1. | International Accounting Standard 7 Statement of Cash flows

2. | Introduction A cash-flow statement is a statement of sources and application of cash funds of an entity for a given period of time. – It is a tool of analyzing the entity ability in generating cash and cash equivalents and the timing and certainty of their generation. It is a also a financial statement and is the subject of International Accounting Standard (IAS) 7.

3. | Benefits of cash flow information A statement of cash flows, when used in conjunction with the rest of the financial statements, provides information that enables users to evaluate – the changes in net assets of an entity, – its financial structure (including its liquidity and solvency) and – its ability to affect the amounts and timing of cash flows in order to adapt to changing circumstances and opportunities.

4. | Benefits of cash flow info. cont’d… Cash flow information is useful in assessing the ability of the entity to generate cash and cash equivalents and enables users to develop models to assess and compare the present value of the future cash flows of different entities. It also enhances the comparability of the reporting of operating performance by different entities because it eliminates the effects of using different accounting treatments for the same transactions and events.

5. | Benefits of cash flow info. cont’d… Historical cash flow information is often used as an indicator of the amount, timing and certainty of cash flows. It is also useful in checking the accuracy of past assessments of future cash flows and in examining the relationship between profitability and net cash flow and the impact of changing prices

6. | Definitions Cash – comprises cash on hand and demand 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. Cash flows – are inflows and outflows of cash and cash equivalents.

7. | Definitions Operating activities – are the principal revenue-producing activities of the entity and other activities that are not investing or financing activities. Investing activities – are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.

8. | Definitions Financing activities – are activities that result in changes in the size and composition of the contributed equity and borrowings of the entity.

9. | Operating activities Cash flows from operating activities are primarily derived from the principal revenue- producing activities of the entity. Examples: – (a) cash receipts from the sale of goods and the rendering of services; – (b) cash receipts from royalties, fees, commissions and other revenue; – (c) cash payments to suppliers for goods and services; – (d) cash payments to and on behalf of employees;

10. | Operating activities – (e) cash receipts and cash payments of an insurance entity for premiums and claims, annuities and other policy benefits; – (f) cash payments or refunds of income taxes unless they can be specifically identified with financing and investing activities; and – (g) cash receipts and payments from contracts held for dealing or trading purposes.

11. | Operating activities Some transactions, such as the sale of an item of plant, may give rise to a gain or loss that is included in recognized profit or loss. – The cash flows relating to such transactions are cash flows from investing activities.

12. | Investing activities Examples of cash flows arising from investing activities are: – (a) cash payments to acquire property, plant and equipment, intangibles and other long-term assets. – (b) cash receipts from sales of property, plant and equipment, intangibles and other long-term assets;

13. | Investing activities – (c) cash payments to acquire equity or debt instruments of other entities and interests in joint ventures – (d) cash receipts from sales of equity or debt instruments of other entities and interests in joint ventures

14. | Investing activities – (e) cash advances and loans made to other parties (other than advances and loans made by a financial institution); – (f) cash receipts from the repayment of advances and loans made to other parties (other than advances and loans of a financial institution);

15. | Investing activities – (g) cash payments for futures contracts, forward contracts, option contracts and swap contracts; – (h) cash receipts from futures contracts, forward contracts, option contracts and swap

16. | Financing activities Examples: – (a) cash proceeds from issuing shares or other equity instruments; – (b) cash payments to owners to acquire or redeem the entity’s shares; – (c) cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short or long-term borrowings;

17. | Financing activities – (d) cash repayments of amounts borrowed; and – (e) cash payments by a lessee for the reduction of the outstanding liability relating to a finance lease.

18. | Reporting cash flows from operating activities An entity shall report cash flows from operating activities using either: – (a) the direct method, whereby major classes of gross cash receipts and gross cash payments are disclosed; or

19. | Reporting cash flows from operating activities – (b) the indirect method, whereby profit or loss is adjusted for the effects of transactions of a non-cash nature, any deferrals or accruals of past or future operating cash receipts or payments, and items of income or expense associated with investing or financing cash flows.

