Quick Notes for Cash Flow

STATEMENT OF CASH FLOWS - Component of Financial statement summarizing operating, investing and financing activities. ✓ Cash receipts ✓ Cash disbursements PRIMARY PURPOSE: To provide relevant information about cash receipts and cash payments of an entity during a period. PAS 7, paragraph 7 Provides that an investment normally qualifies as a cash equivalent only when it has a short maturity of THREE MONTHS or LESS FROM DATE OF ACQUISITION. (Investment must be acquired 3 months or less before the date of maturity) OPERATING ACTIVITIES are cash flows derived primarily from the principal revenue producing activities of the entity. (determination of net income or loss) Sale of goods or services Royalties, rental fees, commissions, other revenue Payments to suppliers Payments to selling, administrative and other expenses Receipts and payment of insurance entity, premiums and claims, annuities, other policy benefits Payment or refund of income tax unless specified. Receipts and payments for securities trading Cash advances and loans made by a Financial Institutions are usually classified as operating activities since they relate to main revenue producing activity. INVESTING ACTIVITIES cash flows derived from acquisition and disposal of long term assets and other investments not included in cash equivalents. (transactions involving nonoperating assets) Acquire Property, plant and equipment, Intangible, long-term assets Sales of Property, plant and equipment, Intangible, long-term assets Acquire equity or debt instruments of other entities (current or long term investments) Sales of equity or debt instruments of other entities Advances and loans to other parties (other than advances and loans made by financial institutions). Receipts from repayments of advances and loans made to other parties. Payments for future contract, forward contract, option contract and swap contract. Receipts from future contract, forward contract, option contract and swap contract. FINANCING ACTIVITIES cash flows derived from the entity capital and borrowings of the entity. Transactions: a. Between entity and the owners – Equity Financing b. Between entity and the creditors – Debt Financing Financing activities include the cash flows from transactions involving nontrade liabilities and equity of entity. Receipts from issuance of ordinary and preference shares Payment to acquire treasury shares Receipts from issuing debentures, loans, notes, bonds, mortgages, and other short or long-term borrowings. Payments for amount borrowed Payments by a lessee for reduction of outstanding principal lease liability. Cash payments to settle obligations such as Trade accounts and Notes Payable, Income Tax payable, accrued expenses are operating activities, not financing activities. Par. 43 Investing and Financing transactions that do not require use of Cash and Cash equivalents shall be excluded from Statement of Cash flows. It shall be disclosed in Financial Statements. The statement of Cash flows is strictly cash concept. Par. 33 Interest paid or received are operating cash flows because they are significant in determining net income or loss. E.g. Interest payments to lenders ALTERNATIVELY: Interest paid may be classified as Financing activities Interest received may be classified as Investing for return on investment. For Financial Institutions, Interest paid or received is operating activities. DIVIDEND RECEIVED DIVIDEND RECEIVED DIVIDEND PAID DIVIDEND PAID Operating cash flow Investing (return on investment) Financing cash flows Operating cash flows (assist users to determine the ability of entity to pay dividends.) ✓ Cash flows arising from Income taxes shall be separately disclosed as cash flows from operating activities. (most of the time all tax cash flows are classified as operating activities).