Ch03 - Statement of Cash Flow - v2

Chapter 03
Statement of cash flow (IAS 7)

Learning Outcomes
At the end of this chapter, students will be able to:

▪ Describe the sections of a cash flow statement,
▪ Conduct basic interpretation of cash flows and changes in cash flows, and
▪ Prepare the operating cash flow section of a statement of cash flows.
2
IAS 7 Statement of Cash Flow
The objective of IAS 7 Statement of Cash Flow is:

▪ To ensure that all entities provide information about the historical changes in cash and cash
equivalents by means of a statement of cash flows
▪ To classify cash flows (i.e. inflows and outflows of cash and cash equivalents) during the period
between those arising from operating, investing and financing activities.
3
Cash and Cash Equivalents
Cash,
Petty cash, Current accounts,
Cash Checks received Savings accounts
Cash on hand and demand deposits.
Note: Overdrafts shall be treated as negative cash.
90 days from the beginning date of

Cash equivalents
investment
Short-term (less than 90 days), highly liquid investments that are readily convertible to known
amounts of cash and which are subject to an insignificant risk of change of value.
Cash equivalents includes government debt securities
4
Statement of Cash Flow
1. Operating Activities
Cash received and spent by selling goods and services through the normal activity of the business.
2. Investing Activities
Cash used in:
• Buying and selling PPE and other investments
• Any investment income.
3. Financing Activities
Cash from/to:
• Investors (shareholders)
• Lenders (banks)
5
Interest and Dividends
Interest Paid and Dividends Paid
Can be classified as:

• Operating, or
Dividends are usually shown as financing.
• Financing
Interest Received and Dividends Received
Can be classified as:

• Operating, or
Both are usually shown as investing
• Investing
6
Reporting Operating Cash Flow
1. Direct Method
Cash received from customers X The direct method is
Cash paid to suppliers (X) encouraged by IFRS...
Cash paid to employees (X)
Net cash flow X
2. Indirect Method
We show only the net operating cash flow by adjusting profit.
Profit before tax X … more than 98% of
Non-Cash Expenses X companies use the indirect
method.
Non-Cash Income (X)
Net cash flow X
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Operating Activities
Profit before taxation 3,350 1. Start with profit before tax.

Adjustments for:
Interest expense 400 2. Add back non-cash expenses
Depreciation 490 and interest
Investment income (500) 3. Remove investment
income/losses
Increase in receivables (500)
Decrease in inventories 1,050 4. Adjust for changes in
Decrease in payables (1,740) working capital (current assets
Cash generated from operations 2,550 and current liabilities)
Interest paid (270)
Income taxes paid (900)
Net cash from operating activities 1,380
8
Working Capital Adjustments
Current Assets Up ↑, Cash Down ↓
Current Assets Down ↓, Cash Up ↑
Current Liabilities Up ↑, Cash Up ↑
Current Liabilities Down ↓, Cash Down ↓
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Investing Activities
Acquisition of subsidiary net of cash (550)

Purchase of PPE (350)
“Proceeds”
Proceeds from sale of equipment 20
means cash
Interest received 200
received
Dividends received 200
Net cash used in investing activities (480)
Investing cash flow is

usually negative.
10
Financial Activities
Proceeds from issue of share capital 250

Proceeds from long-term borrowings 250
Payment of finance lease liabilities (90)
Dividends paid (1,200)
Net cash used in financing activities (790)
On your exam: 230 - 120 = 110

Net increase in cash and equivalents 110 = 1,380 - 480 - 790
Beginning cash and equivalents 120
Ending cash and equivalents 230
On your exam, just copy from the balance sheet!
11
Format of Statement of Cash Flows
Statement of Cash Flows
12
Example: Coffee Republic
13
Example: Coffee Republic (Cont.)
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Example: Coffee Republic (Cont.)
15
Practice question 1
How is cash received or paid in regular ongoing business classified?

