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Ias 7

The document outlines the key learning objectives of a statement of cash flows course, including explaining the purpose and usefulness of a statement of cash flows, defining cash and cash equivalents, classifying cash flows into operating, investing and financing activities, and preparing a statement of cash flows using both direct and indirect methods. It also discusses how to calculate cash flows from customers and suppliers, and the required disclosures for a statement of cash flows.

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64 views15 pages

Ias 7

The document outlines the key learning objectives of a statement of cash flows course, including explaining the purpose and usefulness of a statement of cash flows, defining cash and cash equivalents, classifying cash flows into operating, investing and financing activities, and preparing a statement of cash flows using both direct and indirect methods. It also discusses how to calculate cash flows from customers and suppliers, and the required disclosures for a statement of cash flows.

Uploaded by

maruf_tanmim
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Learning Objectives

1. Explain the purpose of a statement of cash flows


and its usefulness

2. Explain the definition of cash and cash


equivalents

3. Classification of cash flow activities

4. Direct and indirect methods of presenting net


cash flows from operating activities
Learning Objectives

5. Prepare a statement of cash flows and use a


worksheet to prepare a statement of cash flows
with more complex transactions

6. Disclosure requirements
Purpose of a Statement of Cash
Flows
 To provide information about the historical changes in
cash (and equivalents) during the period:

 Ability to generate cash: predict future and


evaluate past cash flows
 Evaluating financial structure: staying liquid and
solvent while meeting obligations and paying
dividends
 Evaluating ability to affect amount and timing of
future cash flows to enable adaptation
 Understanding reasons for the difference between
profit/loss and net cash flow from operations
 Comparing differing entities: operating
performance
Concept of Cash

 Cash
 Cash on hand and demand deposits
 Includes bank overdrafts

 Cash equivalents
 Short-term, highly liquid investments readily
convertible into known amounts of cash and
which are subject to an insignificant risk of
changes in value
 Held to meet cash commitments and have a
short maturity (3 months or less)
(IAS 7 paras 6‒7)
Classifying Cash Flow Activities

 IAS 7 requires that all cash flows be classified


into the following categories:

 Operating activities
 Investing activities
 Financing activities
Classifying Cash Flows
 Interest and dividends
 IAS 7 does not prescribe how interest and dividends
should be classified

 Requires them to be separately disclosed and classified


consistently across periods

 Note textbook approach as follows:


 Interest received > investing
 Interest paid > operating
 Dividends received > investing
 Dividends paid > financing

 Income tax
 IAS 7 also requires separate disclosure of income tax as an
operating activity
Format of the Statement of Cash
Flows
Format of the Statement of Cash
Flows
Reporting Cash Flows from
Operating Activities
 Operating cash flows may be reported using one of two
methods:

1. Direct method ‒ Discloses classes of gross cash


receipts and payments
2. Indirect method ‒ Discloses:
 Classes of gross cash receipts and payments
 Non-cash items
 Items relating to investing or financial activities (non-
operating items)
 The effects of accruals

 The direct method is encouraged by IAS 7


(IAS 7 para 18)
Preparing a Statement of Cash
Flows
 Unlike statements of financial position and
comprehensive income, cash flow is NOT
prepared from the trial balance

 Comparative statements of financial position are


often used, with supplementary information
statement of comprehensive income and specific
general ledger transactions

 Cash flows are mainly calculated in two ways:


1. Formula method
2. Worksheet method
Determining Cash Receipts from
Customers
 Sales revenue reflects sales made by the entity during
the year irrespective of whether the customers have
paid for the sale

 Cash received in the current year includes sales


made in the prior year that are not collected until the
current year and excludes sales made in the current
year where the cash will be received in a future year

 Therefore the cash flows are determined with


reference to the movement in Accounts Receivable

 Other factors affecting the Accounts Receivable account


include:
 Settlement discounts given to customers
 Bad debts written off during the period
Calculating Cash Paid to Suppliers

 Payments to suppliers reflects payments made


during the year for:
 Inventory purchases
 All other supplies and services purchased

 Includes:
 Payments for prior year purchases
 Current year (pre)payments that will be expensed
in future years

 Excludes:
 Current year purchases where the cash will be
paid in a future year
 Expenses recognised in the current year that were
(pre)paid in prior years
Calculating Cash Paid to Suppliers

 Payments to suppliers is often calculated in two


steps :

1. Payments for inventory

 Determined by reference to the movement in


Accounts Payable
 Need to consider settlement discounts given by
suppliers

2. Payments for all other supplies and services

 Determined by identifying expenses in the Income


Statements and adjusting for the effect of
movements in prepayment and accrual accounts
during the year
Cash Flows from Investing and
Financing Activities

 Investing Activities
 Requires identifying cash inflows and outflows
relating to the acquisition and disposal of long-
term assets and other investments not included
in cash equivalents

 Financing activities
 Requires identification of cash flows that result
in changes in the size and composition of
contributed equity and borrowings
Disclosures

 IAS 7 prescribes additional disclosures in the


notes to the financial statements:
 Components of cash and cash equivalents
 Changes in ownership interests of subsidiaries
and other businesses
 Non-cash investing or financing transactions

 Disclosures that are encouraged but not


required:
 Refer IAS 7 para 50

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