IAS 7 Cashflow

Cashflow statement IAS 7
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Introduction
Learning objective
prepare a statement of cash flows using
the direct method
prepare a statement of cash flows using
the indirect method
usefulness of cash flow information

interpret a statement of cash flows
all the above will is for a single entity as

per IAS 7
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IAS 7 STATEMENT OF CASH FLOW
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Definition of Cash flow statement
Definition of other terms
It is a financial statement that

shows how changes in the
statement of financial position and
income affect cash and cash
equivalents, and breaks the analysis
down to operating, investing, and
financing activities.
1. Cash comprises cash on hand and demand
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deposits
Cash equivalents are short-term, highly
liquid investments that are readily
convertible to known amounts of cash and
which are subject to an insignificant risk of
changes in value. Eg treasury bills
3. Cash flows are inflows and outflows of cash
and cash equivalents.
2.
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Definition of other terms
Purpose of the statement of Cash

flow
Operating activities are the principal revenueproducing activities of the entity and other activities
that are not investing or financing activities.
5. Investing activities are the acquisition and
disposal of non-current assets and other
investments not included in cash equivalents.
6. Financing activities are activities that result in
changes in the size and composition of the equity
capital and borrowings of the entity.
The Primary purpose is to provide

information about an entity's cash
receipts and cash payment.
Provide information on cash basis
about the operating ,investing and
financing activities of the company
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Compiled by Nsama Musawa Njebele
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Purpose of the statement of Cash

flow
Presentation & classification of a

statement of cash flows
It provides answers
following questions.
Although IAS 7 does not prescribe a format for

statements of cash flows, it does require the cash
flows to be classified into:
to
the
Where did the cash come from

during the period
What was the cash used for during
the period
What was the change in the cash
balance during the period.
1.
2.
3.
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Cash flow from operating Activities
1.
2. Cash flow from Investing Activities

3. Cash flow from Financing Activities
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Cash flow from operating
Classification of cash flows
Activities
3 classification
1. Cash flow from operating Activities
2. Cash flow from Investing Activities
3. Cash flow from Financing Activities
This includes
Cash receipts from the sale of goods and
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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
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Cash flow from Investing

Activities
10
Cash flow from Financing

Activities
Involves acquisition and disposal of long term assets
i.e.
Cash payments to acquire property, plant and
equipment, intangibles and other non-current assets
Activities that result in changes in the

size and composition of the equity
capital and borrowings of the entity.
Cash receipts from sales of property, plant and
equipment, intangibles and other non-current assets

Cash payments to acquire shares or debentures of
other entities
Cash receipts from the sale of shares or debentures of
other entities
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Summary of cash flow activities
Operating Activities
Investing Activities
Cash inflows
Sale of goods and services
Returns on loan (interest) and on equity securities (dividends)
Cash outflows
To suppliers of inventory
To employees for services
To government for taxes
To lenders for interest
To others for expenses
Cash inflows
From sale of property plant and equipment
From sale of debt or equity securities other entities
From collection of principal on loans to other entities
Cash outflows
To purchase property plant and equipment
To purchase debt or equity securities of other entities
To make loans to other entities
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Income statement
Items & Current
assets and liabilities
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Long term liability

& equity items
Note some cash flows relating to investing or financing activities are classified as operating
activities e.g. receipts of investments (interest and dividends)
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Solution
Issue of shares Financing
Buying of shares Investing
Borrowing a loan Financing
Principal repayment Financing ,Interest
repayment is operating
5. Issuing bond Financing
6. Buying bond investing
7. Paying of dividends investing
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Reporting cash flows from

operating activities
The standard recommends two methods of
reporting operating activities
Direct method
Indirect method
1.
2.
3.
4.
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Which of these are investing, operating or

financing activities. For Bata shoe Company
1. Bata issued out new shares
2. Bata bought shares from Larfage
3. Bata got a loan for from zanaco
4. Bata repaid K500 for loan from zanaco.K400 is for
principal and K100 interest
5. Bata issued a bond on the LuSe
6. Bought a bond from BOZ
7. Bata paid out dividend to shares holders
Financing Activities
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Question

