LKAS – 07STATEMENT OF CASH FLOWS

INTRODUCTIONCash Flow Statement …… Why ????

The statement that shows the movement in cash and cash equivalents during a selected period. Simply, it is the formal presentation of the cash book.

What is a Statement of Cash Flows ?

What are the categories of cash flows ?1. Operating cash flows2. Investing cash flows3. Financing cash flows

LOGIC BEHIND CASH FLOW STATEMENT

2016Rs.

2015Rs.

Non-current assets 40,000 17,500Current assets 5,000 2,500Cash 3,500 7,500

48,500 27,500Stated capital 10,000 10,000Retained earnings 10,000 2,500

20,000 12,500Non-current liabilities 23,500 8,000Current liabilities 5,000 7,000

48,500 27,500

Prepare CFS assuming that no dividend has been paid and no income tax provision

Difference

Rs.22,5002,500

(4,000)

-7,500

15,500(2,000)

OPERATING CASH FLOWSWhat are Operating cash flows ?Are primarily derived from the principal revenue-producing activities of the entity.

- Direct method- Indirect method

How to present operating cash flows ?

Following operating cash flows need to be separately presented irrespective of above methods

- Income tax payments- Interest payments- Gratuity payments

OPERATING CASH FLOWS(Cont’)Direct Method

- Each receipt of operating nature should be presented- Each payment of operating nature should be presented

ImportantThis method is not practically adopted

OPERATING CASH FLOWS(Cont’)Indirect Method

Adjustments are made to profit before tax to arrive at net operating cash flowsAdjustments :

Rs.Profit Before Tax XXXXInterest expense XXXXNon cash items relevant non currentassets and liabilities XXXXItems included in profit but to be included in other categories of cash flowsXXXXChanges in working capital XXXXCash generated from operations XXXX

OPERATING CASH FLOWS(Cont’)Changes in working capital

Working capital changes should be adjusted as follows :Movement Cash Flow

Increase in Current assets Cash out flowDecrease in Current assetIncrease in Current liabilitiesDecrease in Current liabilities

Cash inflowCash inflowCash out flow

In addition following items should be included under OCF:- Tax payments

- Income tax - E.S.C.

- Gratuity payment- Interest payment

OPERATING CASH FLOWS(Cont’)Non cash items relevant to non-current assets and liabilitiesE.g. Depreciation Gratuity provision Amortization Fixed assets written offs Impairment losses of PPE Foreign exchange gain on conversion of a long term liabilityItems included in profit but to be included in other categories of cash flowsE.g. Interest income

Dividend incomeGain on disposal of PPEGain on disposal of shares

INVESTING CASH FLOWSWhat are investing cash flows?Are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.

Direct method should be used, accordingly;- Every receipt of investing nature should be

presented- Every payment of investing nature should be

presented

How to present investing cash flows?

E.g. - Proceeds from disposal of PPE- Proceeds from disposal of investments- Acquisition of PPE - Acquisition of shares and other investments- Dividend received- Interest received

FINANCING CASH FLOWSWhat are financing cash flows?Are activities that result in changes in the size and composition of the contributed equity and borrowings of the entity.

Direct method should be used, accordingly;- Every receipt of financing nature should be

presented- Every payment of financing nature should be

presented

How to present investing cash flows?

E.g. - Proceeds from issue of shares- Amount received on pending allotment of shares - Proceeds from long term borrowings- Payment of long term borrowings - Payment of finance lease rentals- Dividend paid

SPECIAL CASESWithholding tax on interest income

- Withholding tax

Notional tax credit

Ignore

- Interest (Net) Add under ICF - Interest income (Gross)

Deduct from OCF

- Notional tax amount

Ignore- Interest income (Gross)

Deduct from OCF- Interest income (Net)

Add under ICF

SPECIAL CASESProperty, plant and equipment acquired on finance leases- Cost of the leased

asset

Long term borrowing

Ignore

- Lease interest Ignore in interest paid

- Lease creditor Ignore

- Lease rentals paid Under financing CF

- Loan creditor Ignore- Proceeds received Under financing CF- Capital repayment Under financing CF

SPECIAL CASESInvestment / disposal of shares

- Closing investment

Property, plant and equipment

Ignore

- Disposal profit Deduct from OCF- Investment made Under investing CF

- Disposal proceeds Under investing CF

- Closing balance Ignore- Acquisition Under investing CF- Disposal profit Deduct from OCF- Disposal proceeds Under investing CF- Revaluation gain Ignore

STATEMENT OF CASH FLOWS

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