JACQUELINE NGETA
CASH FOLW STATEMENTS
LECTURE NOTES
IAS 7: Statement of Cash Flows
In April 2001 the International Accounting Standards Board adopted IAS 7 Cash Flow
Statements.
A cash flow statement is a statement of source and application of cash funds of an entity for a
given period of time. It is a tool used to analyze the liquidity of a firm.
It
is
also
a
financial statement and therefore subject of international accounting standards.
Terms used:
Cash –
Used to denote cash in hand and demend deposits
Cash equivalents:
Short-term, high liquidity investments that are readily convertible to known amounts of cash
and which are subject to insignificant risk of change in value.
Cash Flow
Inflow and outflow of cash and cash equivalents
Operating activities
The principal revenue-producing activities of a firm.
Investing Activities
Involve the acquisition and disposal of long term assets and other investments not included in
cash equivalents.
Financing Activities
Activities that result n change of in the size and composition of equity capital and borrowing
of the firm
Objectives of Cash Flow Statement
The objectives of cash flow statement are:
1. To ascertain the sources from activities (i.e., operating/investing/financing activities)
from which cash and cash equivalents were generated by an enterprise.
2. To ascertain the uses by activities (i.e., operating/investing/financing activities) for
which cash and cash equivalents were used by an enterprise.
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3. To ascertain the net change in cash or cash equivalents indicating the difference
between sources and uses from or by the three activities between the dates of two
Balance Sheets.
Purposes of Cash Flow Statement
1. Forecast future cash flows
2. Evaluate management decisions
3. Determine the ability to pay dividends to stockholders’ and payments to creditors
4. Show the relationship of net income to the business’s cash flows
Importance of Cash Flow Statement
1. To identify the sources from where cash inflows have arisen within a particular period
and also shows the various activities where in the cash was utilized.
2. It is significant to management for proper cash planning and maintaining a proper
matching between cash inflows and outflows.
3. Shows efficiency of a firm in generating cash inflows from its regular operations.
STRUCTURE OF A CASH FLOW STATEMENT
Operating Activities
Cash flow from operating activities is any cash transaction related to the company's on going
business, which are the business activities-that are responsible for most of the profits.
Operating activities-usually involve producing and delivering goods and provide services.
Over time, cash from operations will show the extent to which day-to-day operating activities
have generated more cash than has been used. The operating profit is adjusted for
depreciation, profit and or losses on sale of non-current assets, interest paid and working
capital changes (i.e., increases or decreases in inventories, receivables and payables).
Cash flows from operating activities are primarily derived from the principle revenue
producing activities of the enterprise. Therefore, they generally arise from transactions that
involve the determination of net profit.
Examples:
a) Cash receipts from sale of goods and rendering of services.
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b) Cash receipts from royalties, fees, commissions and other revenues.
c) Cash payments to suppliers for goods and services.
d) Cash payments to and on behalf of employees.
e) Cash receipts and payments of an insurance enterprise for premiums and claims,
annuities and other policy benefits.
f) Cash payments or refunds of income taxes unless they can be specifically identified
with financing and investing activities.
g) Cash receipts payments from contracts held for dealing or trading purposes.
Notes:
Some transactions such as sale of an item of plant may give rise to a gain or loss which is
included in the determination of profit or loss. However, the cash flows relating to such
transactions are cash flows from investing activities. Amounts paid servicing of finance such
as interest expense may be classified as either operating or financing activity. The approach
adopted must be consistently used.
Investing Activities
Cash flow from investing activities is the second part of cash flow statements. Investing
activities are the changes to your cash position owing to the buying or selling of non-current
assets. This includes selling and replacing equipment that wears out or acquiring a new
building or land so that your company can grow. Investing activities can also include the
purchase or sale of stock, bonds, and securities. Lending money and receiving loan payments
are also considered investing activities.
Separate disclosure of cash flows arising from investing activities is important because the
cash flows represent the extent to which expenditures have been made for resources intended
to generate future income and cash flows.
Examples:
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a) Cash payments to acquire fixed assets. These payments include those relating to
capitalize development costs and self constructed property, plant and equipment.
b) Cash receipts from sales of property, plant and equipment, intangibles and other long
term assets.
c) Cash payments to acquire equity or debt instruments of other enterprises and interests
in joint ventures (other than payments for those instruments considered to be cash
equivalents or those held for dealing or trading purposes).
d) Cash receipts from sales of equity or debt instruments of other enterprises and
interests in joint ventures (other than receipts for those instruments considered to be
cash equivalents and those held for dealing or trading purposes).
e) Cash advances and loans made to other parties (other than advance and loans made by
a financial institution).
f) Cash receipts from the repayment of advances and loans made to other parties (other
than advances and loans of a financial institution).
Financing Activities
Proceeds on the issue of shares and loan notes and the redempticr of certain classes of shares
and loan notes. The financing activities section of the cash flow statement will show
repayments of debt: borrowing of funds, as well as injections of capital and the payment of
dividends.
Examples
1. Cash proceeds from issuing shares or other equity instruments.
2. Cash proceeds from issuing debentures, loans, notes, mortgages and other short or
long term borrowings.
3. Cash repayments of amounts borrowed.
4. Cash payments by lessee for the reduction of outstanding liability to a finance lease.
Note
Investing and financing transactions that do not involve the use of cash or cash equivalenmnt
are not included in a cash flow statement. Such transactions be disclosed elsewhere in the
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financial statements in a way that provides all the relevant information about these
investigating and financing activities.
FORMAT: DIRECT METHOD
Shs in ‘000
Cash flow from operating activities
Cash receipts from customers
x
Cash paid to suppliers and employees
(X)
Cash generated from operations
x
Interest paid
(x)
Income taxes paid
(x)
Net cash flow from operating activities
x
Cash flow from investing activities
Purchase of fixed assets
(x)
Proceeds from sale of fixed assets
x
Purchase of investments
(x)
Proceeds from sale investments
x
Interest received
x
Dividend received
x
Net cash from investing activities
x
Cash flows from financing activities
Proceeds from issue of share capital
x
Redemption of preference shares/debentures
(x)
Long-term borrowing
x
Repayment of long-term borrowings
(X)
Interest paid
(X)
Dividend paid
(X)
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LECTURE NOTES
Net cash from financing activities
X.
Net increase in cash and cash equivalents _
X
Cash and cash equivalents at beginning of period (b/d)
X
Cash and cash equivalents at end of the period (c/d)
X
Indirect method cash flow statement sh'000'
Cash flow from operating activities:
Net profit before tax
X
Adjustments for:
Depreciation
X
Foreign exchange loss
X
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LECTURE NOTES
Interest income
(X)
Dividend income
(X)
Interest expense
X
Operating profit before working capital changes
X
Working capital changes
Increase in sundry debtors
(X)
Decrease in inventories
(X)
Decrease in sundry creditors
(X)
Cash generated from operations
X
X
Note: the calculation for cash flow from investing and financing activities does not
change with the indirect method.
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