STATEMENT OF CASH FLOW - IAS 7

The cash flow statement was previously known as the flow of Cash statement. The cash flow statement
reflects a firm's liquidity.

The balance sheet is a snapshot of a firm's financial resources and obligations at a single point in time,
and the income statement summarizes a firm's financial transactions over an interval of time. These two
financial statements reflect the accrual basis accounting used by firms to match revenues with the
expenses associated with generating those revenues. The cash flow statement includes only inflows and
outflows of cash and cash equivalents; it excludes transactions that do not directly affect cash receipts and
payments. These noncash transactions include depreciation or write-offs on bad debts or credit losses to
name a few. The cash flow statement is a cash basis report on three types of financial activities: operating
activities, investing activities, and financing activities. Noncash activities are usually reported in
footnotes.

The cash flow statement is intended to

1. provide information on a firm's liquidity and solvency and its ability to change cash flows in
future circumstances
2. provide additional information for evaluating changes in assets, liabilities and equity
3. improve the comparability of different firms' operating performance by eliminating the effects of
different accounting methods
4. indicate the amount, timing and probability of future cash flows

The cash flow statement has been adopted as a standard financial statement because it eliminates
allocations, which might be derived from different accounting methods, such as various timeframes for
depreciating fixed assets.

Cash flow activities

The cash flow statement is partitioned into three segments, namely: cash flow resulting from operating
activities, cash flow resulting from investing activities, and cash flow resulting from financing activities.

The money coming into the business is called cash inflow, and money going out from the business is
called cash outflow.

Operating activities

Operating activities include the [uction, costs, and pricing|production], sales and delivery of the
company's product as well as collecting payment from its customers. This could include purchasing raw
materials, building inventory, advertising, and shipping the product.
Under IAS 7, operating cash flows include:

 Receipts from the sale of goods or services

 Receipts for the sale of loans, debt or equity instruments in a trading portfolio
 Interest received on loans
 Dividends received on equity securities
 Payments to suppliers for goods and services
 Payments to employees or on behalf of employees
 Interest payments (alternatively, this can be reported under financing activities in IAS 7, and US
GAAP)

Items which are added back to [or subtracted from, as appropriate] the net income figure (which is found
on the Income Statement) to arrive at cash flows from operations generally include:

 Depreciation (loss of tangible asset value over time)

 Deferred tax
 Amortization (loss of intangible asset value over time)
 Any gains or losses associated with the sale of a non-current asset, because associated cash flows
do not belong in the operating section.(unrealized gains/losses are also added back from the
income statement)

Investing activities

Examples of Investing activities are

 Purchase or Sale of an asset (assets can be land, building, equipment, marketable securities, etc.)
 Loans made to suppliers or received from customers
 Payments related to mergers and acquisitions

Financing activities

Financing activities include the inflow of cash from investors such as banks and shareholders, as well as
the outflow of cash to shareholders as dividends as the company generates income. Other activities which
impact the long-term liabilities and equity of the company are also listed in the financing activities section
of the cash flow statement.

Under IAS 7,

 Proceeds from issuing short-term or long-term debt

 Payments of dividends
 Payments for repurchase of company shares
 Repayment of debt principal, including capital leases
 For non-profit organizations, receipts of donor-restricted cash that is limited to long-term
purposes
Items under the financing activities section include:

 Dividends paid
 Sale or repurchase of the company's stock
 Net borrowings
 Payment of dividend tax

Preparation methods

The direct method of preparing a cash flow statement results in a more easily understood report. The
indirect method is almost universally used, because FAS 95 requires a supplementary report similar to the
indirect method if a company chooses to use the direct method.

Direct method

The direct method for creating a cash flow statement reports major classes of gross cash receipts and
payments. Under IAS 7, dividends received may be reported under operating activities or under investing
activities. If taxes paid are directly linked to operating activities, they are reported under operating
activities; if the taxes are directly linked to investing activities or financing activities, they are reported
under investing or financing activities.

Sample cash flow statement using the direct method

Cash flows from (used in) operating activities

  Cash receipts from customers 3,000

  Cash paid to suppliers and employees (2,000)

  Cash generated from operations (sum) 7,500

  Interest paid (2,000)

  Income taxes paid (4,000)

  Net cash flows from operating activities 2,500

Cash flows from (used in) investing activities

  Proceeds from the sale of equipment 7,500

  Dividends received 3,000

  Net cash flows from investing activities 10,500

Cash flows from (used in) financing activities

  Dividends paid (2,500)

  Net cash flows used in financing activities (2,500)

Net increase in cash and cash equivalents 10,500

Cash and cash equivalents, beginning of year 1,000

Cash and cash equivalents, end of year $11,500

Indirect method

The indirect method uses net-income as a starting point, makes adjustments for all transactions for non-
cash items, then adjusts from all cash-based transactions. An increase in an asset account is subtracted for
net income, and an increase in a liability account is added back to net income. This method converts
accrual-basis net income (or loss) into cash flow by using a series of additions and deductions.

Rules

The following rules are used to make adjustments for changes in current assets and liabilities, operating
items not providing or using cash and nonoperating items.

 Decrease in non-cash current assets are added to net income

 Increase in non-cash current asset are subtracted from net income
 Increase in current liabilities are added to net income
 Decrease in current liabilities are subtracted from net income
 Expenses with no cash outflows are added back to net income (depreciation and/or amortization
expense are the only operating items that have no effect on cash flows in the period)
 Revenues with no cash inflows are subtracted from net income
 Non operating losses are added back to net income
 Non operating gains are subtracted from net income

Example: cash flow of Citigroup:

Citigroup Cash Flow Statement

(all numbers in millions of US$)
Period ending 12/31/2007 12/31/2006 12/31/2005

Net income 21,538 24,589 17,046

Operating activities, cash flows provided by or used in:

Depreciation and amortization 2,790 2,592 2,747

Adjustments to net income 4,617 621 2,910

Decrease (increase) in accounts receivable 12,503 17,236 --

Increase (increase) in liabilities (A/P, taxes payable) 131,622 19,822 37,856

Decrease (increase) in inventories -- -- --

Increase (decrease) in other operating activities (173,057) (33,061) (62,963)

    Net cash flow from operating activities 13 31,799 (2,404)

Investing activities, cash flows provided by or used in:

Capital expenditures (4,035) (3,724) (3,011)

Investments (201,777) (71,710) (75,649)

Other cash flows from investing activities 1,606 17,009 (571)

    Net cash flows from investing activities (204,206) (58,425) (79,231)

Financing activities, cash flows provided by or used in:

Dividends paid (9,826) (9,188) (8,375)

Sale (repurchase) of stock (5,327) (12,090) 133

Increase (decrease) in debt 101,122 26,651 21,204

Other cash flows from financing activities 120,461 27,910 70,349

    Net cash flows from financing activities 206,430 33,283 83,311

Effect of exchange rate changes 645 (1,840) 731

Net increase (decrease) in cash and cash equivalents 2,882 4,817 2,407