STATEMENT OF CASH

FLOWS
Statement of Cash Flows
• A statement of cash flows is a component of
financial statements summarizing the operating,
investing and financing activities of an entity.
• Integral part of the whole set of FS.
• Primary purpose: information about cash receipts
(source: inflow) and payments (use: outflow)
during a period.
• provides users of financial statements with a basis
to assess the ability of the entity to generate cash
and cash equivalents and the needs of the entity to
utilize those cash flows
Cash and Cash Equivalents
• 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 change in value.
• SCF – to provide information about cash and cash
equivalents and their changes.
• IAS 7 says that for an investment to be qualified as
CE, normally it has a short term maturity of
3 months or less from the date of acquisition
Cash and Cash Equivalents
Examples:
1. 3-month BSP treasury bill (T-Bills).
2. Three-year BSP T-Bill purchased three months before
date of maturity.
3. Three-month time deposits.
4. Three-month money market instruments or
commercial papers.
Equity instruments generally are not cash equivalents
because they do not have maturity dates.
Classification of Cash Flows
Objective of IAS 7: - to require 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
• IAS 7 – shall report cash flows from:
1. OPERATING
2. INVESTING
3. FINANCING
Operating Activities
• Cash flows derived primarily from the principal
revenue producing activities of the entity.
• Transactions that affect the determination of Profit
or Loss for the period.
• Examples:
 Cash receipts from rendering of services or sale of
goods.
 Cash receipts from royalties, rental, fees, commissions,
and other revenues.
 Cash payments to suppliers for goods or services.
 Cash payments for administrative, selling, and other
expenses.
Operating Activities
• Cash flows derived primarily from the principal
revenue producing activities of the entity.
• Transactions that affect the determination of Profit
or Loss for the period.
• Examples:
 Cash receipts and payments of insurance for premiums
and claims, annuities, and other policy benefits.
 Cash payments or refunds of income taxes, unless they
can be specifically identified with financing or investing
activities.
 Cash receipts and payments for securities held for
trading or dealing.
Operating Activities
• IAS 7 says that cash flows arising from selling and
purchasing trading securities are OPERATING
ACTIVITIES.
• Cash advances and loans are reported under
operating activities IF THE ENTITY IS FINANCIAL
INSTITUTION (where lending is their major or
central revenue producing activity).
Investing Activities
• Cash flows derived from the acquisition and
disposal of long-term assets and other investments
not included in cash equivalent.
• Cash transactions involving NONOPERATING
ASSETS.
• Examples:
 Cash payments to acquire PPE, intangibles, other long-
term assets.
 Cas receipts from sale of PPE, intangibles, other long-
term assets.
 Cash payments to acquire equity or debt instruments of
other entities and interests in joint ventures
Investing Activities
• Cash flows derived from the acquisition and
disposal of long-term assets and other investments
not included in cash equivalent.
• Cash transactions involving NONOPERATING
ASSETS.
• Examples:
 Cash receipts from sales of equity or debt instruments of
other entities and interests in joint ventures.
 Cash advances and loans to other parties (other than
advances and loans made by financial institutions).
 Cash receipts from repayment of advances, and loans
made to other parties.
Investing Activities
• Cash flows derived from the acquisition and
disposal of long-term assets and other investments
not included in cash equivalent.
• Cash transactions involving NONOPERATING
ASSETS.
• Examples:
 Cash payments for future contract, forward contract,
option contract, and swap contract.
 Cash receipts from future contract, forward contract,
options contract, and swap contract.
Financing Activities
• Cash flows derived from the equity capital and
borrowings of the entity.
• Cash flows resulting from: (1) Between the entity
and owners (equity financing); and (2) Between the
entity and creditors (debt financing).
• Cash transactions involving non-trade liabilities and
equity of the entity.
Financing Activities
• Examples:
 Cash receipts from issuing shares or other equity
instruments, i.e., issuance of ordinary and preference
shares.
 Cash payments to owners to acquire or redeem the
entity’s shares, i.e., payment for treasury shares.
 Cash receipts from issuing debentures, loans, notes,
bonds, mortgages, and other short or long-term
borrowings.
 Cash payments by a lessee for the reduction of the
outstanding principal lease liability.
Non-cash transactions
• IAS 7 says that investing and financing activities
that do not require the use of cash or cash
equivalents are not reported in the statement of
cash flows.
• Disclosure – providing relevant information about
the transactions.
• Purely cash concept (statement of cash flows).
• Examples:
1. Acquisition of assets by issuing share capital.
2. Conversion of bonds into shares.
3. Conversion of PS to OS.
Interest
• IAS 7 says that interest paid and interest received
are classified as OPERATING ACTIVITIES.
• Alternatively, INTEREST PAID can be reported under
FINANCING ACTIVITIES because this is a cost to
obtain capital.
• Alternatively, INTEREST RECEIVED can be reported
under INVESTING ACTIVITIES because it is a return
on investment.
• Financial institutions: OPERATING ACTIVITIES.
• MUST BE CONSISTENT IN CLASSIFICATION.
Dividends
• IAS 7 says that DIVIDENDS RECEIVED is classified as
OPERATING ACTIVITIES.
• Alternatively, it may be classified as INVESTING
ACTIVITIES because it is considered as a return on
investment.
• IAS 7 says that DIVIDENDS PAID is classified as
FINANCING ACTIVITIES.
• Alternatively, it may be classified as OPERATING
ACTIVITY – to allow users to determine the entity’s
ability to pay dividends out of operating cash flows.
• MUST BE CONSISTENT IN CLASSIFICATION.
Income Taxes
• IAS 7 says that income taxes are SEPARATELY
DISCLOSED as cash flows from OPERATING
ACTIVITIES.
• If can be specifically identified, can be classified
under FINANCING or INVESTING.
• Difficult to match with origin/underlying
income/expenses.
Other Considerations:
• the exchange rate used for translation of
transactions denominated in a foreign currency
should be the rate in effect at the date of the cash
flows
• cash flows of foreign subsidiaries should be
translated at the exchange rates prevailing when
the cash flows took place
• Bank overdrafts which are repayable on demand
and which form an integral part of an entity's cash
management are also included as a component of
cash and cash equivalents
Reporting Operating Activities
• IAS 7 provides that an entity shall report cash flows
from operating activities using either DIRECT
METHOD or INDIRECT METHOD.
• DIRECT METHOD: reports major classes of cash
receipts and cash payments (cash basis net
income). May be appropriate to use certain
formulas to arrive at the cash effect.
• INDIRECT METHOD: Net income or loss adjusted for
effects of non-cash transactions, deferrals/accruals,
items of income/expense associated with investing
or financing.
CASH TO ACCRUAL BASIS
OF ACCOUNTING
CASH BASIS OF ACCOUNTING
• Income is recognized when cash is RECEIVED.
• Expense is recognized when cash is PAID.
• Does not recognize accounts such as AR, AP,
Accrued Income, Accrued Expenses, Deferred
Income, and Prepaid Expenses.
ACCRUAL BASIS OF ACCOUNTING
• Income is recognized when EARNED.
• Expense is recognized when INCURRED.
• Recognizes accounts such as AR, AP, Accrued
Income, Accrued Expenses, Deferred Income, and
Prepaid Expenses.
SUMMARY: CASH vs. ACCRUAL
ITEM CASH BASIS ACCRUAL
SALES Cash sales plus collections Cash sales plus sales on
from customers. account.
PURCHASES Cash purchases plus Cash purchases plus
payments to purchases on account.
suppliers/trade creditors.
OTHER INCOME Other income received as Items earned are
cash is recognized as considered income.
income.
EXPENSES Items paid are recognized Items incurred are
as expenses. recognized as expenses.
DEPRECIATION Not recognized. Depreciation is provided.
BAD DEBTS No bad debts because Doubtful accounts are
trade AR is not treated as bad debts.
recognized.
USEFUL FORMULAS: CONVERSION TO
ACCRUAL TO CASH
FROM ACCRUAL ITEMS TO CASH BASIS
Cash received from (+) Trade Receivable, end. Net Sales
customers (-) Trade Receivable, beg. (Accrual)
(Cash basis) (+) Customer Adv., beg.
(-) Customer Adv., end.

