Summary IB1240_IFA_Week 7_The Statement of Cash Flow
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Kurs
(IB124)
Hochschule
The University Of Warwick (UoW)
.The Statement of Cash Flow. Notes summarising all the content from lectures and includes worked examples to better understand concepts. Grade attained: 80%
PURPOSE OF STATEMENTS THAT ANALYSE THE CASH FLOW OF A BUSINESS
● The purpose of a statement of cash flows is to show the reasons for the change in the cash and
bank balance over an accounting period.
● It shows the manner in which cash has been generated and used by the business.
RELATIONSHIP: STATEMENT OF CASH FLOW, PROFIT OR LOSS AND B/S
● Statements of cash flows are intended to complement the statement of profit or loss (statement of
comprehensive) and statement of financial position.
● The main difference between a statement of cash flows and a statement of comprehensive income
lies in the observation that profit is not the same as the increase in cash over a given accounting
period.
● The cash flow statement provides information on the cash that is obtained from operating
activities, which are the core objects of an entity and which typically make up most of the entity’s
ongoing profits/returns.
● The statement of cash flows also shows the impact on cash of movements in assets, liabilities and
capital over the accounting period (financing and investing activities).
● It provides a link between the statement of financial position at the beginning of the period, the
statement of comprehensive income for the period, and the statement of financial position at the
end of the period.
STATEMENT OF CASH FLOWS - IAS 7
● IAS 7 - Statement of Cash Flows (IASB, 2018) defines cash flows as ‘inflows and outflows of
cash and cash equivalents’.
○ Cash is defined as ‘cash on hand and demand deposits’. Demand deposits are repayable
on demand if they can be withdrawn at any time without notice and without penalty, or if
they are at maturity, or where a period of notice of not more than 24 hours or one
working day has been agreed.
○ 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’.
● IAS 7 requires the items that are normally contained in a statement of cash flows to be classified
under three headings. The total of the three classifications are reconciled to the opening and
closing cash position.
○ Net cash from operating activities
○ Net cash from investing activities
○ Net cash from financing activities.
, Cash Flows from Operating Activities
● Operating activities are the principal revenue-producing activities of the entity and other activities
that are not investing or financial activities. Cash flows from operating activities are primarily
made up of the net increase (or decrease) in cash that results from a company’s normal trading
activities.
● It can be derived using two methods: the direct method or the indirect method. Both methods give
the same figure for cash flows from operating activities.
● Direct Method
○ The direct method involves converting all the individual items in the statement of profit
or loss from an accruals basis to a cash basis.
○ It therefore shows the cash received from customers, cash paid to suppliers, and cash paid
in wages and for operating expenses.
○ Taxation cash flows. Tax on operating activities is included in this part of the statement
of cash flows and is taken away from ‘cash generated from operations’ to give ‘net cash
from operating activities’.
■ The tax cash flows refer to cash received and paid to taxation authorities in
respect of a reporting entity’s operating activities.
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