CHAPTER 5:
The Statement
of Cash Flow
Prepared by
Shannon Butler,
CPA, CA
Carleton
University
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Introduction
•The SCF provides important, easily identifiable insights into the
actions of the company that have immediate cash impact.
•The SCF unravels the accruals and deferrals needed in the other
statements.
•Companies are required to include the SCF as part of their
financial statements.
•Objectives of the SCF is to disclose the historical cash flows of
the enterprise during the reporting period for both feedback
and predictive purposes.
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Classification of Cash Flows
Operating activities: the principle revenue producing
activities of the enterprise and the related expenditures
• Inflows - cash received from customers or clients
• Outflows - disbursements incurred to earn the inflow;
• ex. cash paid for inventories, wages and salaries, overhead
costs
• Includes changes in current operating assets and liabilities –
i.e. receivables, inventories , accounts payable
• Net earnings is the reference point and not comprehensive
income
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Classification of Cash Flows
Investing activities: those activities that relate to the longterm - capital assets and long-term investments
• Acquisition and disposals of PP&E, intangible assets
Financing activities: those activities that relate to
borrowings and contributed owners’ equity.
• Excludes changes in operating liabilities such as accounts payable
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Definition of Cash
For purposes of the cash flow statement, “Cash” includes:
• Cash
• Plus cash equivalents - highly liquid short-term investments
• Minus temporary bank overdrafts
Disclose components of cash and cash equivalents
Reconciled to the net change reported on SCF
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Definition of Cash
Cash includes:
• currency on hand including petty cash
• cash in deposit accounts, as long as due on demand with
no notice requirement
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Definition of Cash Equivalents
Cash equivalents are:
• held for the purpose of meeting short-term cash commitments
(not for investing or other reasons)
• Readily convertible into a known amount of cash
• have a maturity of 3 months or less from the time of purchase;
• insignificant risk of change in value; and
• excludes investments in common shares.
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Overdrafts
•Temporary bank overdrafts – must fluctuate from positive to
negative on regular basis
• Lines of credit are normally financing activities and not part of
cash definition
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Interpreting the Statement of Cash
Flow
•Involves examining the SCR for the major sources and uses of cash.
•The following questions must be considered combined with professional
judgement:
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Basic Approach to Preparation
To prepare the SCF:
•Examine changes in each account listed on the SFP
• What caused the change?
• Is it related to cash?
•Example: Change in accounts receivable is a decrease
• implies that cash increased more than sales for the period
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Presentation of Operating Activities
•There are two approaches for presenting the cash provided by
(used in) operating activities:
1. Indirect presentation
2. Direct presentation
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Presentation of Operating Activities
•Direct presentation: revenues and expenses are adjusted to a
cash basis of reporting and shown directly in deriving cash
provided by (or used by) operations
• Preferred method under IFRS and ASPE
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Presentation of Operating Activities –
Direct Example
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Presentation of Operating Activities
Indirect presentation: Operating activities begins with net
earnings, and all inter-period allocations and accruals are
reversed out of net income to derive the cash from
operations
• Two steps – separately shows adjustments for changes in working
capital items
• More dominant in practice
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Presentation of Operating Activities –
Indirect Example
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Offsetting Transactions
In the investing and financing sections, gross cash flows (gross
cash receipts and gross cash payments) are reported separately
• Show separately debt repayments and debt refinancing issues
Exception: Offsetting allowed only when cash receipts and
payments are made on behalf of a customer – i.e. company
collects rent on behalf of a management company and remits
an amount net of a commission
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Non-Cash Transactions
Non-cash transactions are not reported on cash flow statement,
but require note disclosure
Common types of non-cash transactions include:
•
•
•
•
•
•
•
retiring bonds through share issuance
assuming finance lease obligations in exchange for leased assets
converting preferred shares to common shares
settling debt by transferring non-cash assets
bond refinancing with existing bondholders
Converting bonds to common shares
acquiring shares in another company in exchange for shares of the
reporting enterprise
• issuing a stock dividend
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Non-Cash Transactions
• Note Disclosure – When a non-cash transaction is excluded from the
SCF, it is included in a disclosure note to make sure financial
statement users are informed about the transaction.
