IAS 7

Statement of Cash Flows

By
Mian Ahmad Farhan, FCA
Certified Trainer – CDA, Dubai
Partner – Kress Cooper Chartered Accountants, Dubai
Partner – MAF & Co. Chartered Accountants, Lahore
Statement of Cash Flows
 Purpose

Purpose of the statement of cash flows is to provide analysis of the

cash receipts (inflows) and cash payments (outflows) of an entity
during the reporting period categorized into operating , investing,
and financing activities.

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 Benefits
The statement of cash flows helps investors, lenders and creditors to
assess:
• Reasons for differences between profit or loss and cash receipts
and payments;
• The ability to generate future positive cash flows from operations;
• The ability to meet obligations and pay dividends;
• Both cash and non-cash aspects of entities’ investing and
financing transactions.

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 Components

1. Operating activities
2. Investing activities
3. Financing activities
4. Cash and Cash Equivalents

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 Format
Sample Company Cash flows from financing activities
Cash received from issue of equity share capital
Statement of Cash Flows
Cash paid for purchase of treasury shares
For the Year Ended December 31, 20XX Cash received from sale of treasury shares
Cash received from borrowings(loan, notes, bonds, etc.)
Cash flows from operating activities Cash paid for repayment of borrowings
Cash generated from operations(Direct & Indirect Methods) Cash paid for redemption of loan stocks (notes, bonds, etc.)
Cash received from interest and dividend (Other income) Net cash from/(used in) financing activities
Cash paid for interest on borrowings & dividend to shareholders Net increase/decrease in cash and cash equivalents
Cash paid for Income taxes Cash and cash equivalents at beginning of the period
Net cash from/(used in) operating activities Effects of foreign exchange rate changes on the balance of cash
Cash flows from investing activities held in foreign currencies
Acquisition of subsidiaries, net of cash acquired in the acquisition Cash and cash equivalents at end of the period
Cash paid for acquisition of property, plant and equipment
Cash paid as loan or for investment in debt instruments
Cash paid as investment in equity instruments Disclosure of significant non-cash investing and financing activities
Cash paid for purchase or development of intangible assets Supplemental statement of cash flows information
Cash received from the sale or disposal of non-current assets • Conversion of bonds into ordinary shares
Net cash from/(used in) investing activities • Asset acquired under lease agreement
• Issue of bonus shares

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 Operating, Investing & Financing Activities
1 - Operating Activities
a) Cash generated from operations (Direct / Indirect) 2 - Investing Activities
b) Cash received from interest/dividend on investments 3 - Financing Activities
c) Cash paid for interest on borrowings / equity dividend 4 - Cash & Cash Equivalents
d) Cash paid for income taxes
Statement of Financial Position – As on _____
Statement of Profit or Loss – For the year ended _____ Non-Current Assets Owners Equity
Sales Revenue PPE Share Capital & Premium
Cost of Goods Sold / Cost of Sales Revenue Investment Property Retained Earnings
Gross Profit Intangible Assets Non-Current Liabilities
Operating Expenses (Selling, Distribution, & Admin) Long-term Investments Loan Stocks
Profit from Operations / Operating Profits Current Assets Lease Liability
Other Incomes (Interest, Dividend, Asset Disposal Gain) Inventory Long-term Borrowings
Profit Before Interest and Taxes Trade Receivables Deferred Tax Liability
Financial Expenses Prepaid Exp (Operating) Current Liabilities
Profit Before Tax Accrued Income Trade Creditors
Income Tax (Current and Deferred) Short Term Investments Accrued Exp (Operating)
Profit After Tax Not Cash Equivalent Unearned Income
Cash Equivalent Accrued Interest Exp
Cash at Bank / Overdraft Provision for Tax 8
Cash in Hand Short term borrowings
Operating Activities
 Operating Activities

Main revenue producing activities of the entity and other activities

that are not investing or financing activities (including taxes
paid/received, unless clearly attributable to investing or financing
activities).

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 Operating Activities
Cash Inflows Cash Outflows
• Receipt from customers against • Payment to suppliers for
sale of goods or rendering of purchase of goods and services
services
• Payments to and on behalf of
• Returns on investments in employees
securities (operating/investing)
• Payment for operating
expenses
• Payment of interest on loans or
dividend (operating/financing)
• Payment of taxes
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 Cash Generated from Operations
Cash flows from operations can be reported using the
direct method and indirect method.
Cash from operations (Direct Method) 1 - Operating Activities
a) Cash generated from
• Cash received from customers operations (Direct /
Indirect)
• Cash paid to suppliers relating to operations b) Cash received from
interest/dividend on
• Cash paid to and on behalf of employees investments
• Cash paid for other operating expenses c) Cash paid for interest on
borrowings / equity div.
Cash generated from operations d) Cash paid for income
taxes

