cashflow stmnt - hrb

8/11/2019 Cashflow Stmnt - HRB

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Cashflow Statements - IAS 7 -- HR Bhullar

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Cash flowstatements

P ROF . H AMAD R ASOOL B HULLAR FCMA FCIS FPA, M PHIL , M COM , CA ( INTER ), DCMA


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Cash flow statement


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A cash flow statement, presents informationabout the cashflows associated with thecompanys main operations and those associated with its investing and financing activities of theperiod A cash flow statement functions in conjunction with both the income statement (performancedimension) and the balance sheet (financialposition)IAS 7 Cash Flow Statements provides guidlineon standard design n format of a cash flowstatement


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Usefulness of cash flow information


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Ability to generate adequate cash flows is asignificant performance dimensionCash flow information clarifies the dynamics of

short-term liquidity and long-term solvencyCash flow information is an essential input foreconomic decision models


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Concepts of Cash and Cash Equivalents


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Cash comprises cash on hand and demanddeposits with banks (including Bank Overdraft).Cash equivalents are short term, highly liquidinvestments that are readily convertible intoknown amounts of cash and which are subject toan insignificant risk of changes in value.Cash Equivalents are

Highly liquid investmentsHeld for meeting short term commitmentsReadily convertible into known amounts of cash

Having a very insignificant riskShort maturity (3 months maximum)Cash flows exclude

Movements between cash and cash equivalents


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Businesses are like Fruit Trees


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Fruits & leaves = Operating Activities(Profits and Working capital)

Trunk & Branches = Investing Activities(Fixed Assets & Investments)

Roots = Financing Activities(Long term Loans, Bonds & Debentures

and Equity)


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Operating Cash flow versus profits


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Operating Cash flow and profit are differenteconomic phenomena

But linked through the mechanisms of accrual accounting!

Cash flows are factual details of incoming andoutgoing flows of cash, while; Balance sheet and income statement emanate

from professional judgement and are not a directprojection of objective economic data


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Liquidity/solvency and cash flows


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Liquidity- Relates to nearness to cash of the structure of assets- Determined by capacity to convert current assets into cash

Solvency- Relates to future availability of cash in order to settle financial

liabilities on due date- Determined by timing and uncertainty of expected future cash

payments and cash receipts

Liquidity and solvency ratios are determined onstatic financial position data, while cash flowsreflect changes in financial position


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Format & structure of cash flow Statement

Cash flows from opera t ing activities

+ Cash flows from inves t ing activities

+ Cash flows from f inanc ing activities

Net change in cash during period

+ Beginning cash balance

Ending cash balance


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Cash flows from operating activities


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Operating activities are primarily the revenue-generating activities of a companyOperating cash flow is conceptually most nearto net profit

Main differences:1. Non-cash expenses and non-cash revenues (f.i.

depreciation expense)2. Non-operating items (f.i. gain on disposal of

tangible fixed assets)3. Timing differences between net profit andunderlying cash flow (f.i. changes in the level ofinventories, receivables, creditors, etc.)


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Operating cash flows: Examples


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Receipts from sale of goods and rendering ofservices (cashing in of receivables included)Receipts from taxes on sales and VATReceipts from royalties, fees, commissions, Payments to suppliers (payment of creditorsincluding services)

Payments to employees (wages & Salaries)Payments of taxes, VAT, fines, Interest


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Operating cash flows Direct versus indirect method


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2 methods for identifying and presenting theoperating cash flow:

Direct method: engenders the presentation ofthe most important categories of grossoperating cash inflows and cash outflowsIndirect method: net operating cash flow is

determined by adjusting the (net) profit figurefor the 3 types of differences


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Direct method - Example

Cash receipts from customers 30,150

Cash paid to suppliers and employees (27,600)

Cash generated from main operations 2,550

Income taxes paid (1170)

Net cash flow from operating activities 1,380


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Indirect method - Example

Net profit before tax 3,350

Adjustments for:Depreciation 490

Investment income (100)

3,740

Working capital changes:

Increase in trade and other receivables (500)

Decrease in inventories 1,050

Decrease in trade payables (1,740)

Cash generated from main operations 2,550

Income taxes paidNet cash flow from operating activities

(1170)1,380


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Cash flows from investing activities


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Investing activities relate to the acquisitionand disposal of long-term tangible andintangible assets and other investments

Cash flows from investing activities are anindication of the expansion or downsizing ofoperating capacityExamples:

Payments for newly acquired equipmentReceipts from the disposal of a buildingPayments for new investments


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Constructing a cash flow statement


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1. Determine the net change in cashCompare beginning and ending balance

2. Identify all transactions of the period leading to achange in cash

Direct: analyze movements in the accounts of cash (equivalents)transaction by transactionIndirect: explain net change of cash by analyzing all other accounts,knowing that each transaction with an impact on cash also affects anon-cash account

