Chapter 20
Statement of cash flows
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
20-1
Objectives
• Understand the accounting requirements relating to the
disclosure of information about an organisation’s cash flows
• Understand how to construct a cash-flow statement in conformity
with AASB 107 ‘Cash Flow Statement’
• Understand how the statement of cash flows provides information
that is a useful complement to the balance sheet and the income
statement
• Understand how we define ‘cash’ and ‘cash equivalents’ for the
purposes of a cash-flow statement and understand that these
definitions mean that cash-flow statements address transactions
beyond those involving merely ‘cash’
• Understand the differences between cash flows from operations,
cash flows from investing, and cash flows from financing activities
• Be aware of the various supporting notes that must accompany a
cash-flow statement
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
20-2
Comparison with other
financial statements
• Balance sheet
– shows financial position at a certain date
•
Income statement
– shows profit or loss that has been generated for a period of time
using accrual accounting
• Cash-flow statement
– explains the movements in cash and cash equivalents for a given
period
– provides a reconciliation of opening and closing total of cash and
cash equivalent balances appearing in the balance sheet
– indicates sources of cash in terms of cash flows from operations,
investing, and from financing
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
20-3
Purpose of cash flow statement
Purpose of the cash-flow statement
• Assists in assessing the ability of the company or
economic entity to
– generate cash flows
– meet financial commitments as they fall due, including
servicing of borrowings and payment of dividends
– fund changes in the scope and/or nature of its activities
– obtain external finance
By having knowledge of both cash flows and accrual of
profits/losses, investors are likely to be better able to
assess the performance and viability of the reporting entity
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
20-4
Purpose (cont.)
• Argued (by some people) to be more reliable than profit data
as profit data typically based on numerous subjective and
sometimes ‘creative’ judgments
• Cash-flow data tends to be more ‘factual’ or ‘objective’
• Considered by many to be more understandable to users, to
give rise to fewer problems with key terms, and to provide
greater comparability between companies
• Cash flows from operations is considered (by some people) to
be a superior performance measure and useful in assessing
liquidity and solvency
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
20-5
Objective
Objective of AASB 107 ‘Cash Flow Statements’ is
to require the provision of information about the historical
changes in cash and cash equivalents of an entity by means of a
cash-flow statement, which classifies cash flows during the
period from operating, investing and financing activities
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
20-6
Defining ‘cash’ and
‘cash equivalents’
AASB 107 requires the cash-flow statement to provide
information about ‘cash’ and ‘cash equivalents’
• Cash flows—inflows and outflows of cash and cash
equivalents
• Cash—cash on hand (notes and coins held) and
demand deposits (deposits on call with a financial
institution)
• Cash equivalents
– highly liquid investments with short periods to maturity that are
readily convertible to cash on hand at the investor’s option
and are subject to an insignificant risk of changes in value
– borrowings that are integral to the cash management function
and are not subject to a term facility
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
20-7
Defining ‘cash’ and
‘cash equivalents’ (cont.)
‘Cash’ in the cash-flow statement
• May relate to the total of a number of accounts
shown in the balance sheet or accompanying notes
• May include cash at bank, bank overdrafts, shortterm money market deposits, bank bills
• AASB 107 requires that the amount of ‘cash’ and
‘cash equivalents’ as at the end of the financial year
as presented in the cash-flow statement be
reconciled (by way of a note to the financial
statements) to the related items in the balance sheet
(refer to Exhibit 20.2 on page 701 of the text)
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
20-8
Defining ‘cash’ and
‘cash equivalents’ (cont.)
‘Cash equivalents’ in the cash-flow statement
• AASB 107 (par. 7)
Cash equivalents are held for the purpose of meeting shortterm cash commitments rather than for investment or other
purposes. For an investment to qualify as a cash
equivalent it must be readily convertible to a known amount
of cash and be subject to an insignificant risk of changes in
value. Therefore, an investment normally qualifies as a
cash equivalent only when it has a maturity of, say, three
months or less from the date of acquisition
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
20-9
Defining ‘cash’ and
‘cash equivalents’ (cont.)
