13.1 IAS 7 Statement of cash flows

Question 1

The statement of cash flows is an important part of the FS because:

Answer 1

• It helps users to assess liquidity and solvency (an adequate cash position is essential in the short term to ensure survival of business and enable debts and dividends to be paid)
• It helps users to assess financial adaptability (will the entity be able to take effective action to alter its cash flows in response to any unexpected events)
• It helps the users to assess future cash flows (adequate cash position in long term is essential to enable asset replacement, repayment of debt and fund expansion)
• It helps to highlight where cash is being generated (will clearly detail that cash is being generated from core activities and other non operating activities)
• Cash flows are objective (cash flow is a matter of fact whereas calculation of profit is subjective)
• It can help to indicate problems early on

Question 2

IAS 7 Definition - Cash

Answer 2

Comprises cash on hand and on demand deposits (includes bank overdrafts)

Question 3

IAS 7 Definition - Cash equivalents

Answer 3

short term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value (short dated treasury bill)

Question 4

IAS 7 Definition - Operating activities

Answer 4

The principal revenue producing activities of the entity and other activities that are not investing or financing activities

Question 5

IAS 7 Definition - Investing activities

Answer 5

The acquisition and disposal of long term assets and other investments not included in cash equivalents

Question 6

IAS 7 Definition - Financing activities

Answer 6

Activities that result in changes in the size and composition of the contributed equity and borrowings of the entity

Question 7

Cash flows from operating activities consists of

Answer 7

• cash generated from operations
• tax paid
• interest paid

Question 8

Cash generated from operations - Two methods to calculate

Answer 8

• Direct method (IAS 7 encourages use)
• Indirect method

Question 9

Cash generated from operations calculation - Indirect method

Answer 9

• involves a reconciliation from profit before tax to cash generated from operations
• calc starts with profit before tax from SPL, adjusted for non cash items (depreciation) and converting the income and expense figures from the accruals basis to the cash basis, so that just cash flows generated from operating activities remain

Question 10

Cash generated from operations calculation - Direct method

Answer 10

• Involves simply adding cash inflows and deducting cash outflows in respect of operating activities

Question 11

Comparison of direct / indirect (Indirect method)

Answer 11

• The reconciliation highlights the fact that profit and cash are not equal
• Does not show significant elements of trading cash flows
• Low cost in preparing the information

Question 12

Comparison of direct / indirect (Direct method)

Answer 12

• Discloses information not shown elsewhere in the FS
• Shows the cash flows from trading
• Gives the users more info in estimating future cash flows

Question 13

Other cash flows from operating activities - Other cash flows considered

Answer 13

• Interest paid
• Income tax paid

Question 14

Cash flows from investing activities may include

Answer 14

Inflows:
- interest received
- dividends received
- proceeds from sale of non current assets

Outflows:
- purchases of non current assets

Question 15

Cash flows from financing activities may include

Answer 15

Inflows:
- proceeds from the issue of shares
- proceeds from the issue of loans / debentures

Outflows:
- repayment of loans / debentures
- dividends paid