ias-7 cash flow statement

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Statement of Cash Flows IAS 7

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Cash Flow Statement

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Page 1: IAS-7 Cash Flow Statement

Statement of Cash FlowsIAS 7

Page 2: IAS-7 Cash Flow Statement

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IAS 7 - Overview

Objective and scope Cash flows Reporting operating cash flows Reporting investing cash flows Reporting financing cash flows Specific items Disclosures

Page 3: IAS-7 Cash Flow Statement

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IAS 7 – Objective and Scope

IAS 7 objective: to provide a statement to help investors assess the prospects for future cash flows, and to confirm or change their past expectations

Statement provides historical information on the entity’s operating, investing and financing cash flows and how its cash balances have changed in the period as a result

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IAS 7 – Cash Flows

Cash and cash equivalents:Cash on hand and on deposit and “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”

Can include bank overdrafts if part of cash management activities and balance fluctuates between positive and negative amounts

Page 5: IAS-7 Cash Flow Statement

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IAS 7 – Reporting Operating Cash Flows

Operating activities are the principal revenue-producing activities; and those that are not investing or financing activities

Operating cash flows are important: surplus cash flows needed to invest in increased capacity, pay debt when due, and provide a return to shareholders

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IAS 7 – Reporting Operating Cash Flows

Operating cash flows:a) Cash received from customers for the sale

of goods and provision of services, or on account of royalties, fees, or commissions

b) Cash payments to suppliers for goods and services provided; and to and on behalf of employees for their services

c) Cash received from or paid for financial instruments held specifically for dealing or trading purposes

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IAS 7 – Reporting Operating Cash Flows

Two methods: Direct method Indirect method

Either allowed although preference for direct method

Page 8: IAS-7 Cash Flow Statement

Specimen format for a cash flow statement from IAS 7

CASH FLOW STATEMENT FOR THE PERIOD ENDED…

$’000 $’000

Cash flows from operating activitiesNet profit before taxation XAdjustments for:

Depreciation XInterest expense XOperating profit before working capital changes X(Increase)/decrease in trade receivables (X)/X(Increase)/decrease in inventories (X)/X(Increase)/decrease in trade payables X / (X)

Page 9: IAS-7 Cash Flow Statement

Cash generated form operations XInterest paid (X)Dividends paid (X)Income taxed paid (X)

Net cash from operating activities X/(X)

Cash flows from investing activities Purchase of property, plant and equipment (X)Proceeds of sale of equipment XInterest received XNet cash used in investing activities X/(X)

Page 10: IAS-7 Cash Flow Statement

Cash flows form financing activitiesProceeds of issue of shares X Repayment of loans (X) Net cash used in financing activities X/(X)

Net increase/(decrease) in cash and cash equivalents X/(X)

Cash and cash equivalents at the beginningof the period XCash and cash equivalents at the end of the period X

Page 11: IAS-7 Cash Flow Statement

Cash flows from operating activities :begins with the profit before tax as shown in the income statement. The figures below are the adjustments necessary to convert the profit figure to the cash flow for the period.

Depreciation Added back to profit because it is a non-cash expense

Interest expense Added back because it is not part of cash generated from operations (the interest actually paid is deducted later)

Increase in trade receivables

Deducted because this is part of the profit not yet realized into cash but tied up in receivables

Page 12: IAS-7 Cash Flow Statement

Decrease in inventories

Added on because the decrease in inventories liberates extra cash

Decrease in trade payables

Deducted because the reduction in payables must reduce cash

Interest paid

Dividends paid These are the amount actually paid in the year

Income taxed paid

Page 13: IAS-7 Cash Flow Statement

Cash flows from investing activities :cash spent on non-current assets, proceeds of sale of non-current assets and income from investments.

Cash flows from financial activities: the proceeds of issue of shares and long-term borrowing made or repaid.

Net increase in cash and cash equivalents :the overall increase9or decrease) in cash and cash equivalents during the year. Add the cash and cash equivalents at the beginning of the year to give the final balance of cash and cash equivalents at the end of the year.

Page 14: IAS-7 Cash Flow Statement

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IAS 7 – Reporting Operating Cash Flows

Direct method

Page 15: IAS-7 Cash Flow Statement

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IAS 7 – Reporting Operating Cash Flows

Indirect method…same entity?

