The Cash Flow Statement
by Binam Ghimire
1
Learning Objective
1.
2.
3.
4.
5.
Cash Flow from Operations
Cash Flow from Investing
Cash Flow from Financing
IAS7 Presentation of the Cash Flow Statement
Analysis of Cash Flow
Cash Flow Statement IAS 7
 Fundamental Principle in IAS 7
All enterprises that prepare financial statements in
conformity with IFRSs are required to present a
statement of cash flows.
 Objective of IAS 7
 to require the presentation of information about the
historical changes in cash and cash equivalents of
an enterprise by means of a statement of cash flows,
which classifies cash flows during the period according
to operating, investing, and financing activities.
 What are cash and cash equivalents ?
Cash &
Cash Equivalents
 cash on hand
 demand deposits
 short-term, highly liquid investments that are readily
convertible to a known amount of cash, and that are
subject to an insignificant risk of changes in value.
Guidance notes indicate that an investment normally
meets the definition of a cash equivalent when it has:
a maturity of three months or less from the date of
acquisition.
 overdrawn bank balances where these readily fluctuate
from positive to negative
Presentation of the Statement of Cash Flows
 Cash flows must be analysed between
Operating,
Investing
Financing Activities.
Operating activities
 Are the main revenue-producing activities of the
enterprise that are not investing or financing activities,
 So operating cash flows include cash received from
customers and cash paid to suppliers and employees
Investing activities
 Are the
acquisition and
disposal
 of long-term assets and other investments that are not
considered to be cash equivalents
Financing activities
 Are activities that alter the equity capital and borrowing
structure of the enterprise
Note:
 Interest and Dividends received and paid
may be classified as operating, investing, or financing
cash flows, provided that they are classified
consistently from period to period
 Taxation Cash Flows
Cash flows arising from taxes on income are normally
classified as operating, unless they can be specifically
identified with financing or investing activities
 Extraordinary Items
Should be classified as operating, investing or
financing as appropriate and should be separately
disclosed
Cash Flows and Life Cycle
10
Summary so far….
 A Cash Flow Statement is:
 a statement of the cash that flowed into and out of the business
over the last year.
 To aid understanding it is normally presented under 3 headings:
 Net Cashflow (in – out) from Operating Activities
(i.e. from your core trading activity – clearly this should
produce a positive cash inflow)
 Net Cashflow from Investing Activities
(e.g. buying/selling Non Current Assets. Growing companies
will therefore have a negative cashflow).
 Net Cashflow from Financing
(e.g. cash received/repaid re share issues and debt – as a
result it may well be negative)
 The addition of these 3 will then balance to the Increase/Decrease in the
Bank/Cash balances over the year
Cisco Systems
You will note that:
Net cash from operating activities
Net cash used in investing activities
Net cash from refinancing activities
Net increase in cash and cash equivalents
527
$
9,897
(9,959)
589
The Net Decrease in Cash will be reflected in the Balance
Sheet
You will note that:
£M
Net cash from operating activities
3,992
Net cash used in investing activities
(1,859)
Net cash from refinancing activities
(3,036)
Net decrease in cash and cash equivalents
(903)
The Net Decrease in Cash will be reflected in the Balance
Sheet
The Relationship between the
Balance Sheet and the
Cash Flow Statement
 The relationship between the Balance Sheet and the
Cash Flow Statement, usually reveals:
the Investment Cycle representing the purchase of
Non Current Assets
the Operating Cashflow, financing Working Capital
(purchase of Current Assets and payment of Current
Liabilities)
Cashflow from Financing (Equity and/or Debt) to
finance the investment in Non Current Assets
BALANCE SHEET
Cash Flow
Investment Cycle
(i.e. cash used to
buy assets or
received from the
sale of assets)
ASSETS
Non Current Assets
LIABILITIES
Equity
Non Current
Liabilities (Debt)
Operating Cycle
(i.e. from core
trading activities)
Current Assets
Current Liabilities
Cash Flow
From Financing
(i.e. cash from
shares issued and
loans taken)
Evaluation
 What does the Cash Flow Statement of Tesco tell you
about them, after all the Net Decrease in cash and
cash equivalents is £ 903 M for the year ?
Summary
Fundamental Principle in IAS 7
All enterprises that prepare financial statements in
conformity with IFRSs are required to present a
statement of cash flows.
Objective of IAS 7
 to require the presentation of information about the
historical changes in cash and cash equivalents of
an enterprise by means of a statement of cash flows,
which classifies cash flows during the period according
to operating, investing, and financing activities.
 Cash flows must be analysed between
Operating,
Investing
 Financing Activities.