1. Statement of Cash flow Purpose of the statement of cash flows
The purpose of the statement of cash flows is to show the effect of a
company’s commercial transactions on its cash balance.
It is thought that users of accounts can readily understand cash
flows, as opposed to statements of profit or loss and other
comprehensive income and statements of financial position which are
subject to manipulation by the use of different accounting policies.
Cash flows are used in investment appraisal methods such as net
present value and hence a statement of cash flows gives potential
investors the chance to evaluate a business.
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2. Statement of Cash flow
Cash & Cash equivalents
Cash comprises cash on hand and demand deposits
Cash equivalents are short-term, highly liquid investments
that are readily convertible into known amounts of cash and
which are subject to an insignificant risk of changes in value.

3. IAS 7 allows two possible layouts for the statement of cash
Statement of Cash flow
Formats
IAS 7 allows two possible layouts for the statement of cash
flows in respect of operating activities:
The indirect method, where profit before tax is
reconciled to operating cash flow.
b) The direct method, where the cash flows themselves are shown.
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4. Statement of Cash flow
Sections of the statement
IAS 7 Statement of Cash Flows splits cash flows into three
sections:
• Cash flows from operating activities
• Cash flows from investing activities
• Cash flows from financing activities

5. Statement of Cash flow
Operating activities
Cash flows from operating activities are primarily derived
from the principal revenue producing activities of the
entity. Therefore they generally result from the transactions
or other events that enter into the determination of profit or
loss.
The amount of cash flows arising from operating activities
is a key indicator of the extent to which the operations of
the entity have generated sufficient cash flows to repay
loans, maintain the operating capability of the entity, pay
dividends and make new investments without recourse to
external sources of finance

6. Statement of Cash flow
Investing activities
The cash flows included in this section are those related to
the acquisition or disposal of any non-current assets, or
trade investments together with returns received in cash
from investments, i.e. dividends and interest.
This section shows the extent of new investment in assets
which will generate future income and cash flows.

7. Statement of Cash flow
Financing activities
Financing cash flows comprise receipts from or repayments
To external providers of finance in respect of principal
Amounts of finance. Examples of financing cash flows are:
Cash proceeds from issuing shares
Dividends paid to shareholders
Cash proceeds from issuing loan notes
Cash repayments of amounts borrowed
Finance lease liability payments

8. Statement of Cash flow
Interpretation of statements of cash flows
Overall increase/decrease in cash.
(b) What are the significant components in the cash flows?
(c) How do the cash flows compare to expectations?
E.g:
Operating activities – key inflow
Investing activities – key outflow
Financing activities – how the business has financed
acquisitions/purchases of assets. Cash generated from operations vs interest, income tax

9. Statement of Cash flow
(d) Reconciliation of profit before tax to cash generated
from operations impact of accounting policies, e.g.
deferral of expenditure, recognition of income where no
cash generated movements in working capital, e.g. Build
up of inventories/receivables signs of overtrading

10. (e) Ratio analysis (examples of ratios):
Statement of Cash flow
(e) Ratio analysis (examples of ratios):
• Cash return on capital employed =Cash generated from operations Total assets less current liabilities × 100%
• Cash generated from operations to total debt = Cash generated from operations Total debt
• Net cash from operating activities to capital expenditure = Net cash from operating activities × 100%
Net capital expenditure