• Partial cash Transactions – An acquisition where part of
consideration is in cash and remainder is in another asset or a debt
instrument or shares
• the cash part of the transaction will be reported in the cash flow
statement; and
• the non-cash portion will not be reported
• Evaluation – on one hand, the exclusion of non-cash transactions
provides an appropriate focus on cash flows. On the other hand, the
total exclusion of non-cash transactions from the SCF seems to give
precedence to form over substance.
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Debt Transactions
•Interest payments are classified as operating or financing
• Interest expense must be adjusted for the amortization of the
premium or discount
•Principal payments are classified as financing
•Example: During the year the company:
• issued a $1,000,000 bond for $960,000 – show cash inflow of
$960,000 under financing activities
• paid interest of $100,000, but interest expense recognized was
$102,300 – show cash outflow for interest of $100,000
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Analyzing More Complex
Situations
T-Account Method - useful because it:
• provide an organized format for documenting the
preparation process
• facilitates review and evaluation by others
• provides proof of accuracy
• formally keeps track of the changes in balance sheet accounts
and ensures that all accounts are explained
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Analyzing More Complex
Situations
• Use T-account format to accumulate information and explain
changes in individual accounts
• Cash T-account is split into: operating, investing and financing
• Steps:
1. Set up a T-account for each asset, liability and equity account;
2. Start with beginning balance at top and ending balance at
bottom
3. Reconstruct the entries and cross reference the entries
• Will allow for the determination of any cash related transactions
that need to be recognized on SCF
• Refer to Exhibit 5-8
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Analyzing More Complex
Situations
• Reconciliations can also be used to determine cash transactions
• Example: Old equipment is sold for $11,000; original cost is
$35,000. Loss on sale was $6,000.
Proceeds on sale
Net book value:
Historical cost
Accumulated depreciation
Loss on sale
$11,000
$35,000
??
$6,000
Accumulated depreciation must be: $18,000.
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Classification of Interest,
Dividends, and Income Tax
•Classification is an accounting policy choice and must be followed
consistently
•Based on whether or not the payment (receipt) is conceptually an
operating activity or whether it should be traced to its root cause of
investing or financing.
•The judgmental choices, and their rationale, can be summarized in the
chart on the next slide.
•Income tax classification is based on the nature of transaction that causes
the tax
• Income tax generally shown in the operating activities section
• If specifically related to an investing or financing activity, then classify as such
• Dividend distributions causing tax to be paid – show tax as financing activity
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Classification of Interest and
Dividends
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Disclosure of interest, dividends
and income taxes
Income tax, interest paid, interest received, dividends paid, and
dividends received must be separately disclosed
This requirement can be met by:
• Use the direct method which automatically shows the cash flows
separately from each source;
• Use indirect method
• Add back expense; deduct the income
• Then show the actual cash flows for interest, dividends and taxes
• Reporting required cash flows as supplementary information. This is not
strictly in accordance with the reporting standard; but it is a common
reporting practice.
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Disclosure Using Indirect Method
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Disclosure Using Indirect Method
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Summary of Adjustments in
Operating Activities
• To prepare the operating activities section of the SCF, it
is necessary to convert accrual-basis earnings to the
cash basis. There are certain types of adjustments that
must be made to the accrual-basis earnings number.
There adjustments are summarized in the following two
slides.
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Summary of Reconciling
Adjustments
• When adjustments must be made for changes in working
capital accounts related to operations, the protocol is:
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Accounting Standards for Private
Enterprises
• The SCF is required under ASPE as part of a set of
complete financial statements. The ASPE requirements
for this statement are very similar to the IFRS
presentation requirements, the the following
differences:
• Dividends paid are financing
• Interest received and paid and dividends received are operating
• Note disclosure required for investment income receipts,
interest paid and income taxes paid
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END OF CHAPTER 5:
The Statement of Cash Flow
Summary Cash flow information discloses the historical
pattern of cash flows in an enterprise for both feedback
and predictive purposes. The SCF classifies cash flows
from operating activities, cash flows relating to investing
activities, and cash flows relating to financing activities.
There are two alternative to present cash from operating
activities – the direct and the indirect presentation
methods. In the investing and financing sections, gross
cash flows are reported. Transactions are not offset, or
netted, against other flows in the same category.
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