Statement of Cash Flows Flashcards
Define a statement of cash flows.
A statement of cash flows is a component of the financial statements which summarizes the operating, investing, and financing activities of an entity.
Explain the primary purpose of a statement of cash flows.
The primary purpose of a statement of cash flows is to provide relevant information about the cash receipts and cash disbursements of an entity during a period.
Explain operating activities.
Operating activities are the cash flows derived primarily from the principal revenue-producing activities of the entity.
These generally result from the cash effects of transactions and other events that enter into the determination of net income or loss.
What are some examples of cash flows from operating activities?
INFLOWS
A. Cash receipts from sale of goods and rendering of services
B. Cash receipts from royalties, fees, rentals, commissions, and other revenue
OUTFLOWS
C. Cash payments to suppliers for goods and services
D. Cash payments for selling, administrative, and other expenses
BOTH/EITHER
E. Cash receipts and 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 and investing activities
Explain 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 equivalents.
Simply, investing activities are the cash effects of transactions involving non-operating assets, such as investments, PPE, intangibles, and other non-current assets.
How are cash flows arising from trading security transactions classified?
PAS 7, paragraph 15, provides that an entity may hold securities and loans for dealing or trading purposes. These are similar to inventory acquired specifically for resale.
Cash flows arising from trading security transactions are classified as operating activities.
What are some examples of cash flows from investing activities?
INFLOWS
A. Cash receipts from sales of PPE, Intangibles, and other NCA
B. Cash receipts from sales of equity or debt instruments
C. Cash receipts from repayment of advances and loans made to other parties
OUTFLOWS
D. Cash payments to acquire PPE, intangibles, and other NCA
E. Cash payments to acquire equity or debt instruments of another entity
F. Cash advances and loans to other parties (assuming you’re not a financial institution, otherwise this would be an operating activity)
BOTH/EITHER
G. Cash flows from futures, forwards, options, and swaps
Explain financing activities.
Financing activities are the cash flows derived from equity capital and borrowings of an entity.
Simply, financing activities include the cash flows from transactions involving “nontrade liabilities” and “equity”
What are some examples of cash flows from financing activities?
INFLOWS
A. Cash receipts from issuing ordinary and preference shares or other equity instruments
B. Cash receipts from issuing debentures, loans, bonds, mortgages, and other short or long term borrowings
OUTFLOWS
C. Cash payments to owners to acquire or redeem the entity’s shares (payment of treasury shares)
D. Cash payments for amounts borrowed
E. Cash payments by a lessee for the reduction of the outstanding liability related to a finance lease
Explain the treatment of interest paid and interest received in a statement of cash flows.
PAS 7, paragraph 33, provides that interest paid and interest received are classified as operating cash flows, because they enter into determination of net income.
Alternatively, interest received may be classified as an investing cash flow because they represent return on investment.
Alternatively, interest paid may be classified as financing cash flow because it is a cost of obtaining financial resources.
NOTE: Interest paid is SEPARATELY DISCLOSED.
Interest received = Default, operating. Alternatively, investing
Interest paid = Default, operating. Alternatively, financing
Explain the treatment of dividend received and dividend paid in a statement of cash flows.
PAS 7, paragraph 34, provides that dividend paid is classified as financing cash flow because it is a cost of obtaining 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 flow.
Dividend received is classified as operating cash flow, because they enter into the determination of net income.
Alternatively, dividend received may be classified as investing activity because these represent return on investment.
Dividend received = Default, operating. Alternatively, investing.
Dividend paid = Default, financing. Alternatively, operating.
Explain the treatment of bank overdrafts which are repayable on demand.
PAS 7, paragraph 8, provides that bank overdrafts which are repayable on demand form an integral part of cash management. These are included as a component of cash and cash equivalents.
A characteristic of such banking arrangement is that the bank balance often fluctuates from being positive to overdrawn.
Explain the treatment of cash advances and loans, interest received, and interest paid by a financial institution.
PAS 7 provides that for a financial institution, these transactions are classified as operating cash flows.
Define cash.
Cash comprises cash on hand and demand deposits.
Define cash equivalents.
Cash equivalents are short-term highly liquid investments that are readily convertible to known amounts of cash and which are subject to insignificant risk of changes in value.
PAS 7, paragraph 7, provides that 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.
