This project is funded by EU

IAS 7 Cash Flow Statements

 Cash Flow Statements

PREFACE
CONTENTS
This series of workbooks has been written by the project team of the European
Union project Accounting Reform II in the Russian Federation. 1. INTRODUCTION 3

The workbooks cover the concepts of International Financial Reporting 2. DEFINITIONS 3

Standards (‘IFRS’). They are intended to be practical self-instruction aids that
practicing accountants can use to upgrade their knowledge, understanding 3. PRESENTATION OF A CASH FLOW STATEMENT 4
and skills.
4. REPORTING CASH FLOWS FROM OPERATING ACTIVITIES 7
Each workbook is designed for a maximum of three hours of study.
5. FOREIGN CURRENCY CASH FLOWS 8
Each workbook is a combination of:
 Information with examples 6. COMPONENTS OF CASH (AND CASH EQUIVALENTS) 11
 Self Test Questions – Multiple choice and Exercises
 Answers to Self Test Questions 7. CASH FLOW STATEMENT FOR A FINANCIAL INSTITUTION 15

The members of the project team were contributed by 8. MULTIPLE CHOICE QUESTIONS 16
PricewaterhouseCoopers and Rosexpertiza, Moscow.
9. Answers to Multiple Choice Questions 20
The Workbook Series consists of a range of titles listed on our website.

The copyright of the material contained in each workbook belongs to the

European Union and, according to its policy, may be used free of charge for
any non-commercial purpose.

The project team would like to express thanks to those who have contributed
their time and thoughts to the content of the workbooks.

Contact

e-mail Web
maria.ermoshkina@ru.pwc.com www.accountingreform.ru
Tel. Fax.
+ 7 095- 967-6046 + 7 095- 967-6001

Moscow, Russia, July 2004

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 Cash Flow Statements

Cash flow information is useful in assessing the ability to generate cash (and
1. Introduction cash equivalents), and enables users to develop models to compare the
present value of cash flows of different undertakings.
AIM
The aim of this workbook is to assist the individual in understanding Cash Flow It also enhances the comparability of the reporting of operating performance
Statements according to IFRS. by different undertakings, as it eliminates the effects of using different
accounting treatments for the same transactions.
OBJECTIVE
Cash Flow Statements are the subject of IAS 7. Historical cash flow information is often used as an indicator of the amount,
timing and certainty of future cash flows. It is also useful in checking the
Information about the cash flows of an undertaking is useful in providing users accuracy of past assessments of future cash flows, and in examining the
with a basis to assess the ability to generate cash (and cash equivalents) and relationship between profitability, net cash flow, and the impact of changing
the needs to utilise those cash flows. Also required are the timing (and prices.
certainty) of their generation.

The objective of IAS 7 is to require the provision of information about the 2. Definitions
changes in cash (and cash equivalents) of an undertaking, by means of a cash
flow statement. This classifies cash flows during the period from: Cash comprises cash on hand, and demand deposits.
-operating,
-investing and Cash equivalents are short-term, highly-liquid investments that are readily
-financing activities. convertible to known amounts of cash, and which are subject to an
insignificant risk of changes in value.
Scope
EXAMPLE – Cash equivalents
An undertaking should prepare a cash flow statement in accordance with Holding cash earns no interest on your funds. To earn interest on cash
IAS 7, and should present it as an integral part of its financial statements, for balances, your firm places money on short-term deposit, at its bank. Each day,
each period for which financial statements are presented. you add receipts to the deposit, and subtract money needed to pay creditors.

Users are interested in how the undertaking generates, and uses, cash (and Cash flows are inflows and outflows of cash (and cash equivalents).
cash equivalents). Businesses need cash to conduct their operations, to pay
their obligations, and to provide returns to their investors. IAS 7 requires all Operating activities are the principal revenue-producing activities of the
undertakings to present a cash flow statement. undertaking, and other activities that are not investing, or financing activities.

Benefits of Cash Flow Information EXAMPLE- Operating activities

Daily sales and purchases, employee costs and general overheads comprise
A cash flow statement, when used in conjunction with the rest of the financial the operating activities.
statements, provides information that enables users to evaluate the changes in
net assets of an undertaking, its financial structure (including its liquidity and Investing activities are the acquisition, and disposal, of long-term assets (and
solvency) and its ability to affect the amounts (and timing) of cash flows, in other investments not included in cash equivalents).
order to adapt to changing circumstances, and opportunities.
Financing activities are activities that result in changes in the size (and
composition) of the equity capital, and borrowings, of the undertaking.
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 Cash Flow Statements

than part of its operating, investing and financing activities. Cash management
Cash and cash equivalents includes the investment of excess cash in cash equivalents.

Cash equivalents are held for the purpose of meeting short-term cash
commitments, rather than for investment.
3. Presentation of a Cash Flow Statement
For an investment to qualify as a cash equivalent, it must be readily The cash flow statement should report cash flows during the period, classified
convertible to a known amount of cash, and be subject to an insignificant risk by operating, investing and financing activities.
of changes in value.
An undertaking presents its cash flows from operating, investing and financing
An investment normally qualifies as a cash equivalent only when it has a activities in a manner that is most appropriate to its business.
maturity of three months (or less), from the date of acquisition.
Classification by activity provides information that allows users to assess the
Equity investments are excluded from cash equivalents, unless they are, in impact of those activities on the financial position of the undertaking, and the
substance, cash equivalents, for example in the case of preferred shares amount of its cash (and cash equivalents). This information may also be used
acquired within a short period of their maturity (and with a specified to evaluate the relationships among those activities.
redemption date).
A single transaction may include cash flows that are classified differently.
EXAMPLE- Preferred shares acquired within a short period of their
maturity EXAMPLE-Single transaction-both operating and financing activity
You buy some preferred shares of a large, listed company in January. They A cash repayment of a loan includes both interest and capital, the interest
will redeemed in full in March. (The company will buy back the shares from element may be classified as an operating activity, and the capital element is
you.) These may be considered to be cash equivalents. classified as a financing activity.

