Statement of Cash Flows LKAS 7 Presented By Group 5

SCOPE An entity shall prepare a statement of cash flows in accordance with the requirements of this Standard and shall present it as an integral part of its financial statements for each period for which financial statements are presented.

OBJECTIVE The objective of this Standard is to require the provision of information about the historical changes in cash and cash equivalents of an entity by means of a statement of cash flows which classifies cash flows during the period from operating, investing and financing activities.

Statement of Cash Flows Describes the sources of an entity's cash** and how that cash was spent or received (movement) over a specified time period. ** So it talks about cash and anything that is equivalent to cash. Things which is considered to be non cash items such as depreciation is excluded in the preparation of this statement.

Cash & Cash Equivalent Cash – cash on hand and demand deposits Cash Equivalent – Short term highly liquid investments which can be readily converted into cash In the statement of cash flows, cash includes cash and cash equivalent. Cash means the assets that are in the form of cash. It includes cash in hand and in bank Cash equivalents are not cash. These are short-term assets which include treasury bills, marketable securities and commercial papers etc. Short term liquid assets mean assets of which maturity occurs within a period of 3 months from acquisition.

Classification of items in the Cash Flow Statement Operating Activities – The principal revenue generating transactions and other activities which are not part of investing or financing activities Investing Activities – Acquisition and disposal of long term assets and other investments Financing Activities – Activities that result changes in equity and debt Operating Activities - An accounting item indicating the money a company brings in from ongoing, regular business activities, such as manufacturing and selling goods or providing a service. Cash flow from operating activities does not include long-term capital or investment costs. It does include earnings before interest and taxes plus depreciation minus taxes. Cash Flow From Operating Activities = EBIT + Depreciation - Taxes Investing Activities - An item on the cash flow statement that reports the aggregate change in a company's cash position resulting from any gains (or losses) from investments in the financial markets and operating subsidiaries, and changes resulting from amounts spent on investments in capital assets such as plant and equipment. Financing Activities - A category in a company’s cash flow statement that accounts for external activities that allow a firm to raise capital and repay investors, such as issuing cash dividends, adding or changing loans or issuing more stock. Cash flow from financing activities shows investors the company’s financial strength. A company that frequently turns to new debt or equity for cash

Methods for Preparing a Cash Flow Statement 1. Direct Method 2. Indirect Method cashflow.xlsx – Hyperlink The main difference between the direct method and the indirect method involves the cash flow from operating activities, the first section of the statement of cashflows. (There is no difference in the cash flows reported in the investing and financing activities sections.) Under the direct method, the cash flows from operating activities would include the amounts for lines such as cash from customers and cash paid to suppliers. In contrast, the indirect method will show net income followed by the adjustments needed to convert the total net income to the cash amount from operating activities. The direct method must also provide a reconciliation of net income to the cash provided by operating activities. (This is done automatically under the indirect method.) Nearly all corporations prepare the statement of cash flows using the indirect method. However, there the net cash flow from operating activities is the same whethr the method followed is direct or indirect.

Importance to Users Identify the sources where cash inflows occurred provides relevant information in assessing a company's liquidity, quality of earnings and solvency. Helps management in proper cash planning. Shows the efficiency of a company in generating cash inflows from its regular activities. helps for appraisal of various capital investment programmes to determine their profitability and viability Regulatory compliance** * ** It is a must to prepare a cash flow statement with other financials which include P&L/BS/Changes in Equity & Notes to accounts.

Limitations of Cash Flow Statement Prepared on cash basis rather than on accrual basis (Non-cash transactions are ignored) Not a substitute for Income statement Provides historical information Does not present the actual liquidity position of an entity 1. 2. Not a substitute for income statement - Cash flow statement is not suitable for judging the profitability as it ignores non-cash charges 3. 4. The cash balance as shown by the cash flow statement may not represent the real liquidity position of the business because it can be easily influenced by postponing the purchases and other payments

Interpretation of the Cash Flow Statement Cash from operations – company’s ability to generate cash internally, through its core business activities Cash from investing activities – If a company can fund its capital expenditure through cash generated from operations, it is a good sign Cash from financing activities – shows whether the company required external funding and how much dividends have been paid out.

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