CONCEPTUAL FRAMEWORK & ACCOUNTiNG STANDARDS

CHAPTER 3: STATEMENT OF CASH FLOWS

DEFINITION OF TERMS Special items included in operating activities

Cash comprises cash on hand and cash in Cash flows from buying and selling held for
bank. trading securities (whether financial assets or
Cash equivalents are short-term, highly financial liabilities) are classified as operating
liquid investments that are readily convertible to activities. Held for trading securities are similar to
known amounts of cash and which are subject to inventories in the sense that they are acquired
an insignificant risk of changes in value. specifically for resale.
Only debt instruments acquired within 3 Some entities, in the ordinary course of
months or less before their maturity date can their activities, routinely manufacture or acquire
qualify as cash equivalents. Examples of cash items of property, plant and equipment to be held
equivalents: for rental to others and subsequently transfer
a. 1-year treasury bill acquired 3 months these assets to inventories when they cease to be
before maturity date rented and become held for sale. For these
b. 90-day money market instrument or entities, cash flows from the acquisition, rentals
commercial paper and subsequent sale of such assets are
c. 3-month time deposit considered operating activities.

Cash flows include inflows (sources) and INVESTING ACTIVITIES

outflows (uses) of cash and cash equivalents. Investing activities involve the acquisition
and disposal of noncurrent assets and other
CLASSIFICATION OF CASH FLOWS investments. Examples include:
The statement of cash flows presents a. Cash receipts and cash payments in the
cash flows according to the following acquisition and disposal of property, plant
classifications: and equipment, investment property,
1. Operating activities intangible assets and other noncurrent
2. Investing activities assets
3. Financing activities b. Cash receipts and cash payments in the
acquisition and sale of equity or debt
OPERATING ACTIVITIES instruments of other entities (other than
Cash flows from operating activities are those that are classified as cash
primarily derived from the principal revenue- equivalents or held for trading)
producing activities of the entity. Operating c. Cash receipts and cash payments on
activities usually include cash inflows and derivative assets and liabilities (other than
outflows on items of income and expenses, or those that are held for trading or classified
those that enter into the determination of profit or as financing activities)
loss (i.e., included in the income statement). d. Loans to other parties and collections
Examples of cash flows from operating activities: thereof (other than loans made by a
a. Cash receipts from the sale of goods, financial institution)
rendering of services, or other forms of
income FINANCING ACTIVITIES
b. Cash payments for purchases of goods Financing activities are those that affect
and services the entity's equity capital and borrowing structure.
c. Cash payments for operating expenses, Examples include:
such as employe benefits, insurance, and a. Cash receipts from issuing shares or other
the like, and payments or refunds of equity instruments and cash payments to
income taxes redeem them
d. Cash receipts and payments from b. Cash receipts from issuing notes, loans,
contracts held for dealing or trading bonds and mortgage payable and other
purposes short-term or long-term borrowings, and
their repayments
 c. Cash payments by a lessee for the INTERESTS AND DIVIDENDS
reduction of the outstanding liability Entities (except financial institutions) may
relating to a lease. classify cash flows on interests and dividends as
follows:
1. Operating activities - affect profit or loss Cash Flows Option 1 Option 2
2. Investing activities - affect non-current 1. Interest Operating Investing
assets and other investments income activity activity
3. Financing activities - affect borrowings received
and equity. 2. Interest Operating Financing
expense paid activity activity
CASH FLOWS EXCLUDED FROM THE 3. Dividend Operating Investing
ACTIVITIES SECTIONS income activity activity
received
Cash flows on movements between "cash"
4. Dividend Financing Operating
and "cash equivalents" are not presented
paid to activity activity
separately because these are part of the entity's owners
cash management rather than its operating,
investing and financing activities. Option 1 Option 2
Bank overdrafts that cannot be offset to Interest income, Interest income
cash are presented as financing activities. interest expense and and dividend income
Those that can be offset to cash (or are part of dividend income are are classified as
the entity's cash management) forms part of the classified as operating investing activities
balance of cash and cash equivalents and activities because because they result
therefore not presented separately in the activities they enter into the from investments.
sections. determination of profit Interest expense is
Cash flows denominated in a foreign or loss (i.e., income classified as financing
currency are translated using the spot exchange and expenses). activity because it
rate ta the date of the cash flow. Exchange Dividend paid is results from dividend
classified as financing income are borrowing.
differences are not cash flows. However, the
activity because it is a Dividend paid is
effect of exchange rate changes on cash and
transaction with the classified as operating
cash equivalents held or due in a foreign currency owners and alters the activity in order to
is reported in the statement of cash flows in order equity structure. assist users in
to reconcile cash and cash equivalents at the assessing the entity's
beginning and the end of the period. The amount ability to pay dividends
of reconciliation is reported separately from the out of operating cash
operating, investing and financing activities. flows.

GENERAL CONCEPT IN THE PREPARATION Only interests and dividends received or

OF STATEMENT OF CASH FLOWS paid in cash are included in the statement of cash
The statement of cash flows is prepared flows. For example, dividends declared in Year 1
using cash basis. Under the cash basis of but paid in Year 2 are excluded from the
accounting, income is recognized only when statement of cash flows in Year 1 and reported
collected and expenses are recognized only when only in Year 2.
paid, rather than when these items are earned or
incurred. PRESENTATION
Accordingly, only transactions that Cash flows from operating activities may
affected cash and cash equivalents are reported be presented using either:
in the statement of cash flows. Non- cash a. Direct method - shows each major class
transactions are excluded and disclosed only. of grass cash receipts and gross cash
payments; or
b. Indirect method - profit or loss is adjusted
for the effects of non-cash items and
changes in operating assets and liabilities.
 CHANGES IN OWNERSHIP INTERESTS IN
SUBSIDIARIES
Cash flows arising from acquisitions and
disposals of subsidiaries or other business units
resulting to loss or obtaining of control are
classified as investing activities. Those that do not
result to loss or obtaining of control are classified
as financing activities.

DISCLOSURE
Statement of cash flows requires the
following disclosures:
a. Components of cash and cash equivalents
and are conciliation of amounts in the
statement of cash flows with the
equivalent items in the statement of
financial position.
b. Significant cash and cash equivalents held
by the entity that are not available for use
by the group, together with a management
commentary.