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IAS 7: Statement of Cash Flows Notes

The document discusses methods for preparing a statement of cash flows. The indirect method reconciles net income to cash from operations by adding back non-cash expenses and accounting for changes in working capital. The direct method shows cash receipts from sales and cash payments to suppliers and for expenses. Both methods then show cash interest and tax paid. The document provides guidance on various cash flow items and preparation of consolidated statements of cash flows.

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Nepo Seroka
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191 views4 pages

IAS 7: Statement of Cash Flows Notes

The document discusses methods for preparing a statement of cash flows. The indirect method reconciles net income to cash from operations by adding back non-cash expenses and accounting for changes in working capital. The direct method shows cash receipts from sales and cash payments to suppliers and for expenses. Both methods then show cash interest and tax paid. The document provides guidance on various cash flow items and preparation of consolidated statements of cash flows.

Uploaded by

Nepo Seroka
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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STATEMENT OF CASH FLOWS

THE INDIRECT METHOD

The indirect method shows a reconciliation from reported net income to cash
provided by operations.

Calculating Cash flow from Operations


Here are the steps for calculating the cash flow from operations using the indirect
method:

1. Start with net profit before tax.


2. Add back non-cash expenses:
Add back depreciation expense
Add back impairment expense
Subtract out fair value gains
Add back fair value losses
3. Adjust for gains and losses on sales on assets.
Add back losses on sale of assets
Subtract out gains on sale of assets
4. Account for changes in all current assets and liabilities

Change in Inventory
Change in Trade Receivables
Change in Trade Payables
Change in Prepaid Income and Expenses
Change in Accrued Income and Expenses
STATEMENT OF CASH FLOWS

THE DIRECT METHOD

The direct method is the preferred method under IAS 7 and presents cash flows
from activities through a summary of cash outflows and inflows.

Cash Flow from Operations


Under the direct method, (net) cash flows from operating activities are determined
by taking cash receipts from sales, adding interest and dividends, and deducting
cash payments for purchases, operating expenses, interest and income taxes. We'll
examine each of these components below:

1. Cash from customers = Sales + Decrease (or - increase) in Accounts Receivable

2. Cash paid to suppliers = cost of sales+ increase (or - decrease) in Inventory + decrease (or -
increase) in Accounts Payable

3. Cash paid for operating expenses = operating expenses + increase (or - decrease) in
prepaid expenses + decrease (or - increase) in accrued liabilities

THEN FOR BOTH METHODS:

Cash interest paid = interest expense - increase (or + decrease) interest payable

Cash payments for income taxes = income taxes + decrease (or - increase) in income taxes
payable
STATEMENT OF CASH FLOWS

Notes:
Dividends and Interest can be classified under operating, financing or investing activities
depending on the underlying transaction. Although the norm is to classify them under
operating activities.

Depreciation might be capitalised to inventory as manufacturing costs and must be


reversed out as a non-cash item under the Indirect Method.

VAT should be excluded from the Statement of Cash Flows as these are cash flows that the
entity cannot control. Therefore, under the Direct Method, cash paid to suppliers and cash
received from customers should be net of VAT; and is then shown as a separate line item
under Cash from Operations.
Under the Indirect Method, VAT is considered when calculating changes in working capital
and also disclosed as a separate line item under Cash from Operations.

Tax Paid line item excludes deferred tax because it is a non-cash item. Therefore, in
calculating interest paid, only consider the current tax.

Foreign Exchange transactions should be recorded and translated at the rate on the date
of the cash flow and the rate disclosed. The gain/loss on the foreign exchange transactions
should be excluded but any effect on the Cash and Cash Equivalents due to this exchange
rate fluctuation should be reported at the face of the Statement of Cash Flows as a
reconciling line item Currency Adjustments.
STATEMENT OF CASH FLOWS

Consolidated Statement of Cash Flows The group only discloses cash flows that it can
control, therefore, only cash flows from the parent and subsidiary companies. The starting
point is the consolidated Statement of Comprehensive Income and Financial Position.

NCIs share isnt deducted from the subsidiary but brought in as gross amounts as
the group controls these cash flows.

Impairment of Goodwill on acquisition of the subsidiary is a non-cash item and


should be reversed out from the net profit before tax is written-off in the Statement
of Comprehensive Income by being added back under the Indirect Method.

Acquisition of a Subsidiary for cash should be disclosed as a separate line item


under Investing Activities. The amount paid for the purchase of the subsidiary will
be recognised with a note disclosure to break down the net cash outflow:

Disposal of a Subsidiary for cash, the full proceeds should be recognised in full net
of any cash disposed of during this disposal.

Associates and Joint Ventures only cash flows such as dividends, interest and
loans should be included in the Consolidated Statement of Cash Flows and not their
retained portion of profits.

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