Bank borrowings are generally considered to be financing activities. However, Operating Activities
in some countries, bank overdrafts (which are repayable on demand) form an
integral part of an undertaking's cash management. The amount of cash flows arising from operating activities is a key indicator of
the extent to which the operations have generated sufficient cash flows to
In these circumstances, bank overdrafts are included as a component of cash repay loans, maintain the operating capability of the undertaking, pay
(and cash equivalents). The bank balance often fluctuates from being positive dividends (and make new investments) without recourse to external sources of
to overdrawn. financing.

EXAMPLE-Overdraft EXAMPLE – Operating activities not generating cash

You have a seasonal business. For the first half of the year you have positive Your manufacturing activities are not generating cash, as inventories are
cash balances, which you place in short-term deposits. In the second half of increasing rapidly, and your clients are taking excessive credit. Unless
the year, you have negative cash balances, which are financed by a bank corrective action is taken, you will need to obtain more cash from banks or
overdraft. The overdraft is treated as a cash equivalent. investors.
If this is a planned expansion, the financial needs should have been planned in
advance.
Cash flows exclude movements between items that constitute cash (or cash
equivalents) because these components are part of cash management, rather
Information about the specific components of operating cash flows is useful, in
conjunction with other information, in forecasting operating cash flows.
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 Cash Flow Statements

EXAMPLE - sale of an item of plant: a gain that is included in net profit

EXAMPLES –Forecasting operating cash flows You sell a machine, and record a gain of $4.000 in your net profit. For cash
1. You run a chain of super markets. Every store that you open requires flow purposes, this gain is deducted from net profit, and recorded in investing
$50.000 of additional inventory. This fact can be notifies to users, and activities.
monitored in future periods.
2. You are a manufacturer. Every time that you enter a new foreign market, A specialist trading in securities will treat them as inventory acquired
you have to provide $80.000 of inventory, and accounts receivable increase by specifically for resale. Cash flows arising from the purchase and sale of
$120.000. This fact can be notifies to users, and monitored in future periods. dealing (or trading) securities are classified as operating activities. For other
businesses, they will either be operating activities, or cash equivalents (see
Cash flows from operating activities are primarily derived from the principal above).
revenue-producing activities of the undertaking. Therefore, they generally
result from the transactions that enter into the determination of net profit. Cash advances, and loans made by financial institutions, are usually classified
as operating activities, as they relate to the main revenue-producing activity of
Examples of cash flows from operating activities are: that undertaking.

(i) receipts from the sale of goods, and the rendering of services; EXAMPLE- Loans made by financial institutions
You are a financial institution. Making loans, and receiving loan repayments is
(ii) receipts from royalties, fees, commissions and other revenue; your primary business. The cash flows from these loans are shown as
operating activities.
EXAMPLE- fees
You control a franchise of restaurants. Investing Activities
You receive an annual franchise fee from each restaurant, and a fee for every
meal served. The separate disclosure of cash flows arising from investing activities
represents the extent to which expenditures have been made for resources
(iii) payments to suppliers for goods (and services); intended to generate future income and cash flows.

(iv) payments to (and on behalf of) employees; Examples of cash flows arising from investing activities are:

(v) receipts and payments of an insurance undertaking for premiums and (i) payments to acquire property, plant and equipment, intangibles and
claims, annuities and other policy benefits; other long-term assets. These payments include those relating to
capitalised development costs and self-constructed property, plant and
(vi) payments (or refunds) of income taxes unless they can be specifically equipment;
identified with financing and investing activities; and
EXAMPLE- Self-constructed property
(vii) receipts (and payments) from contracts held for dealing (or trading) To expand your business you build a new factory. You capitalise the
purposes. construction costs. This is an investment activity, for cash flow purposes.

Some transactions, such as the sale of an item of plant, may give rise to a gain (ii) receipts from sales of property, plant and equipment, intangibles and
(or loss) that is included in net profit. However, these cash flows are cash other long-term assets;
flows from investing activities.

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 Cash Flow Statements

EXAMPLE- Receipt from sales of property

You sell your head office. As a rare event, this will not be considered to be an EXAMPLE –Hedging
operating activity. It will be an investment activity. You have purchased products from Japan on credit. This is an operating
activity. You will need to pay for them in Yen in 3 months time. You have a
(iii) payments to acquire shares or debt instruments of other undertakings, forward contract to fix the purchase price of the Yen. This will also be treated
and interests in joint ventures (other than for instruments that are cash as an operating activity.
equivalents, or held for dealing (or trading purposes));
Financing Activities
EXAMPLE- Payments to acquire shares
You buy a competitors business, and acquire all of its shares. This is an The separate disclosure of cash flows arising from financing activities is
investment activity. needed to predict claims on cash flows by providers of capital to the
undertaking.
(iv) receipts from sales of shares (or debt) instruments of other
undertakings and interests in joint ventures (other than for Examples of cash flows arising from financing activities are:
instruments that are cash equivalents, or held for trading purposes);
(i) proceeds from issuing shares, or other equity instruments;
(v) advances (and loans) made to other parties (other than by a financial
institution); (ii) payments to owners to acquire, or redeem the undertaking's shares;

