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ACCN04B Module 5 - Statement of Cash Flows

This document provides an overview of the statement of cash flows, including its definition, purpose, and how to prepare it. Specifically, it discusses classifying cash flows into three categories: operating, investing, and financing activities. It defines what activities fall into each category and provides examples. The statement of cash flows reconciles beginning and ending cash balances and provides important information about a company's sources and uses of cash.

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23 views

ACCN04B Module 5 - Statement of Cash Flows

This document provides an overview of the statement of cash flows, including its definition, purpose, and how to prepare it. Specifically, it discusses classifying cash flows into three categories: operating, investing, and financing activities. It defines what activities fall into each category and provides examples. The statement of cash flows reconciles beginning and ending cash balances and provides important information about a company's sources and uses of cash.

Uploaded by

dumpwey1
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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MODULE 5

Financial Accounting and Reporting

SESSION TOPIC 5 : Statement of Cash Flows

LEARNING OUTCOMES:
The following specific learning objectives are expected to be realized at the end of the session:
1. Discuss the definition and purpose of the SCF
2. Classify each items of cash flow into operating, investing and financing
3. Prepare the SCF of an entity

KEY POINTS

Cash Flows Operating Activities Investing Activities Financing Activities

CORE CONTENT
Introduction:
This module covers the discussion of the Statement of Cash Flows, its definition, purpose and preparation.
Emphasis will be given to the three activities within the SCF, and how to prepare each of the three sections. Finally, the
relationship of the SCF to the other financial statements will also be discussed.

IN-TEXT ACTIVITY
Definition of Statement of Cash Flows
A statement of cash flows is a component of financial statements summarizing the operating, investing and financing activities
of an entity.
In simple language, the statement of cash flows provides information about the cash receipt and cash payments of an entity
during a period.
Like the SCI and SoCE, the SCF is dated “for the year-ended”, which means the statement shows the transactions for the year
that reconciles the beginning balance of cash to its year-end balance.

Purpose of Statement of Cash Flows


 The primary purpose of a statement of cash flows is to provide relevant information about cash receipts and cash
payments of an entity during a period.
 Cash flow information is useful in assessing the ability of the entity to generate cash and cash equivalents.
 Users of an entity's FS are interested on how the entity generates and uses cash and cash equivalents.
 Entities need cash to conduct their operations, to pay obligations and to provide returns to their investors.

Cash and Cash Equivalent


 The statement of cash flows is designed to provide information about the change in an entity's cash and cash equivalents.
 Cash compromises cash on hand and demand deposits
 Cash equivalents are short-term highly liquid investments that are readily convertible to known amount of cash and which
are subject to insignificant risk of change in value.
 PAS 7, par. 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.

Examples of Cash Equivalents


a. Three-month BSP treasury bill
b. Three-year BSP treasury bill purchased three months before date of maturity
c. Three-month time deposit
d. Three-month money market instrument or commercial paper

ACCN04B Financial Accounting and Reporting


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Classification of Cash Flows
 Cash flows are inflows and outflows of cash and cash equivalents.
 The statement of cash flows shall report cash flows during the period classified as operating, investing and financing
activities.

Three Major Business Activities


Operating Activities
 Operating activities are the cash flows derived primarily from the principal revenue producing activities of the entity.
Cash flows from operating activities primarily result from transactions that affect income and expenses.

Examples of cash flow transactions reported under operating activities are:


a. Cash received from customers (cash receipts from sale of goods and rendering of services)
b. Cash received from royalties, rentals, fees, commissions, and other revenue
c. Cash payments to suppliers for goods and services
d. Cash payments for selling, administrative and other operating expenses
e. Cash receipts and cash payments of an insurance enterprise for premiums and claims, annuities and other policy benefits
f. Cash payments or refunds of income taxes unless they cn be specifically identified with financing and investing activities
g. Cash receipts and payments for securities held for dealing or trading purposes.