3. Use the information (of step 1 and 2) to construct acash flow statement according to the formal rules


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Applying step 2


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Information for operating cash flow is primarilyderived from balances in the IS, while informationfor the two other principal categories comes from theBalance Sheet (and details in the Notes) Movements in the accounts indicate a change in financial position and further examination isneeded to determine if they had a cash impact

Check if balances have been impacted by accrual - based adjustments or other non -cash activities


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Classifying balance sheet movements as inflowsor outflows of cash


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Assets Equity/liabilities

Increase Outflow Inflow

Decrease Inflow Outflow


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Disposal of fixed assets - Example


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Disposal of equipment: Acquisition cost 275

- Accum. depreciation - 200

Net carrying value = 115 Sale at 135

Result (gain) on disposal = 135 - 115= 20

Incoming cash flow = 135, composed of a decrease in net carrying valueof equipment in the BS (115) and gain on disposal in the IS (20)


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Presentational choices


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Interest paid can be classified under eitheroperating or financing activitiesInterest and dividends received can be included in

either operating or investing cash flowsStarting from net profit or operating profit underthe indirect method (with implications for theadjustments to be made)


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IAS 7 - Direct Method (Extract)


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Source: IAS 7 Cash Flow Statements, Appendices

20X2Cash flows from operating activitiesCash receipts from customers 30,150Cash paid to suppliers and employees (27,600) Cash generated from operations 2,550Interest paid (270) Income taxes paid (900)

Net cash from operating activities 1,380

Cash flows from investing activities Acquisition of subsidiary X, net of cash acquired (550) Purchase of property, plant and equipment (350) Proceeds from sale of equipment 20

Interest received 200Dividends received 200

Net cash used in investing activities (480)

Cash flows from financing activitiesProceeds from issue of share capital 250Proceeds from long-term borrowings 250Payment of finance lease liabilities (90)

Dividends paid* (1,200)

Net cash used in financing activities (790)

Net increase in cash and cash equivalents 110Cash and cash equivalents at beginning of period 120Cash and cash equivalents at end of period 230


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IAS 7 - Direct Method (Extract)


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20X2Cash flows from operating activitiesCash receipts from customers 30,150Cash paid to suppliers and employees (27,600) Cash generated from operations 2,550Interest paid (270) Income taxes paid (900)


Cash flows from investing activities Acquisition of subsidiary X, net of cash acquired (550) Purchase of property, plant and equipment (350) Proceeds from sale of equipment 20Interest received 200Dividends received 200



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IAS 7 - Direct Method (Extract- cont.)


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Cash flows from financing activitiesProceeds from issue of share capital 250Proceeds from long-term borrowings 250Payment of finance lease liabilities (90) Dividends paid* (1,200)

Net cash used in financing activities(790)


* This could also be shown as an operating cash flow.


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IAS 7 - Indirect Method (Extract)


2420X2

Cash flows from operating activitiesProfit before taxation 3,350

Adjustments for:Depreciation 450Foreign exchange loss 40

Investment income (500)Interest expense 400

3,740Increase in trade and other receivables (500)Decrease in inventories 1,050Decrease in trade payables (1,740)

Cash generated from operations 2,550Interest paid (270)Income taxes paid (900)


Cash flows from investing activities Acquisition of subsidiary X net of cash acquired (550)Purchase of property, plant and equipment (350)Proceeds from sale of equipment 20Interest received 200Dividends received 200


Cash flows from financing activitiesProceeds from issue of share capital 250Proceeds from long-term borrowings 250Payment of finance lease liabilities (90)Dividends paid (1,200)

Net cash used in financing activities (790)




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IAS 7 - Indirect Method (Extract)


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20X2

Cash flows from operating activitiesProfit before taxation 3,350 Adjustments for:

Depreciation 450Foreign exchange loss 40Investment income (500)

Interest expense 4003,740Increase in trade and other receivables (500)Decrease in inventories 1,050Decrease in trade payables (1,740)

Cash generated from operations 2,550

Interest paid (270)Income taxes paid (900)




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Non-cash transactions


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These should be excluded from the cash flowstatementThese transactions should be disclosed in thefinancial statements.Examples

Acquisition of assets by assuming directly related liabilities Acquisition of an enterprise by means of issue of equity sharesConversion of debt to equity


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END Notes: Related questions


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1. From which sources did the company raise cashlast year? How was this cash used?

2. Were the normal operating activities capable ofsatisfying its need for cash during the year?

3. If not, is the shortage of cash compensated bynew borrowings, issuing new share capital or byselling fixed assets?

4. Is a surplus of cash used for repayment of debt,for investments or for distribution of dividends?

5. Why has the balance of cash availabledecreased, knowing that the companysoperations have been profitable?

cashflow stmnt - hrb

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