(vi) receipts from the repayments of advances and loans made to other (iii) proceeds from issuing debentures, loans, notes, bonds, mortgages
parties (other than those of a financial institution); and other short or long-term borrowings;

(vii) payments for futures contracts, forward contracts, option contracts and (iv) repayments of amounts borrowed; and
swap contracts (except when the contracts are held for dealing or
trading purposes, or the payments are classified as financing (v) payments by a lessee for the reduction of the outstanding liability
activities); and relating to a finance lease.

(viii) receipts from futures contracts, forward contracts, option contracts and EXAMPLE-Finance lease
swap contracts (except when the contracts are held for dealing or You lease some machinery on a finance lease. The lease is a form of a loan
trading purposes, or the receipts are classified as financing activities). (see IAS 17). Each payment includes 2 parts: an interest payment and a
capital payment. The interest the interest element may be classified as an
When a contract is accounted for as a hedge of an identifiable position, the operating activity, and the capital element is classified as a financing activity.
cash flows of the contract are classified in the same manner as those of the
position being hedged.

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 Cash Flow Statements

Under the indirect method, the net cash flow from operating activities is
4. Reporting Cash Flows From Operating determined by adjusting net profit for the effects of:
Activities
(i) changes in inventories, operating receivables, and payables;
An undertaking should report cash flows from operating activities using either:
(ii) non-cash items such as depreciation, provisions, deferred taxes,
(i) the direct method, whereby major classes of gross receipts and gross unrealised foreign currency gains (and losses), undistributed profits of
payments are disclosed; or associates, and minority interests; and

(ii) the indirect method, whereby net profit is adjusted for the effects of (iii) all other items, which are investing or financing cash flows.
transactions of a non-cash nature, any deferrals (or accruals) of past
(or future) operating cash receipts (or payments), and items of income Alternatively, the net cash flow from operating activities may be presented
(or expense) associated with investing or financing cash flows. under the indirect method, by showing the revenues and expenses disclosed
in the income statement, and the changes during the period in inventories,
operating receivables and payables.
PRACTICAL NOTE
The indirect method can be produced from the opening and closing balance
sheets, together with some information from the income statement. The direct Reporting Cash Flows From Investing and Financing
method normally needs more comprehensive information from the accounting Activities
records, to identify major classes of gross receipts, and gross payments.
An undertaking should report separately major classes of gross receipts, and
Undertakings are encouraged to report cash flows from operating activities gross payments, arising from investing and financing activities, except to the
using the direct method. The direct method provides information that is not extent that cash flows are reported on a net basis.
available under the indirect method.
Reporting Cash Flows on a Net Basis
Under the direct method, information about major classes of gross receipts,
and gross payments, may be obtained either: Cash flows arising from the following operating, investing or financing activities
may be reported on a net basis:
(1) from the accounting records; or
(i) receipts and payments on behalf of clients, when the cash flows reflect
(2) by adjusting sales, cost of sales (interest and similar income, and the activities of the client, rather than those of the undertaking; and
interest expense and similar charges, for a financial institution) and
other items in the income statement for
EXAMPLE –Cash flows shown on a net basis.
You collect money on behalf of a client, and immediately pay it to the client,
(i) changes in inventories, operating receivables, and payables;
less a commission. If you take no risk (if no money is received, you are not
liable to the client), the commissions could be shown net, rather than showing
(ii) other non-cash items; and
the gross receipts and payments.
(iii) other items, for which the cash effects are investing, or financing cash
flows. (ii) receipts and payments for items in which the turnover is quick, the
amounts are large, and the maturities are short.

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 Cash Flow Statements

Examples of these receipts and payments are:

The cash flows of a foreign subsidiary should be translated at the exchange
(i) the acceptance (and repayment) of demand deposits of a bank; rates between the reporting currency, and the foreign currency, at the dates of
the cash flows.
(ii) funds held for clients by an investment undertaking; and
Cash flows denominated in a foreign currency are reported in a manner
(iii) rents collected on behalf of (and paid over to) the owners of consistent with IAS 21 Foreign Exchange Rates.
properties.
This permits the use of an exchange rate that approximates the actual rate.
Examples of these receipts and payments are advances made for (and the For example, a weighted-average exchange rate for a period may be used for
repayment of): recording foreign currency transactions, or the translation of the cash flows of
a foreign subsidiary.
(i) principal amounts relating to credit card clients;
EXAMPLE-Reporting foreign currency, at weighted-average rate.
(ii) the purchase and sale of investments; and You receive $600.000 on March 12. Your reporting currency is Euros. The
exchange rate on March 12 is Euro1= $1.20. The weighted-average rate for
(iii) other short-term borrowings, for example, those which have a maturity the period is Euro1= $1.25. Your policy is to use the weighted-average rate.
period of three months or less. The transaction is reported as Euros 480.000 (600.000/1.25).

Cash flows arising from each of the following activities of a financial institution However, IAS 21 does not permit use of the exchange rate at the balance
may be reported on a net basis: sheet date, when translating the cash flows of a foreign subsidiary.