Cash inflows
From sale of equity securities
From issuance of debt (bonds and notes)
Cash outflows
To stock holders as dividends
To redeem long-term debt or reacquire capital stock
none current assets
Either of the methods can be used the standard

encourages the direct but the indirect is widely
used
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Format for statement of cash flow

indirect method(summary)

indirect method(Detailed)
Proforma statement of cash flows indirect method
Format of cash flow statement

Company Name Cash flow statement for the period
Cash flow from operating activities
Net income(Profit before tax)
List of individual items to reconcile net income to net cash
Provided by operating activities
Net cash flow from operating activities
K
Cash flows from operating activities
Net profits before tax
Adjustments for:
Finance costs (Accrued)
Investment income(interest/dividends received)
Depreciation
Profit on sale of non-current assets
Provisions increase/decrease
Government Grant amortization
Increase/decrease in prepayments
Increase/decrease in accruals
XXX
XXX
Cash flow from investing activities

List of individual inflow & outflow
Net cash provided (used) by investing activities
XXX
Cash flow from financing activities

List of individual inflow & outflow
Net cash provided (used) by financing activities
XXX
XXX
XXX
XXX
Net increase (decrease) in cash

Cash at the beginning of period
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Cash at the end of period IAS 7 STATEMENT OF CASH FLOW
XXX
XXX
XXX
19

Cash flows from investing activities
Purchases of property, plant and equipment
Proceeds of sale of property, plant and equipment
Proceeds from government grants
Interests received
Dividends received
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Cash flows from financing activities:

Proceeds from issue of shares
Proceeds from long-term borrowings
Payment of finance lease liabilities
Dividends Paid
(X)
X
X
(X)
(X)
Cash and cash equivalents at end of the period
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(X)
X
X
X
22
Preparation of cash flow

statement indirect method
Start with the profit before / or loss
Indirect method (or reconciliation

method )starts with the net income
and converts it to net cash flow
from operating activities.
This method adjusts net income for
items that affected reported net
income but did not affect cash
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Net cash used in financing activities

Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of the period
Preparation of cash flow

statement indirect method
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(X)
X
X
X
X
Net cash used in investing activities
X
X
(X)
X
(X)
X/(X)
(X)
(X)/X
X/(X)
_______
X
(X)/X
(X)/X
X/(X)
X
(X)
(X)
X
Operating profit before working capital changes

Increase/decrease in inventories
Increases/decrease in trade receivables
Increase/decrease in trade payable
Cash generated from operations
Finance costs paid
Income taxes paid
Net cash from operating activities
XXX
then adjusted for the effects of the

following
1. non-cash nature
2. deferrals or accruals of past or future
operating cash receipts or payments,
3. income or expense associated with
investing or financing cash flows
4. Changes in working capital
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Item of non-cash nature
Deferrals or accruals
E.g
These might arise from expenses like

finance costs
income tax
Depreciation/amortization
Profit or loss on sale of Non current
assets
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Provisions
To calculate the actual cash flow ,compare the
movement in the statement of financial position
and the income statement
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Changes in working capital
Increases/decrease in trade receivables (X)/X
Increases/decrease in trade receivables (X)/X
Increase on receivables is reduced from profit

because when accounts receivables increase
during the year ,revenue on an accrual basis
are higher than revenues on the cash basis
because goods sold on credit are reported as
revenue but no cash is received.
Customers are holding on cash
The decrease is added to profit
Increase/decrease in trade payable
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(X)/X
X/(X)
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Increase/decrease in trade payable X/(X)
Increase in a/c payables is added to profit

because; when accounts payables increase
expenses on accrue basis are higher than on
the cash basis because expenses are incurred
for which payments are not made.
Company is holding cash for suppliers
The decrease is reduced from profit
Increase is reduced from profit because it
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(X)/X
means cash is held in the inventory
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Information need to prepare cash

flow(indirect)
Steps in preparing cash flow
1. Comparative statement of financial
1. Analyze the notes and income
position to provide changes in assets

,liabilitiesand equity.
2. Current income statement to show cash
provided or used in operations during
the year.
3. Selected transactional data from
general ledgers.
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statement to discover non cash items

and accruals.
2. Using the comparative statement of
financial position ,calculate the
movement in the statements of
financial position.(use the notes also)
3. Determine the change in cash(compare
opening and closing cash balance)
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cash flow from operations

