Cash flows are either receipts (ie cash inflows and so are represented as a positive number in

a statement of cash flows) or payments (ie cash out flows and so are represented as a
negative number using brackets in a statement of cash flows).

Cash flows are usually calculated as a missing figure. For example, when the opening balance
of an asset, liability or equity item is reconciled to its closing balance using information from
the statement of profit or loss and/or additional notes, the balancing figure is usually the cash
flow.

Common cash flow calculations include the tax paid, which is an operating activity cash out
flow, the payment to buy property plant and equipment (PPE) which is an investing activity
cash out flow and dividends paid, which is a financing activity cash out flow. The following
examples illustrate all three of these examples.

Definitions

5. The following terms are used in this Standard with the meanings s peci f
ied: 5.1 Cash com p rises cash on hand and demand de p osits wi t h banks. 5.2 Cash
equivalents are short term , hi g h l y liquid investments tha t are readily convertible
into known amounts of cash and which ar e sub j ec t t o an insi g ni f ican t risk o f chan g
es i nvalue. 5.3 Cash f lows are in f lows and out f lows o f cash and cash equivalents. 5.4
Operating activities are the principal revenue-producing activities of the enterprise
and other activities that are not investing o r financing activities. 5.5 Investing
activities are the acquisition and disposal of long-term assets and other investments
not included in cash equivalents. 5.6 F inancin g activities are activities tha t resul t i
nchan g es i nthe siz e and composition of the owners’ capital (including preference shar e
capital in the case of a company) and borrowings of the enterprise.

Objective
Information about the cash flows of an enterprise is useful in providing users
of financial statements with a basis to assess the ability of the enterprise to
generate cash and cash equivalents and the needs of the enterprise to utilise
those cash flows. The economic decisions that are taken by user s require an
evaluation of the ability of an enterprise to generate cash an d cash
equivalents and the timing and certainty of their generation. The Standard
deals with the provision of information about the historica l changes in cash
and cash equivalents of an enterprise by means of a cas h flow statement
which classifies cash flows during the period from operating , investing and
financing activities

Scope

1. An enterprise should prepare a cash flow statement and should p

resent it for each period for which financial statements are p resented. 2.
Use r s of an enterprise’s financial statements a r eintereste d in how the
enterprise generates and uses cash and cash equivalents. This is the cas
e regardless of the nature of the enterprise’s activities and
irrespective o f whether cash can be viewed as the product of the enterprise,
as may be th e case with a financial enterprise. Ente rprises need cash for
essentially th e same reasons, however different their principal revenue-
producing activitie s might be. They need cash to conduct their operations, to
pay their obligations , and to provide returns to their investors

Classification of cash flows

IAS 7, Statement of Cash Flows requires an entity to present a statement of cash flows as an
integral part of its primary financial statements. A statement of cash flow classifies and
presents cash flows under three headings:

(i) Operating activities

(ii) Investing activities and
(iii) Financing activities

Operating activities can be presented in two different ways. The first is the direct method
which shows the actual cash flows from operating activities – for example, the receipts from
customers and the payments to suppliers and staff. The second is the indirect method which
reconciles profit before tax to cash generated from operating profit. Under both of these
methods the interest paid and taxation paid are presented as cash outflows.

Investing activity cash flows are those that relate to non-current assets. Examples of investing
cash flows include the cash outflow on buying property plant and equipment, the sale
proceeds on the disposal of non-current assets and any cash returns received arising from
investments.

Financing activity cash flows relate to cash flows arising from the way the entity is financed.
Entities are financed by a mixture of cash from borrowings from third parties (debt) and by
the shareholders (equity). Examples of financing cash flows include the cash received from
new borrowings or the cash repayment of debt as well as the cash flows with shareholders in
the form of cash receipts following a new share issue or the cash paid to them in the form of
dividends.

This topic is examined in much more depth in the F7 examination than it is at F3. For
example, in F3, an extract, or the whole statement of cash flow might be required. F7,
however, is more likely to ask for an extract from the statement of cash flows using more
complex transactions (for example, the purchase of PPE using finance leases). However, that
does not mean that F7 will never require the preparation of a complete statement of cash
flows so be prepared.
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX

A statement of cash flows is a financial statement which summarizes cash transactions of a

business during a given accounting period and classifies them under three heads, namely,
cash flows from operating, investing and financing activities. It shows how cash moved
during the period by indicating whether a particular line item is a cash in-flow or a cash out-
flow. The term cash as used in the statement of cash flows refers to both cash and cash
equivalents. Cash flow statement provides relevant information in assessing a company's
liquidity, quality of earnings and solvency.

Sections

As stated above, a statement of cash flows comprises of three sections:

1. Cash Flows from Operating Activities

This section includes cash flows from the principal revenue generation activities such
as sale and purchase of goods and services. Cash flows from operating activities can
be computed using two methods. One is the Direct Method and the other Indirect
Method.

2. Cash Flows from Investing Activities

Cash flows from investing activities are cash in-flows and out-flows related to
activities that are intended to generate income and cash flows in future. This includes
cash in-flows and out-flows from sale and purchase of long-term assets.

3. Cash Flows from Financing Activities

Cash flows from financing activities are the cash flows related to transactions with
stockholders and creditors such as issuance of share capital, purchase of treasury
stock, dividend payments etc.
Format and Example

Following is a cash flow statement prepared using indirect method:

Company A, Inc.

Cash Flow Statement

For the Year Ended Dec 31, 2010

Cash Flows from Operating Activities:

Operating Income (EBIT) $489,000

Depreciation Expense 112,400

Loss on Sale of Equipment 7,300

Gain on Sale of Land −51,000

Increase in Accounts Receivable −84,664

Decrease in Prepaid Expenses 8,000

Decrease in Accounts Payable −97,370

Decrease in Accrued Expenses −113,860

Net Cash Flow from Operating Activities $269,806

Cash Flows from Investing Activities:

Sale of Equipment $89,000

Sale of Land 247,000

Purchase of Equipment −100,000

Net Cash Flow from Investing Activities 136,000

Cash Flows from Financing Activities:

Payment of Dividends −$90,000

Payment of Bond Payable −200,000

Net Cash Flow from Financing Activities −290,000

Net Change in Cash $115,806

Beginning Cash Balance 319,730

sEnding Cash Balance $435,536