(i) receipts, and payments, for the acceptance (and repayment) of Unrealised gains (and losses) arising from changes in foreign currency
deposits with a fixed maturity date; exchange rates are not cash flows.

(ii) the placement of deposits with (and withdrawal of deposits from) other EXAMPLE- Unrealised gain arising from changes in foreign currency.
financial institutions; and You have a foreign investment worth $1,2m. Your reporting currency is Euros.
The exchange rate on January 1 is Euro1= $1.20. The exchange rate on
(iii) advances, and loans made to clients (and the repayment of those December 31 is Euro1= $1.25. The unrealised gain in Euros is not a cash flow.
advances and loans).
However, the effect of exchange rate changes on cash held (or due) in a
5. Foreign Currency Cash Flows foreign currency is reported in the cash flow statement, in order to reconcile
cash at the beginning, and the end, of the period.
Cash flows, arising from transactions in a foreign currency, should be recorded
in an undertaking's reporting currency, by applying the exchange rate between This amount is presented separately from cash flows from operating, investing
the reporting currency, and the foreign currency, at the date of the cash flow. and financing activities and includes the differences, if any, had those cash
flows been reported at end of period exchange rates.
EXAMPLE-Reporting foreign currency, at the date of the cash flow.
You receive $600.000 on March 12. Your reporting currency is Euros. The
exchange rate on March 12 is Euro1= $1.20. The transaction is reported as
Euros 500.000 (600.000/1.2).
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 Cash Flow Statements

Taxes on Income
EXAMPLE- Effect of exchange rate changes on cash held
You have a cash balance worth $2,4m. Your reporting currency is Euros. The Taxes paid are usually classified as cash flows from operating activities.
exchange rate on January 1 is Euro1= $1.20. The exchange rate on When tax cash flows are allocated over more than one class of activity, the
December 31 is Euro1= $1.25. The 8.000 gain in Euros is an exchange total amount of taxes paid is disclosed.
difference shown under operating activities.
EXAMPLE - Total amount of taxes paid is disclosed
Interest and Dividends Your cash flow reports tax payments of $10m for operating activities, $2m for
investment activities and $6m for finance activities. The total tax paid of $18m
Cash flows from interest and dividends received, and paid, should each be should also be noted in the notes to the cash flow statement.
disclosed separately. Each should be classified consistently as either
operating, investing or financing activities. Cash flows arising from taxes on income should be separately disclosed, and
should be cash flows from operating activities, unless they can be specifically
The total amount of interest paid during a period is disclosed in the cash flow identified with financing and investing activities.
statement (whether it has been recorded as an expense in the income
statement, or capitalised in accordance with IAS 23 Borrowing Costs). While tax expense may be readily identifiable with investing or financing
activities, the related tax cash flows are often impracticable to identify, and
EXAMPLE – Interest capitalised. may arise in a different period from the cash flows of the underlying
You have paid a total of $600.000 in interest of which $100.000 has been transaction.
capitalised into a building. The cash outflow will be shown as $600.000, noting
that $100.000 has been capitalised. The charge for interest paid in the income When it is practicable to identify the tax cash flow with an individual
statement will be $500.000 (600.000-100.000), if no interest is accrued at transaction, that provides cash flows that are investing or financing activities,
either the start or the end of the period. the tax cash flow is classified as an investing or financing activity, as
appropriate.
Interest paid, and interest and dividends received, are usually classified as
operating cash flows for a financial institution. There is no consensus on the EXAMPLE- Tax on investing activity
classification of these cash flows for other undertakings. You sell a subsidiary. The following year you have to pay capital gains tax of
$150m on the gain from that sale. This can be classified as a tax on investing
Interest paid, and interest and dividends received, may be classified as activities.
operating cash flows, as they enter contribute to net profit.
Investments in Associates and Joint Ventures
Alternatively, interest paid, and interest and dividends received, may be
financing and investing cash flows respectively, because they are costs of When accounting for an associate, an investor is restricted to the cash flows
obtaining financial resources, or returns on investments. between itself and the investee, for example, to dividends and advances.
Dividends paid may be classified as a financing cash flow, as they are a cost
EXAMPLE-Associate
of obtaining financial resources.
You own 25% of another company. You provide a loan of $44m to the
associate, and receive $6m in dividends. These transactions appear in your
Alternatively, dividends paid may be cash flows from operating, to assist users
cash flow statement. The internal cash flows of the associate are not
to determine the ability to pay dividends out of operating cash flows.
consolidated into your cash flow figures.

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 Cash Flow Statements

The cash flow effects of disposals are not deducted from those of acquisitions.
An undertaking, which reports its interest in a jointly-controlled entity (see IAS
31 Joint Ventures) using proportionate consolidation, includes its proportionate EXAMPLE-Disposals and acquisitions in the same period
share of the jointly-controlled entity's cash flows. You buy a company and sell another in the same period. The cash flows of the
two companies are shown separately under investing activities. (They are not
EXAMPLE- Joint venture netted.)
You own 60% of a joint venture. Using proportionate consolidation, you
consolidate 60% of all its cash flows into your accounts. The aggregate amount of the cash paid (or received) as purchase (or sale)
consideration is reported net of cash acquired (or disposed of).
An undertaking, which reports such an interest using the equity method, the
cash flows in respect of its investments in the jointly-controlled entity, and EXAMPLE- Buying a company which has cash
distributions (and other payments or receipts between it and the jointly You pay $90m for a company. It holds cash balances of $60m at the time of
controlled entity). The accounting is the same as for an associate (see above). purchase. In your cash flow statement, you show the purchase price as $30m.