‘Cash equivalents’ in the cash-flow statement (cont.)
• Also required to disclose policy adopted by
organisation for determining which items are
classified as ‘cash’ in the statement of cash flows
• Explicit disclosure of this policy to assist users in
understanding the cash-flow statement
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
20-10
Defining ‘cash’ and
‘cash equivalents’ (cont.)
‘Cash equivalents’ in the cash-flow statement (cont.)
• For an item to be considered to be a ‘cash equivalent’ it must
be highly liquid and be used as part of the cash management
of the company
• Result—cash equivalent in one entity might not be a cash
equivalent in another
• Depends on the respective cash-management programs
adopted— bank and non-bank bills (highly liquid investments)
typically meet the definition of cash
• Account items such as accounts receivable, accounts payable,
any borrowings subject to a term facility or equity securities
would be excluded from cash equivalents
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
20-11
Classification of cash flows
• AASB 107 requires that cash flows be classified into
those relating to
– operating activities
 the principal revenue-producing activities of the entity and other activities
that are not investing and financing activities, i.e. relate to the provision of
goods and services, and other activities that are neither financing nor
investing activities (refer to definitions of financing and investing)
– investing activities
 the acquisition and/or disposal of long-term assets (including property,
plant and equipment) and other investments (such as securities) not
included in cash equivalents
– financing activities
 relating to changing the size and/or composition of the financial structure
of the entity, including equity and borrowings not following within the
definition of cash
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
20-12
Format of cash-flow statement
• Appendix to AASB 107 provides a suggested
format
– refer to Exhibit 20.3 (page 704 of the text)
– cash flows from operating activities disclosed first,
followed by investing activities and financing activities
• Prior-year comparisons required
• Some items ordinarily considered operating items
for income statement purposes might not be
treated the same for cash-flow purposes and vice
versa (e.g. interest paid)
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
20-13
Cash flows from operating activities
Cash flows from operating activities include
• Receipts from customers
• Payments to suppliers and employees
• Dividends received
• Cash generated from operations
• Interest paid
• Income taxes paid
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
20-14
Cash flows from investing activities
Cash flows from investing activities include:
• Acquisition of subsidiary X, net of cash acquired
• Purchase of property, plant and equipment
• Proceeds from sale of equipment
• Interest received
• Dividends received
Copyright  2007 McGraw-Hill Australia Pty Ltd
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Slides prepared by Craig Deegan
20-15
Cash flows from financing activities
Cash flows from financing activities include
• Proceeds from issue of shares
• Proceeds from borrowings
• Repayment of borrowings
• Dividends paid
• Share buybacks
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
20-16
Format of cash-flow statement (cont.)
Number of items to be separately disclosed (AASB
107, par. 31)
• Interest and other items of a similar nature received
• Dividends received
• Borrowing costs, including interest and other costs
of finance paid
• Dividends paid
• Income taxes paid
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
20-17
Format of cash-flow statement (cont.)
Additional issues
• Cash flows from operating activities to be disclosed
using the direct method—relevant cash inflows and
outflows reported in gross terms rather than in net
terms (AASB 107, par. 18)
• An entity to report separately major classes of gross
receipts and gross payments arising from investing
and financing activities rather than as net amounts
(AASB 107, par. 21)— exceptions noted in pars 22
and 24
• A reconciliation of cash flows from operating
activities with net profit or loss as reported in income
statement (AASB 107, par. 20.1)
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
20-18
Difference between operating profit and
net cash flows from operating activities
Reconciliation of operating profit with net cash
flows from operating activities is required (par.
