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  • Classroom Notes 6396

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    Mary Grace Galleon-Yang Omac
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    The document defines key terms related to a statement of cash flows such as cash, cash equivalents, and cash flows. It explains that cash flows should be categorized into operating, investing, and financing activities. It provides examples of cash flows that would fall under each category, such as cash receipts from sales under operating activities and cash payments to acquire property and equipment under investing activities. The document also discusses the direct and indirect methods for preparing a statement of cash flows and how to determine cash flows if using the indirect method.

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    The document defines key terms related to a statement of cash flows such as cash, cash equivalents, and cash flows. It explains that cash flows should be categorized into operating, investing, and financing activities. It provides examples of cash flows that would fall under each category, such as cash receipts from sales under operating activities and cash payments to acquire property and equipment under investing activities. The document also discusses the direct and indirect methods for preparing a statement of cash flows and how to determine cash flows if using the indirect method.

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    © All Rights Reserved
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    13 views2 pages

    Classroom Notes 6396

    Uploaded by

    Mary Grace Galleon-Yang Omac
    The document defines key terms related to a statement of cash flows such as cash, cash equivalents, and cash flows. It explains that cash flows should be categorized into operating, investing, and financing activities. It provides examples of cash flows that would fall under each category, such as cash receipts from sales under operating activities and cash payments to acquire property and equipment under investing activities. The document also discusses the direct and indirect methods for preparing a statement of cash flows and how to determine cash flows if using the indirect method.

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    © All Rights Reserved
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    of 2

    Page 1

    FINANCIAL ACCOUNTING AND REPORTING

    PAS 7 STATEMENT OF CASH FLOWS

    Key Terms and Definitions

    a. Cash - comprises cash on hand and demand deposits.


    b. Cash equivalents - are short-term, highly liquid investments that are readily convertible to known
    amounts of cash and which are subject to an insignificant risk of changes in value.
    c. Cash flows - are inflows and outflows of cash and cash equivalents.
    d. Operating activities - are the principal revenue-producing activities of the entity and other activities
    that are not investing or financing activities.
    e. Investing activities - are the acquisition and disposal of long-term assets and other investments not
    included in cash equivalents.
    f. Financing activities - are activities that result in changes in the size and composition of the
    contributed equity and borrowings of the entity.

    Cash Equivalents

    a. An investment normally qualifies as a cash equivalent only when it has a short maturity of three
    months or less from the date of acquisition.
    b. Equity investments are excluded from cash equivalents unless they are, in substance, cash
    equivalents like redeemable preference shares.
    c. Bank overdrafts which are repayable on demand and which form an integral part of an
    enterprise's cash management are also included as a component of cash and cash equivalents
    d. Movements between items that constitute cash or cash equivalents are excluded from cash flows
    because these components are part of the cash management of an entity rather than part of its
    operating, investing and financing activities.

    Presentation of Statement of Cash Flows

    a. Cash flows must be analyzed between operating, investing and financing activities.
    b. Interest and dividends received and paid may be classified as operating, investing, or financing cash
    flows, provided that they are classified consistently from period to period
    c. Cash flows arising from taxes on income are normally classified as operating, unless they can be
    specifically identified with financing or investing activities
    d. For operating cash flows, the direct method of presentation is encouraged, but the indirect method is
    acceptable
    The direct method shows each major class of gross cash receipts and gross cash payments.
    The indirect method, whereby profit 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 or payments, and
    items of income or expense associated with investing or financing cash flows

    Determining Major Classes of Gross Cash Receipts and Gross Cash Payments Under the Direct
    Method

    a. From the accounting records of the entity


    b. By adjusting sales, cost of sales (interest and similar income and interest expense and similar
    charges for a financial institution) and other items in the income statement for:
    changes during the period in inventories and operating receivables and payables
    other non-cash items
    other items for which the cash effects are investing or financing cash flows.

    Determining Net Cash Flow from Operating Activities By Adjusting Profit or Loss Under the Indirect
    Method

    a. Changes during the period in inventories and operating receivables and payables
    b. Non-cash items such as depreciation, provisions, deferred taxes, unrealized foreign currency gains
    and losses, undistributed profits of associates, and minority interests
    c. All other items for which the cash effects are investing or financing cash flows.

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    Example of cash flows from operating activities


    a. Cash receipts from the sale of goods and the rendering of services
    b. Cash receipts from royalties, fees, commissions and other revenue
    c. Cash payments to suppliers for goods and services
    d. Cash payments to and on behalf of employees
    e. Cash receipts and cash payments of an insurance entity for premiums and claims, annuities and
    other policy benefits
    f. Cash payments or refunds of income taxes unless they can be specifically identified with financing
    activities and investing activities
    g. Cash receipts and payments from contracts held for dealing or trading purposes.
    Similar to inventory acquired specifically for resale.
    Classified as operating activities.
    Similarly, cash advances and loans made by financial institutions are usually classified as
    operating activities since they relate to the main revenue-producing activity of that entity

    Example of cash flows from investing activities

    a. Cash payments to acquire property, plant and equipment, intangibles and other long-term assets.
    These payments include those relating to capitalized development costs and self-constructed
    property, plant and equipment.
    b. Cash receipts from sales of property, plant and equipment, intangibles and other long-term assets.
    c. Cash payments to acquire equity or debt instruments of other entities and interests in joint ventures
    (other than payments for those instruments considered to be cash equivalents or those held for
    dealing or trading purposes).
    d. Cash receipts from sales of equity or debt instruments of other entities and interests in joint ventures
    (other than receipts for those instruments considered to be cash equivalents and those held for
    dealing or trading purposes).
    e. Cash advances and loans made to other parties (other than advances and loans made by a
    financial institution).
    f. Cash receipts from the repayment of advances and loans made to other parties (other than
    advances and loans of a financial institution).
    g. Cash payments for futures contracts, forward contracts, option contracts and swap contracts except
    when the contracts are held for dealing or trading purposes, or the payments are classified as
    financing activities.
    h. Cash receipts from futures contracts, forward contracts, option contracts and swap contracts except
    when the contracts are held for dealing or trading purposes, or the receipts are classified as
    financing activities.

    Example of cash flows from financing activities

    a. Cash proceeds from issuing shares or other equity instruments.


    b. Cash payments to owners to acquire or redeem the entitys shares.
    c. Cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short or long-
    term borrowings.
    d. Cash repayments of amounts borrowed.
    e. Cash payments by a lessee for the reduction of the outstanding liability relating to a finance lease.

    Presentation of cash flows from investing and financing activities

    a. Investing and financing transactions that do not require the use of cash or cash equivalents shall be
    excluded from a statement of cash flows.
    b. Such transactions shall be disclosed elsewhere in the financial statements in a way that provides all
    the relevant information about these investing and financing activities.
    c. Examples of non-cash investing and financing activities.
    The acquisition of assets either by assuming directly related liabilities or by means of a finance
    lease
    The acquisition of an entity by means of an equity issue
    The conversion of debt to equity

    - -END--

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