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 Cash Generated from Operation
Cash from operations (Indirect Method) 1 - Operating Activities
a) Cash generated from
Under the indirect method the cash generated from operations (Direct /
Indirect)
operations is determined by adjusting operating b) Cash received from
profit/loss for the effects of: interest/dividend on
investments
1. Non-cash items relating to the non-current assets; c) Cash paid for interest on
borrowings / equity div.
such as depreciation, amortization, loss on disposal, d) Cash paid for income
and impairment loss. taxes

2. Changes during the period in inventories, trade

receivables, trade payables, operating accrued
expenses, provision for losses and operating prepaid
expenses. (working capital items relating to operations) 14
 Cash Generated from Operations

Operating profits
Other income
PBIT

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Cash Generated from Operations

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 Cash Generated from Operation
Indirect Method
Profit after tax 150,000
Income tax expense 40,000
Profit before tax 190,000
Interest/Financial expense 50,000
Profit before interest and tax 240,000
Other income (interest, dividend, gain on disposal etc.) 0
Operating profit / Profit from operations 240,000
Add back non-cash expense relating to the non-current assets
Depreciation 25,000
Amortization 0
Loss on disposal of assets 0
Impairment 0
Adjustment for working capital items relating to the operations
Inventory (less increase, add decrease) (6,000)
Trade receivables net of allowances for doubtful debts (less increase, add decrease) 14,000
Prepaid operating expenses(less increase, add decrease) 0
Trade payables (add increase, less decrease) 23,000
Accruals / provisions for operating expenses (add increase, less decrease) (3,000)
Cash generated from operations 293,000 17
Cash Generated from Operation
Direct Method

Op 233,000 + Sales 1,280,000 – Cl 219,000

COGS 400,000 – Op 118,000 + Cl 124,000

Op 102,000 + Purch 406,000 – Cl 125,000

Op 8,000 + Wages 290,000 – Cl 5,000

Oper exp 350,000 – Dep exp 25,000

Op 52,000 + Tax exp 40,000 – Cl 43,000

Op 30,000 + Int exp 50,000 – Cl 45,000

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 Interest and Dividend
Interest and dividends whether received or paid are disclosed
separately and can be classified as operating, investing or
financing activities, based on their nature and as long as they
are consistently treated from period to period.

Interest Received Operating Activities Investing Activities

Dividend Received Operating Activities Investing Activities
Interest Paid Operating Activities Financing Activities
Dividend Paid Operating Activities Financing Activities

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 Gain or Loss on Disposal of Asset

In the statement of cash flows, the gain on disposal of Rs. 12,000 is deducted as an adjustment to
the operating profit. The cash proceeds of Rs. 40,000 are included as a cash inflow under the
heading: “Cash flows from investing activities”.
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Investing Activities
 Investing Activities

Activities that relate to the acquisition and disposal of non-

current assets and those short investments that are not
included in cash equivalents.

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 Investing Activities
Cash Inflows Cash Outflows
• Principal collections from loans • Loans advanced
advanced • Investments made in other entities’
• Disposal proceeds of investments in debt or equity instruments (except
other entities’ debt or equity the investments that are cash
instruments* equivalents).
• Sale proceeds of noncurrent assets • Purchase/acquisition of noncurrent
like; intangible assets, property plant assets like; intangible assets,
and equipment
property plant and equipment
*Unless those are held for trading
purposes or considered as cash
equivalents.
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Cash Flow from Investing Activities

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Cash Flow from Investing Activities

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Cash Flow from Investing Activities

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Cash Flow from Investing Activities

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Financing Activities
 Financing Activities

Activities that cause changes in the contributed equity capital

and the borrowings of an entity (short term or long term).

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 Financing Activities
Cash Inflows Cash Outflows
• Proceeds from issuing share capital • Payment of equity dividends
including share premium
• Payment of interest on borrowings
• Proceeds from borrowings or by
• Repurchase of entity’s own share
issuing debt certificates (short term
capital (Treasury Shares)
or long term)
• Proceeds from donors as restricted • Repayment of debt principal
cash, which is limited to long term • Redemption of debt certificates and
purposes in case of Not-for-profit payment of lease liabilities.
entities.

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Cash Flow from Financing Activities

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Cash Flow from Financing Activities

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Cash Flow from Financing Activities

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Cash Flow from Financing Activities

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 Non-Cash Investing and Financing
Examples of significant non-cash investing and financing activities
might include:
• Acquiring an asset through a lease;
• Conversion of debt to equity;
• Exchange of non-cash assets or liabilities for other non-cash assets
or liabilities;
• Bonus issue of equity shares;
• Issuance of equity shares to acquire assets.

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Cash and Cash Equivalents
 Cash and Cash Equivalents

• Cash in hand
• Cash at bank less bank overdraft balance
• Cash Equivalents
• Very short term (where the original maturity is 3 months or less,
irrespective of maturity timing post balance date)
• Highly liquid investments
• Readily convertible to known amounts of cash
• Subject to insignificant risk of changes in value.