Acquisitions and Disposals of Subsidiaries and Other Non-cash Transactions

Business Units
Investing and financing transactions, that do not require the use of cash,
The aggregate cash flows arising from acquisitions, and from disposals, of should be excluded from a cash flow statement.
subsidiaries (or other business units) should be presented separately as
investing activities. EXAMPLE- Non-cash transaction: conversion of debt to equity
You redeem $100m of company bonds by issuing shares of the same value.
EXAMPLE -Disposals This transaction will not be shown in the cash flow statement, as no cash
You sell a subsidiary. You show the cash flow figures as an investing activity, changed hands, but it will be noted in the notes relating to share capital and
including the proceeds of sale. bonds.

An undertaking should disclose, in aggregate, in respect of both acquisitions Such transactions should be disclosed elsewhere in the financial statements,
and disposals of subsidiaries, (or other business units during the period) each in a way that provides all the relevant information about these investing, and
of the following: financing activities.

(i) the total purchase (or disposal) consideration Many investing and financing activities do not have a direct impact on current
cash flows, although they do affect the capital and asset structure.
(ii) the portion of the purchase (or disposal) consideration, discharged by
cash and cash equivalents; Examples of non-cash transactions are:

(iii) the amount of cash (and cash equivalents) in the subsidiary (or (i) the acquisition of assets, either by assuming directly related liabilities,
business unit) acquired (or disposed of); and or by means of a finance lease;

(iv) the amount of the assets and liabilities other than cash (or cash (ii) the acquisition of an undertaking, by means of an equity issue, and
equivalents) in the subsidiary (or business unit) acquired (or disposed
of), summarised by each major category. (iii) the conversion of debt to equity.

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 Cash Flow Statements

6. Components of Cash (and cash Other Disclosures

equivalents) An undertaking should disclose, together with a commentary by management,
the amount of significant cash and cash equivalent balances, held by the
An undertaking should disclose the components of cash (and cash undertaking, which are not available for use by the group.
equivalents), and should present a reconciliation of the amounts in its cash
flow statement with the equivalent items reported in the balance sheet. EXAMPLE- Cash not available for use by the group.
Your foreign subsidiary has cash balances, but the local government has
Cash and cash equivalents: frozen them, due to tax transgressions that the subsidiary is alleged to have
EXAMPLE - Cash and cash equivalents – sample policy and note made. The amount of these balances would be disclosed as cash not available
Cash and cash equivalents includes cash in hand, deposits held at call with for use.
banks, other short-term highly liquid investments with original maturities of
three months or less, and bank overdrafts. Bank overdrafts are shown within There are various circumstances in which cash (and cash equivalent)
borrowings in current liabilities on the balance sheet.’ balances are not available for use by the group.

Cash and cash equivalents: Examples include cash (and cash equivalent) balances held by a subsidiary,
that operates where exchange controls (or other restrictions) apply, when the
2004 2003 balances are not available for general use by the parent, or other subsidiaries
Cash at bank and in hand 12,698 30,798
Additional information may be relevant to users in understanding the financial
Short-term bank deposits 9,530 5,414 position, and liquidity of an undertaking. Disclosure of this information,
22,228 36,212 together with a commentary by management, is encouraged and may include:

The effective interest rate on short-term bank deposits was 5.9% (2003: (i) the amount of undrawn borrowing facilities that may be available for
5.6%); these deposits have an average maturity of 20 days. future operating activities, and to settle capital commitments,
Cash and bank overdrafts include the following for the purposes of the cash indicating any restrictions on the use of these facilities;
flow statement:
EXAMPLE-Facilities
You have a line of credit for $250m, of which you are only currently using
2004 2003 $35m. The line of credit is available for 5 years, at a cost of 1% above the
Cash and cash equivalents 22,228 36,212 national bank rate. This information helps users know what finance is available
Bank overdrafts (2,650) (6,464) for your expansion plans.
19,578 29,748
(ii) the aggregate amounts of the cash flows from each of operating,
investing and financing activities, related to interests in joint ventures,
An undertaking discloses the policy that it adopts in determining the
reported using proportionate consolidation;
composition of cash (and cash equivalents).

The effect of any change in the policy for determining components of cash
(and cash equivalents), for example, a change in the classification of financial
instruments previously considered to be part of an undertaking's investment
portfolio, is reported in accordance with IAS 8 Changes in Accounting Policies.
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 Cash Flow Statements

EXAMPLE- Joint venture Information from the income statement and balance sheet is provided to show
You own 60% of a joint venture. Using proportionate consolidation, you how the statements of cash flows under the direct method and indirect method
consolidate 60% of all its cash flows into your accounts. You also show the have been derived.
aggregate amounts included in the operating, investing and financing activities
totals. The following additional information is also relevant for the preparation of the
statements of cash flows:
(iii) the aggregate amount of cash flows that represent increases in
operating capacity, separately from those cash flows that are required All of the shares of a subsidiary were acquired for 590. The fair values of
to maintain operating capacity; and assets acquired and liabilities assumed were as follows:

EXAMPLE- Increases in operating capacity Inventories 100

Your only factory has reached full capacity. Your investing activities from your Accounts receivable 100
business have generated $75m. At the very end of the year, you buy some Cash 40
land for $10m, on which you will build a new factory. Showing this amount Property, plant and equipment 650
separately enhances the information provided to users. Trade payables 100
Long-term debt 200
(iv) the amount of the cash flows arising from the operating, investing and
250 was raised from the issue of share capital, and a further 250 was raised
financing activities of each reported industry and geographical
from long-term borrowings.
segment (see IAS 14 Segment Reporting).
Interest expense was 400, of which 170 was paid during the period. 100
The separate disclosure of cash flows that represent increases in operating
relating to interest expense of the prior- period was also paid during the period.
capacity, and cash flows which are required to maintain operating, enables the
user to determine whether the undertaking is investing adequately in the
Dividends paid were 1.200.
maintenance of its operating capacity.
The liability for tax at the beginning and end of the period was 1.000 and 400
An undertaking that does not invest adequately in the maintenance of its
respectively. During the period, a further 200 tax was provided for.
operating capacity may be prejudicing future profitability, for the sake of
Withholding tax on dividends received amounted to 100.
current liquidity, and distributions to owners.
During the period, the group acquired property, plant and equipment with an
The disclosure of segmental cash flows enables users to obtain a better
aggregate cost of 1.250 of which 900 was acquired by means of finance
understanding of the relationship between the cash flows of the business as a
leases. Cash payments of 350 were made to purchase property, plant and
whole, and those of its component parts, and the availability (and variability) of
equipment.
segmental cash flows.
Plant, with original cost of 80 and accumulated depreciation of 60, was sold for
Cash Flow Statement for an Undertaking other than a 20.
Financial Institution
Accounts receivable as at end of 2XX2 include 100 of interest receivable.
The examples show only current period amounts. Corresponding amounts, for
the preceding period, are required to be presented in accordance with IAS 1
Presentation of Financial Statements. Consolidated Income Statement for the period ended 2XX2
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 Cash Flow Statements

Consolidated balance 2XX2

Sales 30.650 sheet 2XX1
Cost of sales (25.820) Assets
Gross Profit 4.470 Cash (and cash equivalents) 410 160
Depreciation (450)
Administrative and selling expense (910) Accounts receivable 1.900 1.200
Interest expense (400) Inventory 1.000 1.950
Investment income 500 Portfolio investments 2.500 2.500
Foreign exchange loss (40) Property, plant and equipment at 3.730 1.910
Net profit before taxation 3.530 cost
Taxes on income (300) Accumulated depreciation (1.450) (1.060)
Net profit 3.230 Property, plant and equipment net 2.280 850
Total assets 8.090 6.600

Liabilities
Trade payables 250 1.890
Interest payable 230 100
Income taxes payable 400 1.000
Long term debt 2.300 1.040
Total liabilities 3.180 4.030

Shareholders' Equity
Share Capital 1.500 1.250
Retained earnings 3.410 1.380
Total shareholders equity 4.910 2.630
Total liabilities and shareholders equity 8.090 6.660

13
 Cash Flow Statements

Direct Method Cash Flow Statement 2XX2 Indirect Method Cash Flow Statement
Cash flows from operating activities 2XX2
Cash receipts from clients 30.150 Cash flows from operating activities
Cash paid to suppliers and employees (27.600) Net profit before taxation 3.530
Cash generated from operations 2.550 Adjustments for:
Interest paid (270) Depreciation 450
Income taxes paid (900) Foreign exchange loss 40
Net cash from operating activities 1.560 Investment income (500)
Cash flows from investing activities Interest expense 400
Acquisition of subsidiary X net of cash (550) 3.920
acquired Increase in trade and other receivables (500)
(Note A) Decrease in inventories 1.050
Purchase of property, plant and equipment (350) Decrease in trade payables (1.740)
(Note B) Cash generated from operations 2.550
Proceeds from sale of equipment 20 Interest paid (270)
Interest received 200 Income taxes paid (900)
Dividends received 200 Cash flow 1.380
Net cash used in investing activities (480) Net cash from operating activities 1.560
Cash Flows from financing activities Cash flow from investing activities
Proceeds from issuance of share capital 250 Acquisition of subsidiary X net of cash acquired (Note A) (550)
Proceeds from long-term borrowings 250 Purchase of property. plant and equipment (Note B) (350)
Payments of finance lease liabilities (90) Proceeds from sale of equipment 20
Dividends paid* (1.200) Interest received 200
Net cash used in financing activities (790) Dividends received 200
Net increase in cash (and cash equivalents) 290 Net cash used in investing activities (480)
Cash (and cash equivalents) at beginning 120 Cash flows from financing activities
of Proceeds from issuance of share capital 250
period (Note C) Proceeds from long-term borrowings 250
Cash (and cash equivalents) at end of 410 Payment of finance lease liabilities (90)
period (Note C) Dividends paid* (1.200)
* This could also be shown as an operating Net cash used in financing activities (790)
cash flow. Net increase in cash (and cash equivalents) 290
Cash (and cash equivalents) at beginning of period 120
(Note C)
Cash (and cash equivalents) at end of period (Note 410
C)
* This could also be shown as an operating cash flow.