Profit before tax

Adjust for non cash movements
(Deprecation, loss/gain on sale of assets)
add back interest accrued
4.Determine net cash flow from ops activities;

1. find cash purely from operations
2 less interest and dividend actually paid.
3 add interest actually received
4.Add /less movements in work capital
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Less interest /dividends received accrued

Cash purely from operations
less tax, interest actually paid.

add interest/dividends actually received
Add /less movements in work capital
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(XX)
XX
X/(X)
XXX
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Question 1
Current assets
Trade receivables
Cash and bank
Total assets
Equity
Share capital
Share premium
Retained earnings
Liabilities
Long term loans
7.Prepare the cash flow statement
(XX)
Xxx
Comparative statement of financial position for ABZ as at 31 December 2014

Assets
2014
2013
Non Current assets
K
K
Property plant and Equipment
976
940
Investments
500
500
1,476
1,440
5.Determine net cash flow from

investment activities
6.Determine net cash flow from
financings activities
XX
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XX
X(X)
Trade payables
Accrued interest payable
Taxation
Bank overdraft
35
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462
280
30
772
2,248
424
314
0
738
2,178
440
140
1,052
1,632
400
120
890
1,410
180
260
364
6
66
0
2,248
352
0
110
46
2,178
36
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Question 1
Solution Step 1
1.Analyze the notes and income statement to
discover non cash items are accruals.
depreciation 140,000
No gain or loss since no asset was sold.
Income statement for the period ending 31 December 2014

Revenue
1,504
Cost of sales
(774)
Gross profit
730
Administration expenses
(450)
Interest payable
(36)
Dividends received
44
Profit before tax
288
Taxation
(66)
Profit after tax
222
The following information is also available
a) Administration expenses include employee salaries of K296 and equipment depreciation of
K140.
b) There were no non current asset disposals during the year to 31 December 2014
c) A dividend of K 60 was paid in March 2014
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Solution Step 2
Solution Step 2
Using the comparative statement of financial
Step 2
Comparative statement of financial position for ABZ as at 31
Assets
2014
Non Current assets
K
976
Investments
500
1,476
position ,calculate the movement in the

statements of financial position.
Current assets
Trade receivables
Cash and bank
Total assets
Equity
Share capital
Share premium
Retained earnings
Liabilities
Long term loans
Trade payables
Taxation
Bank overdraft
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Solution Step 3
Invest
462
280
30
772
2,248
424
314
0
738
2,178
38
-34
30
ops
ops
ops
440
140
1,052
1,632
400
120
890
1,410
40
20
162
Fin
Fin
Fin
180
260
-80
Fin
364
6
66
0
2,248
352
0
110
46
2,178
12
6
-44
46
Ops
Ops
Ops
Profit before tax

Deprecation
Opening -46
Clossing 30
76
This should balance with the cash f low end
balance
C/F class
40
Solution Step 4
opening and closing cash balance)
December 2014
2013
Change
K
940
36
500
0
1,440
Determine net cash flow from ops activities
Determine the change in cash(compare
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38
41
288
140
add back interest paid accrued

Less dividends received accrued
36
(44)
less tax actually paid (wi)

less interest actually paid(wii)
Increase in inventories
add dividends recied
Decrease in receivables
Increase in payables
Cash f low from operating activities
( 110)
( 30)
(38)
44
34
12
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420
-88
332
42
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Solution Step 4 workings

Working (i) taxation
0pening tax payable
Charge for year(i/s)
Payment (bal fig)
Closing tax payable
2. Working (ii) interest
0pening interest payable
Payment (bal fig)
Closing interest payable
1.
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Solution Step 5
5.Determine net cash flow from investment
110
66
( 110)
66
Acquisition of PPE(w3)
0
36
(30)
6
Working 3
Opening balance
Less dep
Acquistion( bal fig)
Closing
activities
43
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(176)
940
(140)
176
976
Solution Step 6
Solution step 7
6.Determine net cash flow from Financing

Net increase in cash and cash equiv
Cash and cash equiv at beginning
Cash and cash equiv at end
activities
Proceeds from issues of new shares(40+20)
Repayment of debt
Dividend paid
60
(80)
(60)
-80
44
332
(176)
(-80)
76
(46)
30
(Net increase in cash and cash equiv should = step 2

