PAS 7 – STATEMENT OF CASH FLOW

Statement of Cash Flow Examples of different activities of cash flows

The statement of cash flows shows the ability of any company to generate cash.
Statement of Cash Flow
The statement of cash flows is THE ONLY statement ignoring an accrual basis and based on a CASH
basis.

All other financial statements follow an accrual principle and it means that we have lots of non-
cash transactions in our financial statements that we need to eliminate for cash flows.
Operating Activities Investing Activities Financing Activities
Objective of PAS 7

The objective of PAS 7 Statement of cash flows is to require the information about the historical
changes in cash and cash equivalents of an entity. Cash flows from operating activities are primarily derived from the principal revenue-producing ac-
tivities of the entity.
This information shall be provided in the statement of cash flows which classifies cash flows during the
period from operating, investing and financing activities. Investing activities involve the acquisition and disposal of noncurrent assets and other investments.

Cash and Cash Equivalents Financing activities are those that affect the entity’s borrowings and contributed equity.

Cash comprises cash on hand and demand deposits.

Cash equivalents are 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. Operating Activities

Ex.: 1-year treasury bill acquired 3 months before maturity date; 90-day money market instrument or Cash receipts from:
commercial paper; 3-month time deposit.  the sale of goods and the rendering of services
 royalties, fees, commissions and other revenue
Cash flows are inflows and outflows of cash and cash equivalent.
Cash payments to:
The statement of cash flows shall report cash flows during the period classified by operating, investing  suppliers for goods and services
and financing activities.  To employees

Conceptual Frameworks & Accounting Standards

PAS 7 – STATEMENT OF CASH FLOW
Cash receipts and cash payments:
 an insurance entity for premiums and claims, annuities and other policy benefits
 Income taxes
 from contracts held for dealing or trading purposes

Investing Activities

Cash receipts from:

 sales of PPE, intangibles and other long-term assets
 sales of equity or debt instruments of other entities and interests in joint ventures
 Cash advances and loans

Cash payments to:

 acquire property, plant and equipment, intangibles and other long-term assets
 acquire equity or debt instruments of other entities and interests in joint ventures Direct Method
 Cash advances and loans made to other parties

Financing Activities

Cash receipts from:

 issuing shares or other equity instruments
 issuing debentures, loans, notes, bonds, mortgages and other short-term or long-term borrowings

Cash payments to:

 owners to acquire or redeem the entity’s shares
 of amounts borrowed
 by a lessee for the reduction of the outstanding liability relating to a finance lease.

Operating Activities Methods

Final reconciliation

The statement of cash flows should also contain the final reconciliation in which you summarize the
overall movement in cash and cash equivalents.

 In Direct method there need to disclose major classes of gross cash receipts and gross cash
payments;
 In Indirect method there need to start with the profit or loss before tax and then adjust it
for the effect of:
 Working capital changes over the period (inventories, operating receivables, payables);
 Non-cash items (depreciation, unrealized foreign exchange gains or losses, etc.);
 Items associated with investing or financing activities. Interest and dividends
 Cash flows from interest and dividends received and paid shall each be disclosed separately. Each
Indirect Method shall be classified in a consistent manner from period to period as either operating, investing or fi -
nancing activities.
Conceptual Frameworks & Accounting Standards
PAS 7 – STATEMENT OF CASH FLOW
 The total amount of interest paid during a period is disclosed in the statement of cash flows
whether it has been recognized as an expense in profit or loss or capitalized in accordance with
IAS 23 Borrowing Costs.
 Interest paid and interest and dividends received may be classified as operating cash flows be-
cause they enter into the determination of profit or loss.
 Alternatively, interest paid and interest and dividends received may be classified as financing
cash flows and investing cash flows respectively, because they are costs of obtaining financial re-
sources or returns on investments.
 Dividends paid may be classified as a financing cash flow because they are a cost of obtaining fi-
nancial resources.
 Alternatively, dividends paid may be classified as a component of cash flows from operating activ-
ities in order to assist users to determine the ability of an entity to pay dividends out of operating
cash flows.

Taxes on income
 Cash flows arising from taxes on income shall be separately disclosed and shall be classified as
cash flows from operating activities unless they can be specifically identified with financing and
investing activities.

Reporting Cash Flows from Investing and Financing Activities

Cash flows from investing and financing activities shall always be reported GROSS, so no netting off.

It means that...
Changes in Ownership Interests in Subsidiaries and Other Businesses
 It cannot be presented the cash paid to acquire some vehicle and cash received from sale of some
 The aggregate cash flows arising from obtaining or losing control of subsidiaries or other busi -
other vehicle in 1 line – instead,
nesses shall be presented separately and classified as investing activities.
 It must be presented these cash flows separately in 2 lines.
 An entity shall disclose, in aggregate, in respect of both obtaining and losing control of sub-
sidiaries or other businesses during the period each of the following:
(a) the total consideration paid or received;
(b) the portion of the consideration consisting of cash and cash equivalents;
(c) the amount of cash and cash equivalents in the subsidiaries or other businesses over which
control is obtained or lost; and
(d) the amount of the assets and liabilities other than cash or cash equivalents in the subsidiaries
or other businesses over which control is obtained or lost, summarized by each major cate -
gory.

Non-cash transactions

Investing and financing transactions that do not require the use of cash or cash equivalents shall be
excluded from a statement of cash flow.

Such transactions shall be disclosed elsewhere in the financial statements in a way that provides all
the relevant information about these investing and financing activities.

Examples of non-cash transactions are:

 the acquisition of assets either by assuming directly related liabilities or by means of a finance
lease;
Other issues – Futures, Forward Contracts, Options & Swaps
 the acquisition of an entity by means of an equity issue; and
 the conversion of debt to equity.
Normally classified as Investing Activities…

Conceptual Frameworks & Accounting Standards