CFAS-07: PAS 7 STATEMENT OF CASH FLOWS

DEFINITION

Component of financial statements summarizing the operating, investing and financing

activities of an entity.

PURPOSE

Provide relevant information about cash receipts and cash payments of an entity
during a period.

CASH AND CASH EQUIVALENTS

- Statement of cash flows is designed to provide information about the

change in cash and cash equivalents.
 CASH comprises cash on hand and other deposits.
 CASH EQUIVALENTS are any short-term investment securities and assets
that are easily and readily converted into a known amount of cash
and have maturity periods of 90 days (3 months) or less and subject to
insignificant risk of change in value

CLASSIFICATIONS OF CASH FLOWS

OPERATING ACTIVITIES

- Cash flows derived primarily from the principal revenue producing

activities of the entity.
- It results from transactions and other events that enter into the
determination of net income or net loss.

** Cash flows arising from the purchase and sale of dealing or trading
securities are classified as operating activities

** Cash advances and loans made by a financial institution are usually

classified as operating activities

INVESTING ACTIVITIES

- The separate disclosure of cash flows arising from investing activities is

important because the cash flows represent the extent to which
expenditures have been made for resources intended to generate future
income and cash flows

- Cash flows derived from the acquisition and disposal of long-term assets
and other investments not included in cash equivalents.
- The aggregate cash flows arising from obtaining or losing control of
subsidiaries or other businesses shall be presented separately and
classified as investing activities.
- Simply, these include cash flows from transactions involving non-operating
assets.

FINANCING ACTIVITIES

- The separate disclosure of cash flows arising from financing activities is

important because it is useful in predicting claims on future cash flows by
providers of capital to the entity.
 - Cash flows derived from the equity capital and borrowings of the entity.
- Contains the sum total of changes that a company experiences during a
designated reporting period that were caused by transactions with
owners or lenders to either:
o Provide long-term funds to the company; or
o To return the funds to the owners or lenders.

PRESENTATION OF THE STATEMENT OF CASH FLOWS

1. Direct Method - shows each major class of gross cash receipts and gross cash
payments.

Cash receipts from customers Xxx

Cash paid to suppliers Xxx

cash paid to employees Xxx

Cash paid for other operating expenses Xxx

Interest paid Xxx

Income taxes paid Xxx

Net cash from operating activities Xxx

2. Indirect method - adjusts accrual basis net profit or loss for the effects of non-cash
transactions.

Profit before interest and income taxes xxx

Add back depreciation xxx

Add back impairment of assets xxx

Increase in receivables xxx

Decrease in inventories xxx

Interest expense xxx

Less interest but not accrued yet paid xxx

Interest paid xxx

Income taxes paid xxx

Net cash from operating activities xxx

INTEREST

Interest paid and interest and dividends received are usually classified as operating
cash flows for a financial institution. However, there is no consensus on the classification
of these cash flows for other entities. Interest paid and interest and dividends received
may be classified as operating cash flows because they enter into the determination of
profit or loss. Alternatively, interest paid and interest and dividends received may be

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classified as financing cash flows and investing cash flows respectively, because they
are costs of obtaining financial resources or returns on investments.

DIVIDENDS

- Provides that dividend received shall be classified as operating cash flow

because it enters into the determination of net income.
- Dividend received may be classified as investing cash flow because it is a
return on investment.
- 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.
- Cash dividends payments affect the financing-activities section of the
statement of cash flow.

INCOME TAXES

Taxes on income arise on transactions that give rise to cash flows that are classified as
operating, investing or financing activities in a statement of cash flows. While tax
expense may be readily identifiable with investing or financing activities, the related tax
cash flows are often impracticable to identify and may arise in a different period from
the cash flows of the underlying transaction. Therefore, taxes paid are usually classified
as cash flows from operating activities.

However, when it is practicable to identify the tax cash flow with an individual
transaction that gives rise to cash flows that are classified as investing or financing
activities the tax cash flow is classified as an investing or financing activity as
appropriate. When tax cash flows are allocated over more than one class of activity,
the total amount of taxes paid is disclosed.

KEY PRINCIPLES FOR THE PREPARATION OF A STATEMENT OF CASH FLOWS

1. Operating activities are the main revenue-producing activities of the entity.

Operating cash flows include cash received from customers and cash paid to
suppliers and employees.

2. Investing activities are the acquisition and disposal of a long-term asset and other
investments that are not considered to be cash equivalents. (IAS 7.6)

3. Financing activities are the activities that alter the equity capital and the borrowing
structure of the entity.

4. 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.

5. Cash flows arising from taxes on income are normally classified as operating, unless
they can be specifically identified with financing or investing activities.

6. For operating cash flows, the direct method of presentation is encouraged, but the
indirect method is acceptable.

7. The exchange rate used for translation of transactions denominated in a foreign

currency should be the rate in effect at the date of the cash flows.

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8. Cash flows of foreign subsidiaries should be translated at the exchange rates
prevailing when the cash flows took place.

9. As regards the cash flows of associates, joint ventures, and subsidiaries, where the
equity or cost method is used, the statement of cash flows should report only cash
flows between the investor and the investee; where proportionate consolidation is
used, the cash flow statement should include the venture’s share of the cash flows
of the investee.

10. Aggregate cash flows relating to acquisitions and disposals of subsidiaries and other
business units should be presented separately and classified as investing activities,
with specified additional disclosures. The aggregate cash paid or received as
consideration should be reported net of cash and cash equivalents acquired or
disposed.

11. Cash flows from investing and financing activities should be reported gross by major
class of cash receipts and major class of cash payments except for the following
cases, which may be reported on a net basis:

 Cash receipts and payments on behalf of customers

 Cash receipts and payments for items in which the turnover is quick, the
amounts are large, and the maturities are short, generally less than three
months

 Cash receipts and payments relating to deposits by financial institutions

 Cash advances and loans made to customers and repayments thereof

12. Investing and financing transactions which do not require the use of cash should be
excluded from the statement of cash flows, but they should be separately disclosed
elsewhere in the financial statements.

13. Entities shall provide disclosures that enable users of financial statements to evaluate
changes in liabilities arising from financing activities.

14. The components of cash and cash equivalents should be disclosed, and a
reconciliation presented to amounts reported in the statement of financial position.

15. The amount of cash and cash equivalents held by the entity that is not available for
use by the group should be disclosed, together with a commentary by management.

PREPARED BY:

AGUIRRE, VHUNY

CHERWEG. HI LA

DICTAAN, AIRA MAE

DULAGAN, CAROL

FERRER, CLARISSA

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