paid (270)Income taxes paid (900)Net cash from operating activities 1,560Cash flows from investing activitiesPurchase of property, plant and equipment (900)

Proceeds from sales of equipment 20Interest received 200Dividends received 200Net cash used in investing activities (480)


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m m

Cash flows from financing activitiesProceeds from issue of share capital 250

Proceeds from long-term borrows 250

Dividend paid (1290)

Net cash used in financing activities (790)

Net increased in cash and cash equivalents 290Cash and cash equivalents at beginning of period (Note) 120

Cash and cash equivalents at end of period (Note) 410


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Cash flow statements (indirect method)

STATEMENT OF CASH FLOWS (INDIRECT METHOD)YEAR ENDED 31 DECEMBER 20*7Cash flows from operating activities m mProfit before taxation 3,570Adjustments for:Depreciation 450

Investments income (500)Interest expense 400

3920Increase in trade and other receivables (500)Decrease in inventories 1050Decrease in trade payables (1740)

Cash generated from operations 2730Interest paid (270)Income taxes paid (900)Net cash from operating activities 1560


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m m

Cash flows from investing activitiesPurchase of property, plant and equipment (900)

Proceeds from sale of equipment 20

Interest received 200

Dividends received 200

Net cash used in investing activities (480)Cash flows from financing activities

Proceeds from issue of share capital 250

Proceeds from long-term borrowings 250

Dividends paid (1290)

Net cash used in financing activities (790)Net increase in cash and cash equivalents 290

Cash and cash equivalents at beginning of period 120

Cash and cash equivalents at beginning of period 410


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Preparing a statement of cashflows

We should learn the format and apply the steps

noted in the example .note that the followingitems are treated in a way that might seemconfusing, but the treatment is logical if youthink in terms of cash.

(a) increase in inventory is treated as negative

(in brackets). This is because it represents a cashoutflow; cash is being spent on inventory.

(b) an increase in receivable would be tread asnegative for the same reasons; more receivables

means less cash. (c) by contrast an increase in payable is

positive because cash is being retained and notused to settle accounts payable. There istherefore more of it.


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Preparation of a statement of cashflows

Example: KANE CO

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER20*2 20*1000 000

Non-current assets 1,596 1,560Cost (318) (224)Depreciation 1,278 1,336

Current assets 24 20Inventory 76 58Trade receivables 48 56Bank 148 134

Total assets 1,426 1,470Equity and liabilities

Equity 360 340Share capital 36 24Share premium 716 514Retained earnings 1,112 878


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Example :

Non-current liabilities 200 500Long-term loans

Current liabilities 12 6

Trade payables 102 86

Taxation 114 92

1,426 1,470

Total equity and liabilities

Dividends paid were 66,000

During the year, the company paid 90,000 for a new piece ofmachinery

Required

Prepare a statement of cash flows for Kane Co for the year ended

31 December 20*2 in accordance with the requirements of IAS7,using the indirect method.


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Step to solve the problem

STEP 1 set out the Performa statement of cashflows with the headings required by IAS7.

STEP2 begin with the cash flows from operatingactivities as far as possible.

STEP3 calculate the cash flow figures forpurchase or sale of non-current assets, issue ofshares and repayment of loans if these are notalready given to you .

STEP4 if you are not given the profit figure, open

up a working for profit or loss. STEP5 you will be now be able to complete the

statement by slotting in the figures given orcalculated.


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Solution:KANE CO

STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER20*2000 000

Cash flows from operating activitiesProfit before tax 392Depreciation charges 118

Loss on sale of tangible non-current assets 18Interest expense 28Increase in inventories (4)Increase in receivables (18)Increase in payables 6Cash generated from operations 540

Interest paid (28)Dividends paid (66)Tax paid (86+124-102) (108)Net cash from operating activities 338Cash flows from investing activities


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Payments to acquire tangible non-current assets (90)

Receipts from sales of tangible non-current assets (w) 12Net cash used in investing activities (78)

Cash flows from financing activities

Issues of share capital(360+36-340-24) 32

Long-term loans repaid(500-200) 300

Net cash used in financing activities (268)Decrease in cash and cash equivalents (8)

Cash and cash equivalents at 1.1*2 56

Cash and cash equivalents at 21.12*2 48


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Working: non-current asset disposals

cost000 000

At 1.1.*2 1,560 At 31.12.*2 1,596

Purchases 90 Disposals (balance) 54

1,650 1.650At 31.12*2 318 At 1.1*2 224

Depreciation on

disposals (balance) 24 Charge for year 118

342 342

NBV of disposals 30Net loss reported (18)

Proceeds of disposals 12

i f f


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Interpretation of statements ofcash flows

What kind of information does the

statement of cash flows ,along with itsnotes, provide?

(a) the relationships between profit andcash can be seen clearly and analyzed

accordingly(b) cash equivalents are highlighted, give a

better picture of the liquidity of thecompany

(c) financing inflows and outflows must beshown, rather than simply passed throughreserves.

i f f


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Interpretation of statements ofcash flows

The advantages of cash flow accounting

Survival in business depends on the ability to generate cash

Cash flow is more comprehensive than profit which isdependent on accounting conventions and concept

Creditorsare more interested in an entitys ability to repay

them than in its profitability Cash flow reporting provides a better means ofcomparing

the results of different companies than traditional profitreporting

Cash flow reporting satisfies the needs of all users better

Cash flow forecasts are easier to prepare, as well as moreuseful the profit forecasts


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