A. Operating cash flow
B. Financing cash flow
C. Investing cash flow
D. Revenue cash flow
16
Practice question 2
What should we do with non-cash expenses in the statement of cash flows?

A. Add back to investing cash flow
B. Add back to operating cash flow
C. Deduct from investing cash flow
D. Deduct from operating cash flow
17
Practice question 3
An increase in receivables makes cash flow decrease

A. True
B. False
18
Practice question 4
An increase in payables makes cash flow decrease

A. True
B. False
19
Practice question 5
Interest paid may be shown as either an operating cash flow or as financing cash flow
A. True
B. False
20
Practice question 6
What is the order for presenting operating cash flow?

1. Adjust for changes in working capital
2. Profit before tax
3. Add back non-cash expenses and deduct non-cash income
4. Deduct interest paid and tax paid
A. (1), (2), (3) and (4)
B. (1), (3), (4) and (2)
C. (4), (2), (3) and (1)
D. (2), (3), (1) and (4)
21
Practice question 7
How should we classify money received from disposal of a non-current asset?

A. It is excluded from the cash flow statement
B. Operating cash flow
C. Investing cash flow
D. Financing cash flow
22
Practice question 8
It is normal for investing cash flow to be negative

A. True
B. False
23
Practice question 9
Loan repayment is classed as a ………………………. cash flow.

A. Investing
B. Operating
C. Financing
D. Revenue
24
Practice question 10
The following information relates to Geofrost, a limited liability company, for the year ended 31 October 20X7.
Extracts from the statement of profit or loss for the year ended 31 October 20X7
$’000
Finance costs (400)
Investment income 180
Profit before tax 15,000
Less tax 4,350
Profit for the year 10,650
25
Practice question 10 (Cont.)
Statement of financial position as at 31 October 20X7 Equity and liabilities

20X7 20X6 Capital and liabilities
$000s $000s
Ordinary share capital 19,365 17,496
Assets
Retained earnings 16,115 6,465
Non-current assets 43,282 26,574
35,480 23,961
Non-current liabilities
Current assets
Loan 8,000 10,300
Inventory 3,560 9,635
Receivables 6,405 4,542
Current liabilities
Cash 2,045 1,063
Bank overdraft 1,230 429
12,010 15,240
Trade payables 7,562 4,364
Taxation 3,020 2,760
Total assets 55,292 41,814
11,812 7,553
Total equity and liabilities 55,292 41,814
26
Practice question 10 (Cont.)
Additional information:
1. Depreciation expense for the year was $4,658,000
2. Assets with a carrying value of $1,974,000 were disposed of at a profit of $720,000
Prepare the statement of cash flows for the year ended 31 October 20X7 for Geofrost.
27
END OF CHAPTER
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Chapter 03

Statement of cash flow (IAS 7)

At the end of this chapter, students will be able to:

The objective of IAS 7 Statement of Cash Flow is:

Note: Overdrafts shall be treated as negative cash.

90 days from the beginning date of

Interest Paid and Dividends Paid

Can be classified as:

Interest Received and Dividends Received

Can be classified as:

Profit before taxation 3,350 1. Start with profit before tax.

Current Assets Up ↑, Cash Down ↓

Current Assets Down ↓, Cash Up ↑

Current Liabilities Up ↑, Cash Up ↑

Current Liabilities Down ↓, Cash Down ↓

Acquisition of subsidiary net of cash (550)

Investing cash flow is

Proceeds from issue of share capital 250

On your exam: 230 - 120 = 110

Statement of Cash Flows

How is cash received or paid in regular ongoing business classified?

What should we do with non-cash expenses in the statement of cash flows?

An increase in receivables makes cash flow decrease

An increase in payables makes cash flow decrease

What is the order for presenting operating cash flow?

How should we classify money received from disposal of a non-current asset?

It is normal for investing cash flow to be negative

Loan repayment is classed as a ………………………. cash flow.

Statement of financial position as at 31 October 20X7 Equity and liabilities

Total equity and liabilities 55,292 41,814

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