14
 Cash Flow Statements

Notes to the Cash Flow Statement (direct method and Cash (and cash equivalents) at the end of the period include deposits with
indirect method) banks of 100 held by a subsidiary which are not freely remissible to the
holding company because of currency exchange restrictions.
A. Acquisition of Subsidiary The Group has undrawn borrowing facilities of 2.000 of which 700 may be
used only for future expansion.
During the period the group acquired subsidiary X. The fair value of assets
acquired and liabilities assumed were as follows: D. Segment Information
Cash 40 Segment Segment Total
Inventories 100 A B
Accounts receivable 100 Cash flows from:
Property, plant and equipment 650 Operating activities 1,700 (140) 1,560
Trade payables (100) Investing activities (640) 160 (480)
Long-term debt (200) Financing activities (570) (220) (790)
Total purchase price 590 490 (200) 290
Less: Cash of X (40)
Cash flow on acquisition net of cash acquired 550 Alternative Presentation
(indirect method)
B. Property, Plant and Equipment
As an alternative, in an indirect method cash flow statement, operating profit
During the period the Group acquired property, plant and equipment with an before working capital changes is sometimes presented as follows:
aggregate cost of 1.250, of which 900 was acquired by means of finance
leases. Cash payments of 350 were made to purchase property, plant and Revenues excluding investment income 30,650
equipment. Operating expense excluding depreciation (26,910)
Operating profit before working capital changes 3,740
C. Cash (and cash equivalents)

Cash (and cash equivalents) consist of cash on hand and balances with 7. Cash Flow Statement for a Financial
banks, and investments in money market instruments. Cash (and cash
equivalents) included in the cash flow statement comprise the following
Institution
balance sheet amounts:
1. The example shows only current period amounts. Comparative
2XX2 2XX1 amounts for the preceding period are required to be presented.
Cash on hand and balances with banks 40 25
Short-term investments 370 135 2. The example is presented using the direct method.
Cash (and cash equivalents) as previously reported 410 160
Effect of exchange rate changes - (40)
Cash (and cash equivalents) as restated 410 120

15
 Cash Flow Statements

2XX2
Cash flows from operating activities
Interest and commission receipts 28.447
Interest payments (23.463)
Recoveries on loans previously written off 237
Cash payments to employees and suppliers (997)
4.224
(Increase) decrease in operating assets:
Short-term funds (650)
Deposits held for regulatory or monetary control 234
purposes
Funds advanced to clients (288)
Net increase in credit card receivables (360)
Other short-term negotiable securities (120)
Increase (decrease) in operating liabilities:
Deposits from clients 600
Negotiable certificates of deposit (200)
Net cash from operating activities before income tax 3.440
Income taxes paid (100)
Net cash from operating activities 3.340
Cash flows from investing activities
Disposal of subsidiary M 50
Dividends received 200
Interest received 300
Proceeds from sales of non-dealing securities 1.200
Purchase of non-dealing securities (600)
Purchase of property, plant and equipment (500)
Net cash from investing activities 650

Cash flows from financing activities

Issue of loan capital 1.000
Issue of preference shares by subsidiary undertaking 800
Repayment of long-term borrowings (200)
Net decrease in other borrowings (1.000)
Dividends paid (400)
Net cash from financing activities 200
Effects of exchange rate changes on cash (and cash 600
equivalents)
Net increase in cash (and cash equivalents) 4.790
Cash (and cash equivalents) at beginning of period 4.050
Cash (and cash equivalents) at end of period 8.840

16
 Cash Flow Statements

6. The acquisition, and disposal, of long-term assets are:

8. Multiple Choice Questions 1. Operating activities.
2. Investing activities.
1. A company provides consolidated accounts, with comparative 3. Financial activities.
accounts for 5 previous periods.
For how many periods are cash flow statements are required? 7. Activities that result in changes in the size (and composition) of the
1. 1 equity capital, and borrowings are:
2. 5 1. Operating activities.
3. 6 2. Investing activities.
3. Financial activities.
2. Cash flow statements are required from:
1. All companies. 8. For an investment to qualify as a cash equivalent, it must be:
2. Listed companies. 1. Illiquid and low risk.
3. Financial institutions. 2. Liquid and low risk.
3. Liquid and medium risk.
3. A cash flow statement provides information that enables users to
evaluate the changes in: 9. The maximum maturity of a cash equivalent is:
1. Net assets of an undertaking. 1. 3 months.
2. Its financial structure. 2. 6 months.
3. Its liquidity. 3. 1 year.
4. Solvency.
5. Profitability. 10. Bank borrowings are generally considered to be:
1. Operating activities.
4. A cash flow statement helps in examining the relationship between: 2. Investing activities.
1. Profitability. 3. Financial activities.
2. Net cash flow. 4. Cash equivalents.
3. The impact of changing prices.
4. Staffing levels. 11. If bank overdrafts form an integral part of an undertaking's cash
management,
1. i they are considered to be:
2. i-ii 1. Operating activities.
3. i-iii 2. Investing activities.
4. i-iv 3. Financial activities.
4. Cash equivalents.
5. Daily sales and purchases, employee costs and general overheads
comprise: 12. A single transaction:
1. Operating activities. 1. May include cash flows that are classified differently.
2. Investing activities. 2. Must be included in full in one of the three headings.
3. Financial activities. 3. May be spread over more than one period.

17
 Cash Flow Statements

13. The amount of cash flows arising from operating activities is a key 15. Examples of cash flows arising from investing activities are:
indicator of the extent to which the operations have generated sufficient
cash flows to: (i) Payments to acquire property, plant and equipment, intangibles and
1. Repay loans. other long-term assets. These payments include those relating to
2. Maintain the operating capability of the undertaking. capitalised development costs and self-constructed property, plant and
3. Pay dividends. equipment.
4. Make new investments.
(ii) Receipts from sales of property, plant and equipment, intangibles and
14. Examples of cash flows from operating activities are: other long-term assets.

