1. Accounting for Assets
Cash Flows

2. Statement of Cash flows
Learning outcomes:
Explain the purpose of the statement of cash flows
Identify the contents of the statement of cash flows
Prepare a basic statement of cash flows
Understand the usefulness of the statement of cash flows
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3. Overview
IAS 7 Statement of Cash Flows requires an entity to present a statement of cash flows as an integral part of its primary financial statements.
Does “profit” give a true picture of a company’s operations ?
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4. Objective of IAS 7
requires the presentation 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 according to operating, investing, and financing activities.
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5. Seeks to answer 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?
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6. Cash and Cash Equivalents
Cash on hand
Demand deposits
Cash Equivalents
Investments that are
Short term,
Highly liquid, and
Easily converted to a known amount of cash
Not subject to a significant change in value
All references to Cash
include Cash Equivalents
when discussing the
Statement of Cash Flows

7. Cash and cash equivalents
Cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes.
NB: An investment normally qualifies as a cash equivalent only when it has a short maturity of, say, three months or less from the date of acquisition.
Examples: Cash at hand, cash in bank, bank overdraft.

8. Definitions Operating activities Investing 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.
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
Do we have examples of cash flows from operating activities ?
cash receipts from the sale of goods and the rendering of 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;
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.
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10. Investing activities
Do we have examples of cash flows arising from investing activities ?
cash payments to acquire property, plant and equipment, intangibles and other long-term assets.
cash receipts from sales of property, plant and equipment,
intangibles and other long-term assets;
c) cash payments to acquire equity or debt instruments of other
entities
d) cash receipts from the repayment of advances and loans made to other parties
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11. Financing activities
Do we have examples of cash flows arising from financing activities ?
cash proceeds from issuing shares or other equity instruments;
cash payments to owners to acquire or redeem the entity’s shares;
cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short-term or long-term borrowings;
cash repayments of amounts borrowed; and
cash payments by a lessee for the reduction of the outstanding liability relating to a finance lease.
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12. Statement of Cash Flows: Concept
Operating
activities
Investing
Financing
Inflows
Cash
Pool
Operating
activities
Investing
Financing
Outflows

13. Preparing a Statement of Cash Flows
There are TWO methods of preparing the statement of cash flows:
Indirect method
Direct method
The indirect method derives cash flows from accrual basis statements
The direct method determines cash flows directly for each source or use of cash

14. Statement of Cash Flows: Indirect Method - Concept
Earned
Revenues
Net Income + -
Eliminate
non-cash revenues
Operating
cash flow
Eliminate
non-cash charges
Expenses
Incurred

15. The Statement of Cash Flows: Indirect Method
Accrual Basis Statements
Cash Flow Statement
Income Statement items
and changes in Current
Assets and Current Liabilities
Operating activities:
Adjust net income for accruals,
non-cash charges and non-
operating gains/losses
Balance Sheet:
Changes in
Non-Current Assets
Investing activities:
Inflows from sale of assets and
outflows from purchases of assets
Balance Sheet:
Changes in Non-Current
Liabilities and Equity
Financing activities:
Inflows and outflows from loan
and equity transactions

16. Direct Method (Operating Activities)
Inflows
Outflows
From sales of goods or services
From returns on loans (interest) and returns on equity securities (dividends)
To suppliers for inventory
To employees for services
To government for taxes
To lenders for interest
To others for expenses

17. Investing and Financing Activities
For the direct and indirect methods: the sections reporting investing and financing activities are the same
The net inflows or outflows for each section (under the two methods) are identical
The operating activities are reported differently

18. Using the Indirect method
Why ? its Easier
Net profit or loss is adjusted for :
Changes during the period in inventories, receivables and payables.
Non-cash items e.g. depreciation, provisions, profits/losses on the sale of assets
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19. Operating cash flows: indirect method
Shs. ‘000’
Cash flow from operating activities:
Net profit before tax and extra-ordinary items X
Adjustments for:
Depreciation
Foreign exchange loss
Interest income
(X)
Dividend income
Interest expense
Operating profit before working capital changes
Increase in trade & other receivables
Decrease in inventories
Decrease in trade payables
Cash generated from operations
Interest paid
Incomes taxes paid
Net cash from operating activities

20. Interest & Dividends
Dividends paid can be classified into two ways either as:
As a financing cash flow or
As a component of cash flows from operating activities
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21. Operating cash flows: Direct method
Shs. ‘000’
Cash flow from operating activities:
Cash receipts from customers X
Cash paid to suppliers and employees
(X)
Cash generated from operations
Interest expense
Income taxes paid
Net cash flow from operations

22. 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 assets X
Purchase of investments
Proceeds from sale of investments
Interest received
Dividend received
Net cash from investing activities
Cash flows from financing activities:
Proceeds from issue of share capital
Redemption of preference shares/debentures
Long-term borrowings
Repayment of long-term borrowings
Interest paid
Dividend paid
Net cash from financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of the period

23. Special Items: Depreciation - Steps
Prepare the T-Account for accumulated depreciation and determine the accumulated depreciation on asset sold
Determine the cash flow from sale of equipment
Determine any purchases of plant and equipment (at cost)
Identify the inflows and outflows affecting the operating and investing sections

24. Reporting Significant Non-Cash Transactions
Transactions not involving cash inflows or cash outflows are non-cash transactions
They are not reported in the body of the cash flow statement
If material, they are reported as notes to the statement or in a supplementary schedule to the financial statements
Example: issue of bonds (payable) for the purchase of land

25. Financial Liquidity
The higher the ratio the less likely the company will have liquidity problems
Current Cash Debt Coverage Ratio = Net cash provided by operating activities/Average Current liabilities
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26. Financial Flexibility
Cash Debt Coverage Ratio =Net cash provided by operating activities/Average Total liabilities
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27. Free cash flows Questions :
Is the company able to pay its dividends without resorting to external financing ?
If business operations decline will the company be able to maintain its needed capital expenditure ?
What is the amount of discretionary C/flows that that can be used for additional investment, retirement of debt, purchase of treasury shares or addition to liquidity ?
Free Cash flows = Net cash provided by Operating Activities – Capital Expenditures – Dividends
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28. Q & A
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