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Conceptual Framework Module 9

The document discusses the statement of cash flows, which summarizes a company's operating, investing, and financing cash flows. It defines cash flows as inflows and outflows of cash and cash equivalents, and classifies them into three categories: operating activities involving core business operations, investing activities involving long-term assets and investments, and financing activities involving equity and borrowing activities. The document provides examples of cash flows for each category and discusses accounting standards regarding interest, dividends, taxes, and the direct and indirect methods for preparing the statement of cash flows.

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Jaime Larona
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Download as PDF, TXT or read online on Scribd
18 views

Conceptual Framework Module 9

The document discusses the statement of cash flows, which summarizes a company's operating, investing, and financing cash flows. It defines cash flows as inflows and outflows of cash and cash equivalents, and classifies them into three categories: operating activities involving core business operations, investing activities involving long-term assets and investments, and financing activities involving equity and borrowing activities. The document provides examples of cash flows for each category and discusses accounting standards regarding interest, dividends, taxes, and the direct and indirect methods for preparing the statement of cash flows.

Uploaded by

Jaime Larona
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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PRESENTATION OF FINANCIAL STATEMENT

Statement of Cash Flow


A statement of cash flow is a component of financial statements summarizing the
operating, investing, and financing activity of an entity.
This is a summary of disbursements and receipts of cash and cash equivalent.
Classification of Cash flow
Cash flows are inflows and outflows of cash and cash equivalents. The statement of cash
flows during the period are classified as operating, investing, and financing activities.
Operating Activity
Operating activities are the cash flows derived primarily from principal revenue producing
activities.
Examples of cash flows from operating activities are:
a) Cash receipt from sales of goods, and rendering of services
b) Cash receipts from royalties, rental, fees, commissions, and other revenue
c) Cash payments to suppliers for goods and services
d) Cash payments for selling, administrative, and other expenses
e) 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 specifically identified with financing and
investing activities
g) Cash receipts and payments for securities held for trading
Investing activities
Investing activities are the cash flows derived from the acquisition and disposal of long-
term assets and other investments not included in cash equivalents.
Examples of cash flows from investing activities:
a) Cash receipts and payment to acquire property, plant, or equipment, intangibles and other
long-term assets
b) Cash receipts and payment for the acquisition and sale of debt and equity instrument.
c) Cash advances and loans to other parties other than loans made by financial institution
d) Cash receipts from repayment of advances and loans made to other parties
e) Cash payments and receipts for future contracts, forward contracts, option contract, and
swap contracts
Financing Activities
Financing activities are the cash flows derived from the equity capital and borrowings from
the entity.
Examples of cash flows from financing activities:
a) Cash receipts from issuance of ordinary and preference shares
b) Cash payments to acquire treasury shares
c) Cash receipts from issuing debentures, loans, notes, bonds, mortgages, and other short or
long-term borrowings
d) Cash payments for the amounts borrowed
e) Cash payments by a lessee for the reduction of the outstanding principal lease liability
Noncash transactions
PAS 7, paragraph 43, provides that investing and financing transactions that do not require
use of cash and cash equivalents shall be excluded from the statement of cash flows.
Interest
PAS 7, paragraph 33, provides that interest paid and interest received shall be classified as
operating cash flows because such items enter into the determination of net income or loss.
Alternatively, interest paid can be classified as financing activites while interest received
can be classified as investing activities.
Dividends
PAS 7, paragraph 33, provides that dividends received shall be classified as operating cash
flow because it enters into the determination of income
Alternatively, dividends received can be classified as investing activities.
PAS 7, paragraph 34, provides that dividends paid shall be classified as financing cash flow
because it is a cost of obtaining financing resources.
Alternatively, dividends paid may be classified as operating cash flow.
Income taxes
PAS 7, paragraph 35, provides that cash flows arising from income taxes shall be separately
disclosed as cash flows from operating activities unless they can be specifically identified with
investing and financing activities.
The approaches in preparing statement of cash flows
There are two approaches in preparing statement of cash flows, namely, direct and indirect
method.
1. Direct method formulas using t-account workback or squeeze
Accounts Receivables Accounts Payables
A/R beg. A/R end. Inventory beg. Inventory end.
Unearned Income Unearned income A/P end A/P beg.
end. beg.
Sales Sales discount and Purchase discount Purchases
allowances and allowances
Cash received Cash paid to
from sales suppliers
Total Total Total Total

Operating Expenses Payable Operating Income Receivable


OEP end. OEP beg. OIR beg. OIR end.
Prepaid OE beg. Prepaid OE end. Unearned OI end. Unearned OI beg.
Cash paid for OE OE incurred Operating Income Cash received from
OI
Total Total Total Total

2. Indirect Method utilizes profit before interest and tax as initial balance and following are
the adjustments
Items Adjustments
Increase in current assets -
Decrease in current assets +
Increase in current liability +
Decrease in current liability -
Noncash Expenses i.e. depreciation, losses from sale of assets +
Noncash Income i.e. Income from associate, gain from sales of assets` -
Direct Method Sample
Indirect Method Sample

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