Cash and cash equiv at at end = that in financial
position)
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CHAMBISHI METALS STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER

2009
K'000
Non-current assets
Cost
7,980
Depreciation
(1,590)
6,390
Current assets
Inventory
120
Trade receivables
380
Bank
240
740
Total assets
7,130
FA Equity and liabilities
Equity
Share capital
1,800
Share premium
180
Retained earnings
3,580
5,560
Non-current liabilities
Long-term loans
1,000
Current liabilities
Trade payables
60
Taxation
510
570
Total equity and liabilities
7,130
Question 2
Chambishi Metals Co's income statement for the year ended 31 December 2008 and statements of
financial position at 31 December 2008 and 31 December 2009 were as follows.
CHAMBISHI METALS INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2009
K'000 K'000
Sales
3,600
Raw materials consumed
350
Staff costs
4,70
Depreciation
590
Loss on disposal of non-current asset
90
1,500
Operating profit
2,100
Interest payable
140
Profit before tax
1,960
Taxation
620
Profit for the year
1,340
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2008
K'000
7,800
(1,120)
6,680
100
290
280
670
7,350
1,700
120
2,570
4,390
2,500
30
430
460
7,350
Dividends paid were K330, 000

During the year, the company paid K450, 000 for a new piece of machinery.
Required
Prepare a statement of cash flows for Chambishi Metals Co for the year ended 31 December 2009 in
accordance with the requirements of IAS 7, using the indirect method.
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Solution step 1
Solution step 2
Analyze the notes and income statement to
2009
K'000
discover non cash items are accruals

Depreciation
590
Loss on disposal of non-current asset
Non-current assets
Cost
Depreciation
Current assets
Inventory
Trade receivables
Bank
90
Total assets
FA Equity and liabilities
Share capital
Share premium
Retained earnings
Non-current liabilities
Long-term loans
Current liabilities
Trade payables
Taxation
Total equity and liabilities
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Solution step 3
100
290
280
670
7,350
1,800
180
1,700
120
100
40
3,580
5,560
2,570
4,390
1,010
1,000
2,500
60
510
570
7,130
30
430
460
7,350
20
90
-40
(1,500)
30
80
Ops
ops
balancing
Financing
Financing
Financng
ops
Deprecation
loss on sale of asset
add back interest paid accrued

50
51
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2,780
-760
2,020
52
5.Determine net cash flow from investment activities

Acquisition of PPE(w3)
(450)
Cashflow from sale of equip
60
cash flow from investment activities (390)
Working 3
Opening balance
6,680
Less dep
(590)
Acquisition
450
Disposal ( bal fig )
(150)
Closing
6,390
Actual cash flow from disposal is 60 ( 150-90 los on disposal)
0
140
140
0
140
Solution Step 5
430
620
540
510
590
90
less tax actually paid (wi)

(540)
less interest actually paid(wii)
( 140)
Increase in inventories
(20)
Increase in receivables
(90)
Increase in payables
30
Solution Step 4 workings
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120
380
240
740
7,130
C/F class
Invest
Invest
Profit before tax

1,960
Opening 280
Closing 240
-40
This should balance with the cash f low end balance

0pening tax payable
Payment (bal fig)
Closing tax payable
Payment (bal fig)
Closing interest payable
180
470
650
Solution Step 4
closing cash balance)
1.
7,800
(1,120)
6,680
Determine net cash flow from ops activities
Determine the change in cash(compare opening and
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Change
2008
K'000
7,980
(1,590)
6,390
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Solution Step 6
Solution step 7
Net increase in cash and cash equiv
Cash and cash equiv at beginning
Cash and cash equiv at at end
6.Determine net cash flow from Financing
activities
Proceeds from issues of new shares(100+40) 160
Repayment of debt
(1500)
Dividend paid
(330)
cash flow from Financing Actv
(1,670)
2,020
(390)
(1,670)
-40
(280)
240
(Net increase in cash and cash equiv should = step 2