Page 16: IAS-7 Cash Flow Statement

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IAS 7 – Reporting Operating Cash Flows

Common adjustments to convert profit or loss to cash from operations: Changes in working capital accounts Elimination of non-cash items Elimination of investing and financing items

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IAS 7 – Reporting Investing Cash Flows

Investing activities:“the acquisition and disposal of long-term

assets and other investments not included in cash equivalents”

Importance:Is the entity maintaining its capacity and

increasing the potential for increased operating cash flows in the future?

Page 18: IAS-7 Cash Flow Statement

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IAS 7 – Reporting Investing Cash Flows

Examples:

Cash payments to acquire property, plant, and equipment; intangibles; and other long-term assets, including capitalized development costs

Cash receipts from the disposal of items in (a) Cash payments to acquire debt and equity instruments of other

entities or interests in joint ventures; excluding investments held for trading or in cash equivalents

Cash receipts from the disposal of items in (c) Cash advances and loans to other parties and their cash

repayments Cash payments for and receipts from futures, forwards, options

and swaps unless they are held for trading or are classified as financing flows.

Page 19: IAS-7 Cash Flow Statement

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IAS 7 – Reporting Investing Cash Flows

Example – Wienerberger AG, Austria

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IAS 7 – Reporting Financing Cash Flows

Financing activities:“result in changes in the size and composition

of the contributed equity and borrowings of the entity”

Importance:Financing cash flows change the capital

structure of the firm and affect the relative interests of those with claims to future cash flows of the entity

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IAS 7 – Reporting Financing Cash Flows

Example – Wienerberger AG, Austria

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IAS 7 – Specific Items

No netting of inflows and outflows Interest and dividends received and interest

and dividends paid – choice of operating, investing or financing flows as appropriate

Income tax cash flows – generally operating flows

Non-cash transactions – not included in statement; disclosed instead

Page 23: IAS-7 Cash Flow Statement

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IAS 7 – Specific Items

Cash flows between an entity and its subsidiaries, associates and joint ventures reported only if accounted for by the cost or equity method

Acquisition/loss of control of subsidiary – investing cash flow

Exchange rate changes on foreign cash balances – reconciling item at bottom of statement

Page 24: IAS-7 Cash Flow Statement

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IAS 7 - Disclosures

Operating, investing, financing flows Change in cash and cash equivalents Components of cash and cash equivalents Reconciliation of change to amounts on

statement of financial position Explanation of significant cash balances not

available for use

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End-of-Chapter Practice

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End-of-Chapter Practice

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End-of-Chapter Practice

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3-3 Companies are affected by a number of events and transactions, some of which have an effect on their cash and cash equivalents, and some which do not. Following are some examples of such events and transactions:1.Annual payment of $100 on a finance lease obligation, $2 of which is interest2.Acquisition of a 4100, 3%, 90-day government treasury bill3.Payment of $25 to a pension fund trustee4.Cash received on the maturity of the treasury bill in item 2 above5.Annual payment of $100 on an operating lease for sales office space6.Receipt of $10 on the sublease of excess sales office space7.Acquisition of the company’s treasury shares at a cost of $758.Conversion of convertible debt into common shares9.Payment of $30 of a portion of long-term debt reported in current liabilities along with $3 of interest10.Costs incurred to repair a customer’s product under warranty—inventory supplies used $1; labor paid $4

InstructionsFor each item listed above(a)identify the effect on the company’s cash and cash equivalents; and(b)indicate how the transaction or event will be reported on the company’s statement of cash flows, if at all, and if any special disclosures are required.

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End-of-Chapter Practice

Page 29: IAS-7 Cash Flow Statement

Example 1:

Banks Designers, Inc. (BDI) is preparing its statement of cash flows for the year ended December 31, 2011. BDI wants to see what the statement would look like using US GAAP as well as IFRS. On the next slides are the balance sheet and statement of income account balances, and some additional information.

Statement of cash flows example

Prepare the following:► A statement of cash flows using US GAAP.► A statement of cash flows using IFRS with net income

for the reconciliation of income to operating cash flows.► A statement of cash flows using IFRS with operating

income for the reconciliation of income to operating cash flows.