Investing Activities
 Investing activities are the cash flows derived from the acquisition and disposal of long-term assets and other investments
not included in cash equivalent.
 As a simple guide, investing activities include cash flows from transactions involving non-operating assets.

Examples of cash flow transactions reported under investing activities:


a. Cash payments to acquire property, plant and equipment, intangibles and other long-term assets.
b. Cash receipts from sales of property, plant and equipment, intangibles and other long-term assets.
c. Cash advances and loans to other parties (long term note receivable).
d. Cash receipts from repayment of advances and loans made to other parties.
e. Cash receipts and payments for future contract, forward contract, option contract and swap contract. (derivatives)

Financing Activities
 Financing activities are the cash flows derived from equity capital and borrowings of the entity.
 In other words, financing activities are cash flows that result from transactions between the entity and its owners (equity
financing) and between theentity and its creditors (debt financing).
 As a simple guide, financing activities include the cash flows from transactions involving nontrade liabilities and equity of
an entity.

Examples of cash flow transactions reported under financing activities:


a. Cash receipts from issuing shares or other equity instruments (for example, issuance of ordinary and preference shares).
b. Cash payments to owners to acquire or redeem the enterprise's shares (for example, payment for treasury stock).
c. Cash receipts from issuing debentures, loan, notes, bonds, mortgages and other long-term borrowings.
d. Cash payments for the amounts borrowed.

Interest
 PAS 7, par. 33, provides that interest paid and interest received shall be classified as operating cash flows because they
enter into the determination of net income or loss.
 Alternatively, interest paid may be classified as financing cash flow because it is a cost of obtaining financial resources
 Alternatively, interest received may be classified as investing cash flow because it is a return on investment.

Dividends
 PAS 7, par. 33, provides that dividend received shall be classified as operating cash flows because they enters into the
determination of net income.
 Alternatively, dividend received may be classified as investing cash flow because it is a return on investment.
 PAS 7, par. 34, provides that dividend paid shall be classified as financing cash flows because it is a cost of obtaining

ACCN04B Financial Accounting and Reporting


**For Instructional Materials Use Only 2
financial resources.
 Alternatively, dividend paid may be classified as operating cash flow in order to assist users to determine the ability of the
entity to pay dividends out of operating cash flows.

Income Taxes
 PAS 7, par. 35, provides that cash flows arising from income taxes shall be separately disclosed as cash flows from
operating activities unless they can be specifically identified with investing and financing activities.
 Tax cash flows are often difficult to match to the originating underlying transaction, so most of the time all tax cash flows
are classified as arising from operating activities.

Presentation of Operating Activities


Direct Method
 PAS 7, par. 18, provides that an entity shall report cash flows from operating activities using either direct method or
indirect method.
 The direct method shows in detail or itemizes the major classes of gross cash receipts and gross cash payments.
 The cash receipts are listed one by one, the cash payments are listd one by one, and the difference represents the net
cash flow from operating activities.

Indirect Method
 The indirect method means that the net income or loss is adjusted for the effects of transactions of a non cash nature, any
deferrals or accruals of past or future operating cash receipts and payments, and items of income or expense associated
with investing and financing activities.
 The indirect method of presenting the cash flow from operations begins with the accrual basis net income and applies a
series of adjustments to convert the income to a cash basis.

SESSION SUMMARY
 Statement of Cash Flows provides information on the sources and utilization of cash during the period.
 Cash inflows and outflows are presented in the SCF according to what activities they have been generated or utilized.
 An entity shall prepare a statement of cash flows and present it as an integral part of the financial statements for each
period for which financial statements are presented.

ACCN04B Financial Accounting and Reporting


**For Instructional Materials Use Only 3
SELF-ASSESSMENT
Assignment : Solve exercises that require preparation of an SCF for an entity with proper classification of items into
operating, investing and financing activities.
Quiz : Problems about statement of cash flows

REFERENCES
Refer to the references listed in the syllabus of the subject.

ACCN04B Financial Accounting and Reporting


**For Instructional Materials Use Only 4

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