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 Statement of Cash Flows – Format
Sample Company Cash flows from financing activities
Cash received from issue of equity share capital
Statement of Cash Flows
Cash paid for purchase of treasury shares
For the Year Ended December 31, 20XX Cash received from sale of treasury shares
Cash received from borrowings(loan, notes, bonds, etc.)
Cash flows from operating activities Cash paid for repayment of borrowings
Cash generated from operations(Direct & Indirect Methods) Cash paid for redemption of loan stocks (notes, bonds, etc.)
Cash received from interest and dividend (Other income) Net cash from/(used in) financing activities
Cash paid for interest on borrowings & dividend to shareholders Net increase/decrease in cash and cash equivalents
Cash paid for Income taxes Cash and cash equivalents at beginning of the period
Net cash from/(used in) operating activities Effects of foreign exchange rate changes on the balance of cash
Cash flows from investing activities held in foreign currencies
Acquisition of subsidiaries, net of cash acquired in the acquisition Cash and cash equivalents at end of the period
Cash paid for acquisition of property, plant and equipment
Cash paid as loan or for investment in debt instruments
Cash paid as investment in equity instruments Disclosure of significant non-cash investing and financing activities
Cash paid for purchase or development of intangible assets Supplemental statement of cash flows information
Cash received from the sale or disposal of non-current assets • Conversion of bonds into ordinary shares
Net cash from/(used in) investing activities • asset acquired under lease agreement
• Issue of bonus shares

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Notable Consideration
 Notable Consideration

• Non-cash investing and financing activities must be disclosed

separately
• Cash flows must be reported gross. Set-off is only permitted in very
limited cases and additional disclosures are required (examples
relating to term deposits and loans)
• Foreign exchange transactions should be recorded at the rate at
the date of the cash flow
• Acquisition and disposal of subsidiaries are investing activities and
specific additional disclosures are required

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 Notable Consideration

• Where the equity method is used for joint ventures and associates,
the statement of cash flows should only show cash flows between
the investor and investee
• Disclose cash not available for use by the group
• Assets and liabilities denominated in a foreign currency generally
include an element of unrealized exchange difference at the
reporting date

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 Notable Consideration

• Disclose the components of cash and cash equivalents and provide

a reconciliation back to the statement of financial position amount
if required
• Non-cash investing and financing transactions are not included in
the statement of cash flows and should be disclosed elsewhere in
the financial statements

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 Analysis of the Statement of Cash Flows
Identify which one is the best scenario.
Scenario I Scenario II Scenario III
Sample Co. Simple Co. Somple Co.
Rs. (000) Rs. (000) Rs. (000)
Operating Activities 7,000 7,000 -7,000
Investing Activities 3,000 -3,000 3,000
Financing Activities 2,000 -4,600 5,000
Net Cash Flows during the year 12,000 -600 1,000
Opening Cash and Cash Equivalent 500 500 -900
Closing Cash and Cash Equivalent 12,500 -100 100

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Summary
 IAS 7 Statement of Cashflows Effective date: Periods beginning on or after 1 Jan 1994

Operating activities Investing activities Financing activities Cash and Cash Equivalent
Single entity

Relates to statement Relates to non- Relates to owner's • Unrestricted Cash in

of profit or loss current assets and equity, non-current hand or at bank Split lease instalments
• Short term, highly
Definition:
current investments liabilities and short- Interest = operating 1. Cash & cash
not part of cash & term borrowings liquid, readily activities
Cash generated equivalence:
cash equivalent convertible to known Principal = financing
from operations amount of cash § Short term
Consolidated activities
Received or paid interest and dividends are disclosed • Less bank over-draft (maturity 3
statement of
separately and can be classified as operating,
cashflows
months or less);
Direct Indirect investing or financing, based on their nature and as • original maturity is 3 § Highly liquid
Method Method long as they are consistently treated from period to months or less, investments;
period. irrespective of § Readily
maturity timing post convertible to
Important to consider: balance date
known amounts of
§ Gross Vs. Net cash flows
§ Foreign currency cash flows cash.
§ Cash flow per share is not a required disclosure § Subject to
§ Net reporting by financial institutions insignificance risk
§ Reporting; forward contracts, futures, options and swaps Dividends Dividends Acquisition / Acquisition of change in value.
§ Reporting extra ordinary items paid to NCI received from disposal of of associate
§ Acquisition and disposal of subsidiary and other group units associates and subsidiary or joint
joint ventures venture
Required Disclosures Classify as cash
The amount of significant cash and cash equivalent balances held by an entity flows from
which are not available for use by the group should be disclosed along with a financing Classify as cash Show net cash Show
commentary by management. flows from effects as part of payments
Recommended Disclosures Investing cash flows from under cash
a) The amount of undrawn borrowing facilities, indicating restrictions on their use, if activities Investing activities flows from
any; Investing
b) The aggregate amount of cash flows that are attributable to the increase in Disclosure in activities
operating capacity separately from those cash flows that are required to maintain
notes to the
operating capacity; and
c) The amount of the cash flows arising from the operating, investing and financing statement
activities of each reportable segment determined in accordance with IFRS 8.
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