Cash paid to (+)AP, end. CGS

suppliers (Cash (-) AP, end. (Accrual)
basis) (+) Inventory, beg.
(-) Inventory, end.
Operating Expenses (+) Prepaid expense, beg. Operating Expenses
(Cash basis) (+) Accrued expense, end. (Accrual basis)
(-) Prepaid expense, end.
(-) Accrued expense, beg.
USEFUL FORMULAS: CONVERSION TO
ACCRUAL TO CASH
FROM ITEMS TO
Other Income (+) Unearned Inc., beg. Other Income
(Cash basis) (+) Accrued Inc., end. (Accrual)
(-) Unearned Inc., end.
(-) Accrued Inc., beg.
Interest Expense (+) Interest payable, end. Interest paid
(Cash basis) (+)Amort of discount on (Accrual)
Bonds Payable
(-) Interest payable, beg.
(-) Amort of premium on
Bonds Payable
USEFUL FORMULAS: CONVERSION TO
ACCRUAL TO CASH
FROM ITEMS TO
Income Tax Expense (+) Income tax payable, Income Tax Paid
(Cash Basis) end. (Accrual)
(+) Def. Tax Asset, beg.
(+) Def. Tax Liability, end.
(-) Income tax payable,
beg.
(-) Def. Tax Asset, end.
(-) Def. Tax Liability, beg.
ILLUSTRATION