20. | Operating cash flows: Direct method Direct MethodShs. ‘000’ Cash flow from operating activities: Cash receipts from customersX Cash paid to suppliers and employees(X) Cash generated from operations X Interest expense(X) Income taxes paid (X) Net cash flow from operations X/(X)

21. | Operating cash flows: indirect method Indirect methodShs. ‘000’ Cash flow from operating activities: Net profit before tax and extra-ordinary itemsX Adjustments for: Depreciation/Amortization/Impairment lossX Foreign exchange lossX Interest income(X) Dividend income(X) Interest expenseX Operating profit before working capital changesX Increase in sundry debtors(X) Decrease in inventoriesX Decrease in sundry creditors(X) Cash generated from operationsX

22. | Example 1 Show the cash flows from operating activities using both the direct and indirect methods. 20092010 Shs '000' Revenue 120,000 288,000 Cost of sales (84,000) (201,600) Gross profit 36,000 86,400 Operating expenses (4,000) (9,600) Operating profit before tax 32,000 76,800 Tax (9,600) (23,040) Profit after tax 22,400 53,760 Dividends (2,500) (6,000) Retained profit 19,900 47,760 20092010 Current assetsShs '000' Inventory 1,220 1,100 Debtors 960 650 Creditors 290 800

23. | Presentation of the statement of cash flows Cash flows from operating activities (see previous slides)XX Cash flow from investing activities: Purchase of fixed assets(X) Proceeds from sale of fixed assetsX Purchase of investments(X) Proceeds from sale of investmentsX Interest receivedX Dividend received from associate companiesX Net cash from investing activities XX Cash flows from financing activities: Proceeds from issue of share capitalX Redemption of preference shares/debentures(X) Long-term borrowingsX Repayment of long-term borrowings(X) Interest paid(X) Dividend paid(X) Net cash from financing activities XX Net increase in cash and cash equivalents X Cash and cash equivalents at beginning of period X Cash and cash equivalents at end of the period X

24. | Other issues (1) Foreign currency cash flows: – These are be recorded in an entity’s functional currency by applying to the foreign currency amount the exchange rate between the functional currency and the foreign currency at the date of the cash flow. Interest and dividends: – Cash flows from interest and dividends received and paid should be disclosed separately. – Each is classified in a consistent manner from period to period as either operating, investing or financing activities.

25. | Other issues (2) Taxes on income: These are separately disclosed and classified as cash flows from operating activities unless they can be specifically identified with financing and investing activities.

26. | Non-cash transactions Investing and financing transactions that do not require the use of cash or cash equivalents shall be excluded from a statement of cash flows. Examples include: – (a) the acquisition of assets either by assuming directly related liabilities or by means of a finance lease; – (b) the acquisition of an entity by means of an equity issue; and – (c) the conversion of debt to equity.

27. | Class illustrations Example 2: Using the following financial statements, prepare a statement of cash flows for the period ending 31 December 2010 using the indirect approach. Ignore taxes and dividends. 31 December 2009 31 December 2010 Non-Current assetsShs. '000' Land and buildings - cost 5,000 7,500 Accum. depre. (1,500) 3,500 (1,950) 5,550 Motor vehicles 2,500 3,500 Accum. depre. (500) 2,000 (1,500) 2,000 Furniture and fittings 1,200 1,500 Accum. depre. (450) 750 (850) 650 Current assets 6,250 8,200 Inventory 1,200 800 Debtors 750 630 Cash at bank 300 800 Cash at hand 120 2,370 100 2,330 Equity and liabilities 8,620 10,530 Share capital 5,000 6,500 Share premium 1,220 Retained profit 1,450 1,890 Current liabilities 7,670 9,610 Creditors 950 920 8,620 10,530

28. | Example 3: Prepare a cash flow statement using the indirect approach 31 December 2009 31 December 2010 Non-Current assetsShs '000' Land and buildings -cost 5,000 7,500 Accum. depre. (1,500) 3,500 (1,950) 5,550 Motor vehicles 2,500 3,500 Accum. depre. (500) 2,000 (1,500) 2,000 Furniture and fittings 1,200 1,500 Accum. depre. (450) 750 (850) 650 Current assets 6,250 8,200 Inventory 1,220 1,100 Debtors 960 650 Cash at bank 290 800 Cash at hand 120 2,590 130 2,680 Equity and liabilities 8,840 10,880 Share capital 5,000 6,500 Share premium 1,220 Retained profit 1,450 1,890 Current liabilities 7,670 9,610 Creditors 950 920 Tax payable 220 1,170 350 1,270 8,840 10,880 Dividends paid during the year amounted to Sh. 60,000

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