Cash and cash equiv at at end = that is financial
position)
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Operating activities Direct method
Operating activities Direct method
The direct method of arriving at cash f low from

operating activities uses the actual trading cash
f lows to arrive at operating profit
Examples of actual transaction
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Proforma statement of cash flows

direct method
Cash flows from operating activities
Cash receipts from customers
Cash paid to suppliers and employees
Interest paid
Income taxes paid
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cash received from customers

cash paid to suppliers
cash paid for expenses
cash paid for wages and salaries
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Proforma statement of cash flows

direct method
Cash flows from investing activities
Purchase of property, plant and equipment
Proceeds from sale of equipment
Interests received
Dividends received
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issue of share capital
Proceeds from long-term borrowings
Dividends paid*
Net cash used in financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period (Note)
Cash and cash equivalents at end of period (Note)
X
(X)
X
(X)
( X)
X
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(X)
X
X
X
(X)
X
X
(X)
(X)
X
X
X
60
10
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Direct method
Deriving relevant cash flows

Can use
accounting records of the entity by totaling the
cash receipts and payments directly, or
2. the opening and closing statements of financial
position and income statement for the year by
constructing summary control accounts for
sales (to derive cash received from customers)
Purchases (to derive cash payments to suppliers)
Wages (to derive cash paid to and on behalf of
employees)
Opening receivables balance
XX
Add sales (from incomes statement) XX
Less Receipt (bal fig)
(XX)
Closing receivables
XX
1.
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cash cash payments to suppliers
Opening trade payables

Add purchases**
Add admin +selling expenses
Less salaries & depreciation
Less Payment Bal fig
Closing trade payable
**Opening inventory
Purchase (bal fig)

Closings inventory
Cost of sales
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Question 1 above use direct

method
Comparative statement of financial position for ABZ as at 31 December 2014
Assets
2014
2013
Non Current assets
K
K
976
940
Investments
500
500
1,476
1,440
XX
XX
XX
(XX)
Current assets
Trade receivables
Cash and bank
(xx)
xxx
Total assets
Equity
Share capital
Share premium
Retained earnings
XX
Liabilities
Long term loans
XX
(XX)
XX
62
Trade payables
Taxation
Bank overdraft
63
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462
280
30
772
2,248
424
314
0
738
2,178
440
140
1,052
1,632
400
120
890
1,410
180
260
364
6
66
0
2,248
352
0
110
46
2,178
64

Question 1
Opening receivables balance
314
Add sales (from incomes statement) 1,504
Less receipt (bal fig)
(1,538)
Closing receivables
280
Income statement for the period ending 31 December 2014

Revenue
1,504
Cost of sales
(774)
Gross profit
730
Administration expenses
(450)
Interest payable
(36)
Dividends received
44
Profit before tax
288
Taxation
(66)
Profit after tax
222
The following information is also available
a) Administration expenses include employee salaries of K296 and equipment depreciation of
K140.
b) There were no non current asset disposals during the year to 31 December 2014
c) A dividend of K 60 was paid in March 2014
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66
11
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cash payments to suppliers
Opening trade payables

Add purchases**
Add admin +selling expenses
Less salaries & depreciation(296+140)
Less Payment Bal fig
Closing trade payable
**Opening inventory
Purchase (bal fig)
Closings inventory
Cost of sales
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Solution
Note other workings are just same as indirect method
0pening tax payable
110
66
Payment (bal fig)
110
Closing tax payable
66
0
36
Payment (bal fig)
30
Closing interet payable
6
1.
352
812
450
(436)
(814)
364
424
812
(462)
774
67
Cash flows from operating

activities
Cash receipts from customers
Cash paid to suppliers
Cash paid to employees
Interest paid
Income taxes paid
Dividend received
Advantages
Disadvantages
(814 )
(296)
428
(30)
(110)
44
332
It shows Information
which is not shown
elsewhere in the
financial statements
The method does show

the true cash flows
involved in the trading
operations of the entity.
69
Advantages of Cash flow over

Income statement
70
A statement of cash flows in conjunction with a

statement of financial position provides information
on liquidity, viability and adaptability.
Cash flows cannot be manipulated easily and are not
affected by judgment or by accounting policies
It gives an indication of the relationship between

profitability and cash generating ability,
Analysts and other users of financial information
often, formally or informally, develop models to assess
and compare the present value of the future cash flow
of entities.Historic cash flow is used
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significant costs are

incurred in
preparing the
information as it is
not found anywhere
Advantages of Cash flow over

