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Statement of Cash Flows

IAS 7

IAS 7 - Overview
Objective

and scope
Cash flows
Reporting operating cash flows
Reporting investing cash flows
Reporting financing cash flows
Specific items
Disclosures
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IAS 7 Objective and Scope


IAS

7 objective: to provide a statement to


help investors assess the prospects for
future cash flows, and to confirm or change
their past expectations
Statement provides historical information on
the entitys operating, investing and financing
cash flows and how its cash balances have
changed in the period as a result

IAS 7 Cash Flows


Cash

and cash equivalents:


Cash on hand and on deposit and 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
Can include bank overdrafts if part of cash
management activities and balance fluctuates
between positive and negative amounts
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IAS 7 Reporting Operating


Cash Flows
Operating

activities are the principal


revenue-producing activities; and those that
are not investing or financing activities
Operating cash flows are important: surplus
cash flows needed to invest in increased
capacity, pay debt when due, and provide a
return to shareholders

IAS 7 Reporting Operating


Cash Flows
Operating cash flows:
a) Cash received from customers for the sale of
goods and provision of services, or on
account of royalties, fees, or commissions
b) Cash payments to suppliers for goods and
services provided; and to and on behalf of
employees for their services
c) Cash received from or paid for financial
instruments held specifically for dealing or
trading purposes
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IAS 7 Reporting Operating


Cash Flows
Two methods:
Direct method
Indirect method
Either

allowed although preference for direct


method

Specimen format for a cash flow statement from IAS 7

CASH FLOW STATEMENT FOR THE PERIOD


ENDED
$000

Cash flows from operating activities


Net profit before taxation
Adjustments for:
Depreciation
Interest expense
Operating profit before working
capital changes
(Increase)/decrease in trade receivables
(Increase)/decrease in inventories
(Increase)/decrease in trade payables

X
X
X
X
(X)/X
(X)/X
X / (X)

$000

Cash generated form operations


Interest paid
(X)
Dividends paid
Income taxed paid
Net cash from operating activities
Cash flows from investing activities
Purchase of property, plant and equipment
Proceeds of sale of equipment
Interest received
Net cash used in investing activities

(X)
(X)
X/(X)

(X)
X
X
X/(X)

Cash flows form financing activities


Proceeds of issue of shares
Repayment of loans
Net cash used in financing activities

X
(X)
X/(X)

Net increase/(decrease) in cash and cash


equivalents

X/(X)

Cash and cash equivalents at the beginning


of the period
Cash and cash equivalents at the end of the
period

X
X

Cash flows from operating activities :begins with the profit


before tax as shown in the income statement. The figures below
are the adjustments necessary to convert the profit figure to the
cash flow for the period.

Depreciation

Added back to profit because it is a non-cash


expense

Interest expense

Added back because it is not part of cash


generated from operations (the interest
actually paid is deducted later)

Increase in trade
receivables

Deducted because this is part of the profit


not yet realized into cash but tied up in
receivables

Decrease in
inventories

Added on because the decrease in inventories


liberates extra cash

Decrease in trade
payables

Deducted because the reduction in payables


must reduce cash

Interest paid

Dividends paid

Income taxed paid

These are the amount actually


paid in the year

Cash flows from investing activities :cash spent on


non-current assets, proceeds of sale of non-current
assets and income from investments.
Cash flows from financial activities: the proceeds of
issue of shares and long-term borrowing made or
repaid.
Net increase in cash and cash equivalents :the
overall increase9or decrease) in cash and cash
equivalents during the year. Add the cash and cash
equivalents at the beginning of the year to give the
final balance of cash and cash equivalents at the end
of the year.

IAS 7 Reporting Operating


Cash Flows
Direct

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method

IAS 7 Reporting Operating


Cash Flows
Indirect

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methodsame entity?

IAS 7 Reporting Operating


Cash Flows
Common adjustments to convert profit or
loss to cash from operations:
Changes in working capital accounts
Elimination of non-cash items
Elimination of investing and financing items

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IAS 7 Reporting Investing


Cash Flows
Investing activities:
the acquisition and disposal of long-term
assets and other investments not included in
cash equivalents
Importance:
Is the entity maintaining its capacity and
increasing the potential for increased
operating cash flows in the future?
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IAS 7 Reporting Investing


Cash Flows

Examples:

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Cash payments to acquire property, plant, and equipment;


intangibles; and other long-term assets, including capitalized
development costs
Cash receipts from the disposal of items in (a)
Cash payments to acquire debt and equity instruments of other
entities or interests in joint ventures; excluding investments held
for trading or in cash equivalents
Cash receipts from the disposal of items in (c)
Cash advances and loans to other parties and their cash
repayments
Cash payments for and receipts from futures, forwards, options
and swaps unless they are held for trading or are classified as
financing flows.

IAS 7 Reporting Investing


Cash Flows
Example

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Wienerberger AG, Austria

IAS 7 Reporting Financing


Cash Flows
Financing activities:
result in changes in the size and composition
of the contributed equity and borrowings of
the entity
Importance:
Financing cash flows change the capital
structure of the firm and affect the relative
interests of those with claims to future cash
flows of the entity
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IAS 7 Reporting Financing


Cash Flows
Example

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Wienerberger AG, Austria

IAS 7 Specific Items


No

netting of inflows and outflows


Interest and dividends received and interest
and dividends paid choice of operating,
investing or financing flows as appropriate
Income tax cash flows generally operating
flows
Non-cash transactions not included in
statement; disclosed instead

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IAS 7 Specific Items


Cash

flows between an entity and its


subsidiaries, associates and joint ventures
reported only if accounted for by the cost or
equity method
Acquisition/loss of control of subsidiary
investing cash flow
Exchange rate changes on foreign cash
balances reconciling item at bottom of
statement
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IAS 7 - Disclosures
Operating,

investing, financing flows


Change in cash and cash equivalents
Components of cash and cash equivalents
Reconciliation of change to amounts on
statement of financial position
Explanation of significant cash balances not
available for use