20.1)
• Items that might cause a difference include
- depreciation and amortisation
- increases/decreases in accounts receivable and payable,
interest payable and receivable, accrued expenses, income
tax payable, deferred taxes payable, prepaid expenses,
inventories
- loss/gain on sale of plant and equipment
- refer to Table 20.2 on page 704 for an example, and to
Exhibit 20.4 on page 706—Reconciliation of cash flows from
operations to net profit
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
20-19
Non-cash financing and investment
activities
Required note
• AASB 107 requires that information about
transactions and events that do not result in cash
flows during the financial year but affect assets and
liabilities that have been recognised are to be
disclosed in the accounts or the consolidated
accounts where the transactions and other events
- involve parties external to the entity; and
- relate to financing and investing activities
• Refer to AASB 107, par. 43
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Slides prepared by Craig Deegan
20-20
Non-cash financing and investment
activities (cont.)
Examples of non-cash financing and investing
transactions
– conversions of liabilities to equity
– acquisitions of entities by means of an equity issue
– acquisitions of assets by assumption of directly related
liabilities such as purchase of a building by incurring a
mortgage to the seller
– acquisitions of assets by entering into finance leases
– exchange of non-cash assets or liabilities for other non-cash
assets or liabilities
Refer to Exhibit 20.5 on page 707—Note relating to
non-cash financing and investing activities
Copyright  2007 McGraw-Hill Australia Pty Ltd
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Slides prepared by Craig Deegan
20-21
Disclosure of financing facilities
AASB 107 suggests that information should be
disclosed about the external financing
arrangements of the entity
– Additional information may be relevant to users in
understanding the financial position and liquidity of an
entity. Disclosure of this information, together with a
commentary by management, is encouraged and may
include the amount of undrawn borrowing facilities that
may be available for future operating activities and to
settle capital commitments, indicating any restrictions on
the use of these facilities (AASB 107, par. 30)
Refer to Exhibit 20.6 on page 708 for an example
of a financing facility note
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
20-22
Calculating cash inflows and
outflows
Cash flows from operating activities
• Cash receipts from customers
= sales + beginning receivables – ending receivables – bad
debts expense (where bad debts are written off directly
against debtors) – transfer from provision for doubtful
debts (where debts that have previously been considered
doubtful have subsequently proven uncollectable) – any
discounts that may have been given to customers for
early payment
Refer to Worked Example 20.1 on page 709—The
calculation of cash received from customers
Copyright  2007 McGraw-Hill Australia Pty Ltd
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Slides prepared by Craig Deegan
20-23
Calculating cash inflows and
outflows (cont.)
Cash flows from operating activities (cont.)
• Classification of interest and dividends received
– AASB 107 (refer to par. 33) provides choice as to where
interest paid and dividends and interest received are to be
presented
– Appendix A of AASB 107 includes interest paid in operating
activities but includes interest and dividends received as
part of financing activities
– AASB 107 (par. 34) states that dividends paid are to be
classified as a financing cash flow as they relate to the cost
of obtaining external resources
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
20-24
Calculating cash inflows and
outflows (cont.)
Cash flows from operating activities (cont.)
• Calculation of cash received from interest revenue
= interest revenue + opening interest receivable – closing interest
receivable – discount amortisation + premium amortisation
• Calculation of cash received from dividends
= dividend income + opening dividends receivable – closing
dividends receivable
• Cash payment of interest
= interest expense + opening interest payable – closing interest
payable – discount amortisation + premium amortisation
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
20-25
Calculating cash inflows and
outflows (cont.)
Cash flows from operating activities (cont.)
• Cash payment of income taxes
= income tax expense + opening income tax payable –
closing income tax payable + opening deferred tax liability
– closing deferred tax liability + closing deferred tax asset –
opening deferred tax asset
Note (AASB 107, par. 35)
– cash flows arising from taxes on income are to be
separately disclosed and classified as cash flows from
operating activities unless they can be specifically identified
with financing and investing activities
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
20-26
Calculating cash inflows and
outflows (cont.)
Cash flows from operating activities (cont.)
