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Advanced Accounting – Topic 4 September- January 2013

Cash Flow Statement

Definition: A financial statement that reflects the inflow of revenue vs. the outflow of expenses resulting from operating, investing and financing activities during a specific time period

The purpose of the statement of cash flows is to provide information about a company’s gross

receipts and gross payments for a specified period of time.

The gross receipts and gross payments will be reported in the cash flow statement according to one

of the following classifications: operating activities, investing activities, and financing activities.

The net change from these three classifications should equal the change in a company’s cash and

cash equivalents during the reporting period. For instance, the cash flow statement for the calendar

year 2010 will report the causes of the change in a company’s cash and cash equivalents between

its statement of financial position of December 31, 2009 and December 31, 2010.

In addition to the cash amounts being reported as operating, investing, and financing activities, the

cash flow statement must disclose other information, including the amount of interest paid, the

amount of income taxes paid, and any significant investing and financing activities which did not

require the use of cash.

The statement of cash flows is to be distributed along with a company’s statement of

comprehensive income and statement of financial position.

Information about the cash flows of an enterprise is useful in providing users of financial

statements with a basis to assess the ability of the enterprise to generate cash and cash equivalents

and the needs of the enterprise to utilize those cash flows. The economic decisions that are taken

by users require an evaluation of the ability of an enterprise to generate cash and

cash equivalents and the timing and certainty of their generation.

The Standard deals with the provision of information about the historical changes in cash and cash

equivalents of an enterprise by means of a cash flow statement which classifies cash flows during

the period from operating, investing and financing activities.

A cash flow statement, when used in conjunction with the other financial statements, provides

information that enables users to evaluate the changes in net assets of an enterprise, its financial

structure (including its liquidity and solvency) and its ability to affect the amounts and timing of

Sam Chintha Majan College


cash flows in order to adapt to changing circumstances and opportunities. Cash flow information is

useful in assessing the ability of the enterprise 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 enterprises. It also enhances the comparability of the reporting of operating performance

by different enterprises because it eliminates the effects of using different accounting treatments

for the same transactions and events.

Usefulness of the Statement of Cash Flows

The information in a statement of cash flows shows and help investors, creditors and others assess various

aspects of the firm’s financial position.

(1) Assess the enterprise’s ability to generate positive future net cash flows.

(2) Assess the enterprise’s ability to meet its obligations, its ability to pay dividends and its needs for

external financing.

(3) Assess the reasons for difference between net income and associated cash receipts.

(4) Assess the effects on an enterprise’s financial position of both its cash and non cash investing and

financing transactions during the period.

The following terms are used in this Standard with the meanings specified:

Cash comprises cash on hand and demand deposits with banks.

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.

Cash flows are inflows and outflows of cash and cash equivalents.

Operating activities are the principal revenue-producing activities of the enterprise 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 owners’

capital (including preference share capital in the case of a company) and borrowings of the

enterprise.Sam Chintha Majan College


Statement of Cash Flows is segregated into three sections:

1. Operating Activities

2. Investing Activities

3. Financing Activities

Operating Activities include:

Cash inflow

1. Revenue from sale of goods and services

2. Interest (from debt instruments of other entities)

3. Dividends (from equities of other entities)

Cash outflow

1. Payments to suppliers 2. Payments to employees

3. Payments to Government

4. Payments to Lenders

5. Payments for other expenses

Investing Activities include:

Cash inflow

1. Sale of Property, Plant, and Equipment 2. Sale of Debt or Equity Securities (other entities)

3. Collection of principal on loans to other entities

Cash outflow

1. Purchase Property, Plant, and Equipment 2. Purchase Debt or Equity Securities (other entities)

3. Lending to other entities



Financing Activities include:

Cash inflow

1. Sale of Equity Securities 2. Issuance of Debt Securities

Cash outflow

1. Dividends to shareholders 2. Redemption of long-term debt

3. Redemption of capital stock

Information for the preparation of the Statement of Cash Flows is derived from three sources:

1. Comparative statement of financial statements 2. Current income statements

3. Selected transaction data

Income +

Depreciation Expense

_

Decrease in Deferred Taxes

=Net Cash Flow from Operating Activities

Increase in Deferred TaxesIncrease in Accounts Receivable

Decrease in Accounts Receivable

Increase in Inventories

Decrease in InventoriesIncrease in Prepaid Expenses

Decrease in Prepaid Expenses

Decrease in Payables

Increase in Payables Gain on Disposal

Loss on Disposal

Statement of Cash flow Indirect Method

Cash Flow from Operating Activities

Net Income XXX,XXX

Adjustments to reconcile net income to net cash provided by operating activities:



Depreciation and amortization XX,XXX

Changes in other accounts affecting operations:

(Increase)/decrease in accounts receivable X,XXX

(Increase)/decrease in inventories X,XXX

(Increase)/decrease in prepaid expenses X,XXX

Increase/(decrease) in accounts payable X,XXX

Increase/(decrease) in taxes payable X,XXX

Net cash provided by operating activities XXX,XXX

Cash Flow from Investing Activities

Capital expenditures (XXX,XXX)

Proceeds from sales of equipment XX,XXX

Proceeds from sales of investments XX,XXX

Investments in subsidiary (XXX,XXX)

Net cash provided by investing activities (XXX,XXX)

Cash Flow from Financing Activities

Payments of long-term debt (XX,XXX)

Proceeds from issuance of long-term debt XX,XXX

Proceeds from issuance of common stock XXX,XXX

Dividends paid (XX,XXX)

Purchase of treasury stock (XX,XXX)

Net cash provided by financing activities (XX,XXX)

Increase (Decrease) in Cash XX,XXX


Download - Statement of Cash Flow

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