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Cash Flow Statement Class Notes

The document discusses cash flow statements (CFS), which summarize all cash received and paid by an entity over a period. A CFS is now a main financial statement along with the income statement and balance sheet. There are two methods for preparing a CFS - the direct method and indirect method. The direct method reports major cash categories, while the indirect method reconciles net income to cash provided by operating activities. The CFS provides important information about an entity's profitability and cash position for managers and users of financial statements. Two examples are provided of preparing CFS for companies.

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23 views13 pages

Cash Flow Statement Class Notes

The document discusses cash flow statements (CFS), which summarize all cash received and paid by an entity over a period. A CFS is now a main financial statement along with the income statement and balance sheet. There are two methods for preparing a CFS - the direct method and indirect method. The direct method reports major cash categories, while the indirect method reconciles net income to cash provided by operating activities. The CFS provides important information about an entity's profitability and cash position for managers and users of financial statements. Two examples are provided of preparing CFS for companies.

Uploaded by

Abdallah Hassan
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© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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ADVANCED ACCOUNTING (Class Notes-3) Assts. Prof.

Özgür Teraman, PhD

CASH FLOW STATEMENTS

A cash flow statement (CFS) is a summary of all the cash that an entity has received
for a period of account and all the cash payments that it has made during the same
period.

A CFS is now considered to be one of the main financial statements along with the
profit and loss account and the balance sheet.

Example of a cash flow statement

How important it is to show where the entity’s profit has come from?

How important it is to show where the entity’s cash has come from?
In summary:

• cash received less cash paid is not the same as profit;

• an entity needs enough cash to keep going; and

• it has to make a profit in the long-run. So users of accounts need information


about an entity’s cash position and its profitability.

PREPARATION OF CASH FLOW STATEMENT

There are two recognized ways of preparing a CFS:

the direct method and

the indirect method.


The interrelationship between the main financial statements
THE DIRECT METHOD
THE INDIRECT METHOD
Preparation of a CSF in accordance with IAS 7 using the individual method
CASH AND CASH EQUIVALENTS

IAS 7’s definition of cash equivalents is:

Short-term, highly liquid investments that are readily convertible to known


amounts of cash and which are subject to insignificant risk of changes in value.

A maturity date of up to three months is usually taken as a guide to what is meant by


‘short-term, highly liquid investments’.

Exercise – 1:
Required:

• Prepare Dennis Limited’s cash flow statement for the year ended 31 January
2010.

• Outline what it tells the managers of Dennis Limited.

(a) Dennis Ltd’s accounts using IAS 7 format:


(b) Dennis Limited generated £4000 cash from its operating activities during the year to
31 January 2010. It also increased its cash position by that amount during the year.
However, it did invest £100,000 in purchasing some tangible fixed assets during the
year, but this appeared to be paid for out of issuing another £100,000 of ordinary
shares.
Exercise – 2:

Additional information: There were no purchases or sales of plant and machinery


during the year.
Required:

• Prepare Frank Limited’s cash flow statement for the year ended 28 February
2012.

• What does it tell the managers of Frank Limited?

(a) Frank Ltd’s accounts using IAS 7 format


(b)

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