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End-of-Chapter Practice

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End-of-Chapter Practice

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End-of-Chapter Practice
3-3 Companies are affected by a number of events and transactions, some of which have an effect on their cash and
cash equivalents, and some which do not. Following are some examples of such events and transactions:
1.Annual payment of $100 on a finance lease obligation, $2 of which is interest
2.Acquisition of a 4100, 3%, 90-day government treasury bill
3.Payment of $25 to a pension fund trustee
4.Cash received on the maturity of the treasury bill in item 2 above
5.Annual payment of $100 on an operating lease for sales office space
6.Receipt of $10 on the sublease of excess sales office space
7.Acquisition of the companys treasury shares at a cost of $75
8.Conversion of convertible debt into common shares
9.Payment of $30 of a portion of long-term debt reported in current liabilities along with $3 of interest
10.Costs incurred to repair a customers product under warrantyinventory supplies used $1; labor paid $4
Instructions
For each item listed above
(a)identify the effect on the companys cash and cash equivalents; and
(b)indicate how the transaction or event will be reported on the companys statement of cash flows, if at all, and if
any special disclosures are required.

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End-of-Chapter Practice

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Statement of cash flows example


Example 1:
Banks Designers, Inc. (BDI) is preparing its statement of cash flows for the year
ended December 31, 2011. BDI wants to see what the statement would look like
using US GAAP as well as IFRS. On the next slides are the balance sheet and
statement of income account balances, and some additional information.

Prepare the following:


A statement of cash flows using US GAAP.
A statement of cash flows using IFRS with net income
for the reconciliation of income to operating cash flows.
A statement of cash flows using IFRS with operating
income for the reconciliation of income to operating
cash flows.

Statement of cash flows example


Example 1 (continued):
Balance sheet accounts:

As of
January 1,
2011
Cash

$ 555,000

$ 674,480

Accounts
receivable

157,800

149,000

Inventory

254,600

269,000

Prepaid
expenses

59,000

62,000

Equipment

875,000

875,000

(120,000)

(175,000)

Accumulated
depreciati
on
Land
Total assets

As of
January 1,
2011

As of
December
31, 2011

500,000

450,000

$2,281,400

$2,304,480

Accounts
payable
Accrued
liabilities

95,000

As of
December 31,
2011
$

87,500

45,000

49,800

1,200,000

1,050,000

Common
stock

400,000

400,000

Retained
earnings

541,400

717,180

$2,281,400

$2,304,480

Notes payable

Total liabilities
and equity

Statement of cash flows example


Example 1 (continued):
Income statement balances:
For the year ended
December 31, 2011
Sales
Interest revenue
Dividend revenue
Cost of goods sold
Salary expense
Depreciation expense
Other operating
expenses
Loss on sale of land

$1,300,500
5,000
4,500
(750,500)
(125,500)
(55,000)
(49,800)
(5,000)

Statement of cash flows example


Example 1 (continued):
Other information:

The following account balances are all zero at both the beginning and end of the year:
interest payable, interest receivable, dividends payable, dividends receivable and income
taxes payable.

BDI does not include any interest or dividend cash flows in the operating section of the
statement of cash flows when it prepares its statement under IFRS.

BDI uses the indirect method for the operating section for both US GAAP and IFRS.

As of December 31, 2011, BDI has one bank account balance that is overdrawn. The
overdraft amount is $12,000. BDI has not yet moved this from its cash account into the
liabilities section of its balance sheet. Overdrafts are an integral part of BDIs cash
management.

BDI paid dividends of $20,000 during 2011.

BDI paid income taxes of $7,000 that were attributable to financing activities. It paid
income taxes of $2,000, all attributable to investing activities.

BDI sold land this year with a cost basis of $50,000. It reported a $5,000 loss on the
sale.

Statement of cash flows example


US GAAP
Example 1 solution:
BDI
Statement of cash flows
For the year ended December 31, 2011
Operating activities
Net income

$195,780

Adjustments to reconcile net income to net


cash provided by operating activities:
Depreciation expense
Loss on sale of land
Decrease in accounts receivable
Increase in inventory
Increase in prepaid expenses

$55,000
5,000
8,800
(14,400)
(3,000)

Statement of cash flows example


US GAAP
Example 1 solution (continued):
Investing activities
Sale of land

$45,000

Net cash provided by investing


activities

$ 45,000

Financing activities
Borrowings loan repayments
Borrowings bank overdraft
Payment of dividends
Net cash used in financing activities

(150,000)
12,000
(20,000)
(158,000)

Net
in cash
*Note
thatincrease
the cash balance
at December 31, 2011, must exclude bank overdrafts
of $12,000.
131,480
Cash at January 1, 2011

555,000

Statement of cash flows example


IFRS reconciling to net income

BDI
Statement of cash flows
For the year ended December 31, 2011

Operating activities
$195,78
0

Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Interest revenue
Dividend revenue
Depreciation expense
Loss on sale of land
Interest expense
Income taxes paid due to investing and financing activities
Decrease in accounts receivable

$(5,000)
(4,500)
55,000
5,000
23,000
9,000
8,800

Statement of cash flows example


IFRS reconciling to net income

Investing activities
Sale of land

$45,000

Receipt of interest

5,000

Receipt of dividends
Income taxes paid due to investing
activities

4,500
(2,000)

Net cash provided by investing activities

$ 52,500

Financing activities
Borrowings loan repayment

(150,000)

Payment of interest

(23,000)

Payment of dividends

(20,000)

Payment of income taxes

(7,000)

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