• Cash payments to suppliers
= opening accounts payable – closing accounts payable +
cost of sales + closing inventory – opening inventory –
discounts given by suppliers + stock write-offs
Refer to Worked Example 20.2 on page 713—Calculating the
cash payments made to suppliers
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
20-27
Calculating cash inflows and
outflows (cont.)
Cash flows from investing activities
• Cash payments for non-current assets
= closing balance of non-current assets – opening balance of noncurrent assets + original cost of assets sold – assets acquired
through non-cash transactions – revaluation increases +
accumulated depreciation written back to revalued assets
– need to exclude any increase in assets generated by non-cash
transactions, e.g. acquisition of plant by mortgage over other
assets
– refer to Worked Example 20.3 on pp. 715—Calculating cash flows
from investing activities
• Proceeds from sale of non-current assets
– specific information about the sale transaction required—actual
receipt of cash recorded in cash-flow statement, not gain or loss
on sale
Copyright  2007 McGraw-Hill Australia Pty Ltd
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Slides prepared by Craig Deegan
20-28
Calculating cash inflows and
outflows (cont.)
Cash flows from financing activities
• Payment of cash dividends
= Dividends paid + dividends proposed + opening dividends
payable – closing dividends payable
• Includes issue of shares, issue of debt, repayment
of debt
Note
To determine cash flows from the issue of equity securities,
need to consider whether any share issue has been financed
out of reserves (e.g. retained earnings or revaluation reserve)
—if so, no related cash flow
Copyright  2007 McGraw-Hill Australia Pty Ltd
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Slides prepared by Craig Deegan
20-29
Calculating cash inflows and
outflows (cont.)
Refer to Worked Example 20.4 on pp. 716—
Comprehensive example of preparation of cash-flow
statement, including
– calculation and disclosure of cash flows from operating
activities
– calculation and disclosure of cash flows from investment
activities
– calculation and disclosure of cash flows from financing
activities
– reconciliation of net cash provided by operating activities
with operating profit after tax
– note concerning non-cash financing and investing activities
Copyright  2007 McGraw-Hill Australia Pty Ltd
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Slides prepared by Craig Deegan
20-30
Contractual implications
• To date limited information is available on the use of
cash-flow data in contractual agreements
• Cash flows from operations would appear to provide
an indication of ability to service debt
– perhaps more so than interest coverage
• Could argue that traditional financial ratios (current
ratio, acid test ratios) are deficient in monitoring the
liquidity of the organisation
• Has been argued that use of cash-flow data would
provide an earlier indication of solvency problems than
that provided by using conventional financial ratios
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
20-31
Summary
• Cash-flow statement considered to be very useful
complement to an entity’s balance sheet and income
statement
• It provides information useful for making assessments
about such things as an entity’s ability to:
–
–
–
–
generate cash flows
meet financial commitments as they fall due
finance changes in operating activities
obtain and service external debt
• As not based on accrual accounting, its compilation is
not greatly influenced by professional judgment
Copyright  2007 McGraw-Hill Australia Pty Ltd
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Slides prepared by Craig Deegan
20-32
Summary (cont.)
• Cash-flow statement provides a reconciliation of
opening and closing cash with cash being described
as ‘cash on hand’ and ‘cash equivalents’
Cash equivalents
– highly liquid investments with short periods to maturity readily
convertible to cash on hand at investor’s option
– borrowings integral to the cash management function of the
entity and not subject to a term facility
Cash flows to be divided into
– operating activities
– investing activities
– financing activities
Copyright  2007 McGraw-Hill Australia Pty Ltd
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Slides prepared by Craig Deegan
20-33
Summary (cont.)
Direct method to be applied
•
relevant cash inflows are reported in gross terms rather than being
netted off against each other
AASB 107 requires a number of notes to be provided,
including
•
•
•
reconciliation of cash balance per cash-flow statement with related
balance sheet items
a reconciliation of cash flows from operating activities with profit or
loss as reported in income statement
material financing and investing transactions and events that do not
result in cash flows
Calculation of cash flows can be applied using either
•
•
equation approach or
t-account approach
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
20-34