CASH FLOW STATEMENTS-IAS 7 Power Point Presentations

CASH FLOW STATEMENTS-IAS 7
PRESENTED BY;
DR FRANCIS K GITAGIA
Ph.D, CPA
INTRODUCTION
• In the past, the importance of cash to the healthy growth, or even
survival of an enterprise has either been neglected. As a result, there
have been in the past, several business failures – some having
recorded healthy profits and asset bases (on the balance sheet);
however, experiencing liquidity problems.
• Thus it is important for users of financial statements to be able to
assess the cash and cash related matters of an entity. Such
information is provided to users in the form of a cash flow statement.
• A cash flow statement may easily be understood as a summary of the
cashbook – set out using standard formats
Cash movements as per cashbook
• May be summarized as follows:
Operating activities-Receipts from debtors,Receipts from cash sales,

Payments to suppliers, Payments for expenses etc
Investing activities-Proceeds on disposal of fixed assets, Purchase of
fixed assets
Financing activities-Loans obtained, Loans repaid
CASH FLOW FORMAT
Suppose a cashbook was provided as follows
CASHFLOW FORMAT CONT’
• Then the cash flow shall be summarized as follows;
OPERATING CASHFLOWS
• Cash flows arising from operating activities is a key indicator of the extent to which the operations of
the enterprise have generated sufficient cash flows to repay loans, maintain the operating capability
of the enterprise, pay dividends and make new investments without recourse to external sources of
financing.
• Includes;
 Cash receipts from the sale of goods and the rendering of services;
 Cash receipts from royalties, fees, commissions and other revenue;
 Cash payments to suppliers for goods and services;
 Cash payments to and on behalf of employees;
 Cash receipts and cash payments of an insurance enterprise for premiums and claims, annuities and
other policy benefits;
 Cash payments or refunds of income taxes unless they can be specifically identified with financing
and investing activities; and
 Cash receipts and payments from contracts held for dealing or trading purposes
INVESTING ACTIVITIES
• Represent the extent to which expenditures have been made for resources intended to generate future
income and cash flows
 Includes:
 Cash payments to acquire property, plant and equipment, intangibles and other long-term assets
 Cash receipts from sales of property, plant and equipment, tangibles and other long-term assets
 Cash payments to acquire equity or debt instruments of other enterprises and interests in joint ventures
 Cash receipts from sales of equity or debt instruments of other enterprises and interests in joint ventures
 Cash advances and loans made to other parties
 cash receipts from the repayment of advances and loans made to other parties
 Cash payments for future contracts, forward contracts, option contracts and swap contracts except when
the contracts are held for dealing or trading purposes, or the payments are classified as financing activities;
and
 Cash receipts from future contracts, forward contracts, option contracts and swap contracts except when
the contracts are held for dealing or trading purposes, or the receipts are classified as financing activities.
FINANCING ACTIVITIES
• Claims on future cash flows by providers of capital to the enterprise.
Examples of cash flows arising from financing activities are;
Cash proceeds from issuing shares or other equity instruments;
Cash payments to owners to acquire or redeem the enterprise’s shares
Cash proceeds from issuing debentures, loans, notes, bonds mortgages
and other short or long-term borrowings;
Cash repayments of amounts borrowed; and
Cash payments by a lessee for the reduction of the outstanding liability
relating to a finance lease.
METHODS OF PREPARING
CASHFLOW STATEMENT
• The direct method – whereby major classes of gross cash receipts and
gross cash payments are disclosed; or
• The indirect method – whereby the net profit or loss is adjusted for
the effects of transactions of a non-cash nature and
accruals/prepayments
Illustration
Illustration Cont’
Illustration Cont’
• Now assume that in the above illustration:
• Not all sales were made on a cash basis
• Debtors at the beginning of the year were 4.8m
• Debtors at the year end were 5.2m
• Not all purchases were made on a cash basis;
• Creditors at the beginning of the year were Sh3.6m
• Creditors at the year end were Sh3.9m
Illustration cont’
Format for cash flow statement (using direct cash flow method
Format for cash flow statement (using
Indirect cash flow method
Comprehensive example
ILLUSTRATION CONT’
ILLUSTRATION CONT’
SOLUTION’-DIRECT METHOD
DIRECT METHOD CONT’
SOLUTION- INDIRECT METHOD
SOLUTION CONT’

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CASH FLOW STATEMENTS-IAS 7

Operating activities-Receipts from debtors,Receipts from cash sales,

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