Page 30: IAS-7 Cash Flow Statement

Example 1 (continued):Balance sheet accounts:

Statement of cash flows example

As of January 1,

2011

As of December 31, 2011

Cash $ 555,000 $ 674,480

Accounts receivable 157,800 149,000

Inventory 254,600 269,000

Prepaid expenses 59,000 62,000

Equipment 875,000 875,000

Accumulated depreciation

(120,000) (175,000)

Land 500,000 450,000

Total assets $2,281,400 $2,304,480

As of January 1,

2011

As of December 31,

2011

Accounts payable $ 95,000 $ 87,500

Accrued liabilities 45,000 49,800

Notes payable 1,200,000 1,050,000

Common stock 400,000 400,000

Retained earnings 541,400 717,180

Total liabilities and equity $2,281,400 $2,304,480

Page 31: IAS-7 Cash Flow Statement

Example 1 (continued):Income statement balances:

Statement of cash flows example

For the year ended December 31, 2011

Sales $1,300,500

Interest revenue 5,000

Dividend revenue 4,500

Cost of goods sold (750,500)

Salary expense (125,500)

Depreciation expense (55,000)Other operating expenses (49,800)

Loss on sale of land (5,000)

Interest expense (23,000)

Income tax expense (105,420)

Net income $ 195,780

Page 32: IAS-7 Cash Flow Statement

Statement of cash flows example

Example 1 (continued):

Other information:

► The following account balances are all zero at both the beginning and end of the year: interest payable, interest receivable, dividends payable, dividends receivable and income taxes payable.

► BDI does not include any interest or dividend cash flows in the operating section of the statement of cash flows when it prepares its statement under IFRS.

► BDI uses the indirect method for the operating section for both US GAAP and IFRS.

► As of December 31, 2011, BDI has one bank account balance that is overdrawn. The overdraft amount is $12,000. BDI has not yet moved this from its cash account into the liabilities section of its balance sheet. Overdrafts are an integral part of BDI’s cash management.

► BDI paid dividends of $20,000 during 2011.

► BDI paid income taxes of $7,000 that were attributable to financing activities. It paid income taxes of $2,000, all attributable to investing activities.

► BDI sold land this year with a cost basis of $50,000. It reported a $5,000 loss on the sale.

Page 33: IAS-7 Cash Flow Statement

Example 1 solution:

Statement of cash flows exampleUS GAAP

BDIStatement of cash flows

For the year ended December 31, 2011Operating activitiesNet income $195,780Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation expense $55,000

Loss on sale of land 5,000

Decrease in accounts receivable 8,800

Increase in inventory (14,400)

Increase in prepaid expenses (3,000)

Decrease in accounts payable (7,500)

Increase in accrued liabilities 4,800Net cash provided by operating activities 244,480

Page 34: IAS-7 Cash Flow Statement

*Note that the cash balance at December 31, 2011, must exclude bank overdrafts of $12,000.

Statement of cash flows exampleUS GAAP

Investing activities

Sale of land $45,000Net cash provided by investing activities $ 45,000

Financing activities

Borrowings – loan repayments (150,000)

Borrowings – bank overdraft 12,000

Payment of dividends (20,000)

Net cash used in financing activities (158,000)

Net increase in cash 131,480

Cash at January 1, 2011 555,000

Cash at December 31, 201* $686,480

Example 1 solution (continued):

Page 35: IAS-7 Cash Flow Statement

Statement of cash flows exampleIFRS reconciling to net income BDI

Statement of cash flows For the year ended December 31, 2011

Operating activities

Net income $195,780

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

Interest revenue $(5,000)

Dividend revenue (4,500)

Depreciation expense 55,000

Loss on sale of land 5,000

Interest expense 23,000

Income taxes paid due to investing and financing activities 9,000

Decrease in accounts receivable 8,800

Increase in inventory (14,400)

Increase in prepaid expenses (3,000)

Decrease in accounts payable (7,500)

Increase in accrued liabilities 4,800

Net cash provided by operating activities $266,980

Page 36: IAS-7 Cash Flow Statement

Statement of cash flows exampleIFRS reconciling to net income

Investing activities

Sale of land $45,000

Receipt of interest 5,000

Receipt of dividends 4,500Income taxes paid due to investing activities (2,000)

Net cash provided by investing activities $ 52,500Financing activities

Borrowings – loan repayment (150,000)

Payment of interest (23,000)

Payment of dividends (20,000)

Payment of income taxes (7,000)

Net cash used in financing activities (200,000)

Net increase in cash 119,480

Cash at January 1, 2011 555,000

Cash at December 31, 2011 $674,480