(i) Receipts from the sale of goods, and the rendering of services. (iii) Payments to acquire shares or debt instruments of other undertakings,
and interests in joint ventures (other than for instruments that are cash
(ii) Receipts from royalties, fees, commissions and other revenue. equivalents, or held for dealing (or trading purposes)).

(iii) Payments to suppliers for goods (and services). (iv) Receipts from sales of shares (or debt) instruments of other
undertakings and interests in joint ventures (other than for
(iv) Payments to (and on behalf of) employees. instruments that are cash equivalents, or held for trading purposes).

(v) Receipts and payments of an insurance undertaking for premiums and (v) Advances (and loans) made to other parties (other than by a financial
claims, annuities and other policy benefits. institution).

(vi) Payments (or refunds) of income taxes unless they can be specifically (vi) Receipts from the repayments of advances and loans made to other
identified with financing and investing activities. parties (other than those of a financial institution).

(vii) Receipts (and payments) from contracts held for dealing (or trading) (vii) Payments for futures contracts, forward contracts, option contracts
purposes. and swap contracts (except when the contracts are held for dealing or
trading purposes, or the payments are classified as financing
(viii) Sale of an item of plant, giving rise to a gain (or loss) that is included activities).
in net profit.
(viii) Receipts from futures contracts, forward contracts, option contracts
1. i and swap contracts not held for dealing or trading purposes.
2. i-ii
3. i-iii 16. Examples of cash flows arising from financing activities are:
4. i-iv
5. i-v (i) Proceeds from issuing shares, or other equity instruments.
6. i-vi
7. i-vii (ii) Payments to owners to acquire, or redeem the undertaking's shares.
8. i-viii
(iii) Proceeds from issuing debentures, loans, notes, bonds, mortgages
and other short or long-term borrowings.

(iv) Repayments of amounts borrowed.

18
 Cash Flow Statements

20. Examples of these receipts and payments that can be netted are
(v) Payments by a lessee for the reduction of the outstanding liability advances made for (and the repayment of):
relating to a finance lease.
(vi) Receipts by a lessor for the reduction of the outstanding liability (i) Principal amounts relating to credit card clients.
relating to a finance lease.
(ii) The purchase and sale of investments.
17. Which method of cash flow reporting starts with net profit?
1. Direct method. (iii) Short-term borrowings (3 months, or less).
2. Indirect method.
3. Both. 1. i
4. Neither. 2. i-ii
3. i-iii
18. Which method of cash flow reporting starts with changes in
inventories? 21. Cash flows, arising from transactions in a foreign currency, should
1. Direct method. be recorded in:
2. Indirect method. 1. Local currency.
3. Both. 2. An undertaking's reporting currency, at the rate of the date of the
4. Neither. transaction.
3. An undertaking's reporting currency, at the rate at the end of the
19. If you start with net profit, to calculate the cash generated from period.
operating activities, you:
adjust net profit for the effects of: 22. When translating the cash flows of a foreign subsidiary, use the
parent's reporting currency:
(i) Changes in inventories, operating receivables, and payables. (i) At the rate of the start of the period.
(ii) At the rate at the end of the period.
(ii) Non-cash items such as depreciation, provisions, deferred taxes, (iii) At the weighted average rate.
unrealised foreign currency gains (and losses), undistributed profits of
associates, and minority interests. 1. (i) only.
2. (ii) only.
(iii) Investing cash flows. 3. (iii) only.
4. (i) or (ii)
(iv) Financing cash flows. 5. (i) or (iii)
6. (ii) or (iii)
(v) Social security costs. 7. (i), (ii) or (iii)

1. i 23. Unrealised gains (and losses) arising from changes in foreign

2. i-ii currency exchange rates are:
3. i-iii 1. Translated at closing rate.
4. i-iv 2. Translated at opening rate.
5. i-v 3. Not cash flows.

19
 Cash Flow Statements

24. Cash flows from interest and dividends received, and paid, should: 16. 5
1. Each be disclosed separately. 17. 2
2. Be shown as a net figure. 18. 4
3. Be excluded from the cash flow statement. 19. 4
20. 3
25. Taxes paid are usually classified as cash flows from: 21. 2
1. Operating activities. 22. 3
2. Investing activities. 23. 3
3. Financial activities. 24. 1
25. 1
26. When accounting for an associate, an investor reports the cash
26. 2
flows:
27. 1
1. Using proportional consolidation.
2. Only the cash flows between itself and the investee.
3. In a separate cash flow statement.

27. When accounting for a joint venture, an investor reports the cash
flows:
1. Using proportional consolidation.
2. Only the cash flows between itself and the investee.
3. In a separate cash flow statement.

9. Answers to Multiple Choice Questions

Question Answer
1. 3
2. 1
3. 4
4. 3
5. 1
6. 2
7. 3
8. 2
9. 1
10. 3
11. 4
12. 1
13. 4
14. 7
15. 6

20
This publication has been produced with the assistance of the European Union. The contents of this publication are the sole responsibility of ZAO “PricewaterhouseCoopers”
and OOO “Rosexpertiza” and can in no way be taken to reflect the views of the European Union.