Income statement
It assist users of financial statements in making

judgments on the amount, timing and degree of
certainty of future cash flows.
68
Direct Method
the statement is same
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1,538
Note 332 is the same as for indirect method .The rest of
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Limitations of the statement of

cash flows
Limitations of the statement of

cash flows
Statements of cash flows are based on historical

information and therefore do not provide complete
information for assessing future cash flows.
There is some scope for manipulation of cash flows,
e.g. a business may delay paying suppliers until after
the year end.
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Cash flow is necessary for survival in the short-term,

but in order to survive in the long-term a business
must be profitable. It is often necessary to sacrifice
cash flow in the short-term in order to generate profits
in the
73
Interpretation of statements of
cash flow
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74
cash flow
Cash generation from trading operations
Dividend and interest payouts
The figure should be compared to the
These can be compared to cash generated
operating profit. Overtrading may be

indicated by:
High profits and low cash generation
Large increases in inventory, receivables
and payables
from trading operations and check if cash

generated can sustain such payments. In
most years they should
8/14/2014
75
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cash flow
76
assignment
Capital expenditure and financial investment

The nature and scale of a companys investment in noncurrent assets is clearly shown.
A simple test may be to compare investment and
depreciation.
If investment >depreciation, the company is investing at a
greater rate than its current assets are wearing out this
suggest expansion.
If investment = depreciation, the company is investing in
new assets as existing ones wear out. The company appears
stable.
If investment<depreciation the non-current asset base of
the company is not being maintained. This is potentially
worrying as non-current assets are generators of profit
8/14/2014
Evaluate the application of IAS 7 by the companies

listed on the LuSe
Evaluate the performance of companies listed on
the LuSe by Interpreting the cash flows
77
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78
13
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79
14

IAS 7 Cashflow

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IAS 7 Cashflow

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Cashflow statement IAS 7

the direct method

prepare a statement of cash flows using

the indirect method

usefulness of cash flow information

all the above will is for a single entity as

IAS 7 STATEMENT OF CASH FLOW

IAS 7 STATEMENT OF CASH FLOW

Definition of Cash flow statement

Definition of other terms

It is a financial statement that

1. Cash comprises cash on hand and demand

IAS 7 STATEMENT OF CASH FLOW

IAS 7 STATEMENT OF CASH FLOW

Definition of other terms

Purpose of the statement of Cash

The Primary purpose is to provide

IAS 7 STATEMENT OF CASH FLOW

Compiled by Nsama Musawa Njebele

IAS 7 STATEMENT OF CASH FLOW

Cashflow statement IAS 7

Purpose of the statement of Cash

Presentation & classification of a

Although IAS 7 does not prescribe a format for

Where did the cash come from

IAS 7 STATEMENT OF CASH FLOW

Cash flow from operating Activities

2. Cash flow from Investing Activities

IAS 7 STATEMENT OF CASH FLOW

Cash flow from operating

Classification of cash flows

IAS 7 STATEMENT OF CASH FLOW

receipts from royalties, fees,

Cash flow from Investing

IAS 7 STATEMENT OF CASH FLOW

Cash flow from Financing

Involves acquisition and disposal of long term assets

equipment, intangibles and other non-current assets

Activities that result in changes in the

Cash receipts from sales of property, plant and

equipment, intangibles and other non-current assets

IAS 7 STATEMENT OF CASH FLOW

Compiled by Nsama Musawa Njebele

IAS 7 STATEMENT OF CASH FLOW

Cashflow statement IAS 7

Summary of cash flow activities

Summary of cash flow activities

IAS 7 STATEMENT OF CASH FLOW

Long term liability

IAS 7 STATEMENT OF CASH FLOW

Compiled by Nsama Musawa Njebele

IAS 7 STATEMENT OF CASH FLOW

Reporting cash flows from

Which of these are investing, operating or

IAS 7 STATEMENT OF CASH FLOW

Summary of cash flow activities

none current assets

Either of the methods can be used the standard

IAS 7 STATEMENT OF CASH FLOW

Cashflow statement IAS 7

Format for statement of cash flow

Format for statement of cash flow

Format of cash flow statement