1hls arLlcle ls relevanL for ACCA l7 and 2 plus AA1 and ClMA papers

SLudenLs of flnanclal reporLlng papers wlll need Lo develop a sound undersLandlng of Lhe prlmary sLaLemenL known as Lhe
'SLaLemenL of Cash llows' 1he sLaLemenL of cash flows ls renowned for causlng varylng degrees of problems wlLh sLudenLs
because dependlng on Lhe level of flnanclal reporLlng paper you are slLLlng wlll depend on Lhe level of complexlLy you are
expecLed Lo deal wlLh when deallng wlLh Lhls prlmary flnanclal sLaLemenL

1hls arLlcle looks aL Lhe key aspecLs of Lhe sLaLemenL of cash flows and wlll also look aL how Lhe sLaLemenL dlffers dependlng on
whlch CAA you are slLLlng lL wlll also focus on Lhe purpose of Lhe sLaLemenL of cash flows ln an aLLempL Lo lllusLraLe why Lhe
sLaLemenL ls prepared because undersLandlng Lhe reasonlng behlnd why we do someLhlng asslsLs us greaLly ln acLually
performlng Lhe Lask

1he sLaLemenL of cash flows feaLures ln Lhe provlslons lald down ln lAS 7 SLaLemenL of Cash llows lf you are sLudylng under a
uk varlanL of flnanclal reporLlng Lhen you wlll look Lo Lhe provlslons ln l8S 1 Cash llow SLaLemenLs 1hls arLlcle wlll be prlmarlly
concerned wlLh Lhe provlslons ln lAS 7 buL LhroughouL we wlll be referrlng Lo some noLable dlfferences Lo lLs uk l8S 1
counLerparL

1he purpose

1he sLaLemenL of cash flows ls a prlmary flnanclal sLaLemenL ln vlew of Lhe facL LhaL lL ls a prlmary flnanclal sLaLemenL Lhen lL
musL be glven Lhe same promlnence as Lhe oLher prlmary flnanclal sLaLemenLs Lhe sLaLemenL of comprehenslve lncome (Lhe
lncome sLaLemenL) Lhe sLaLemenL of flnanclal poslLlon (Lhe balance sheeL) and Lhe sLaLemenL of changes ln equlLy

uurlng flnanclal reporLlng sLudles you wlll have come across Lhe lAS8's 'accruals concepL' 1hls concepL requlres LhaL
LransacLlons and evenLs are accounLed for wlLhln Lhe flnanclal sLaLemenL as Lhey arlse as opposed Lo when Lhey are pald 1he
sLaLemenL of cash flows however does noL accord Lo Lhls prlnclple 8y deflnlLlon Lhe sLaLemenL of cash flows ls prepared on a
cash basls raLher Lhan an accruals basls

1he ob[ecLlve of Lhe sLaLemenL of cash flows ls Lo provlde Lhe user of Lhe flnanclal sLaLemenLs wlLh lnformaLlon as Lo how Lhe
reporLlng enLlLy has generaLed cash durlng Lhe reporLlng perlod and how Lhe enLlLy has spenL LhaL cash durlng Lhe reporLlng
perlod 1he same ob[ecLlve ls also applled ln l8S 1 When preparlng a sLaLemenL of cash flows you wlll ofLen come across Lhe
Lerm 'cash and cash equlvalenLs' Cash and cash equlvalenLs are classed as

Cash on hand
ShorLLerm hlghly llquld lnvesLmenLs
uemand deposlLs
SomeLlmes users of flnanclal sLaLemenLs wlll wanL Lo know for example how much lncome Lax an enLlLy has pald ln Lhe
reporLlng perlod 1he sLaLemenL of comprehenslve lncome wlll show Lhe LaxaLlon charge on Lhe proflLs for LhaL reporLlng perlod
LogeLher wlLh any over/under provlslon from prevlous perlods 1he sLaLemenL of flnanclal poslLlon wlll show Lhe llablllLy owed
Lo Lhe Lax auLhorlLles as aL Lhe reporLlng daLe ln Loday's economlc cllmaLe lL ls noL uncommon for enLlLles Lo agree an
lnsLalmenL plan wlLh PM 8evenue and CusLoms and Lherefore ln Lhe uk as corporaLe Laxes are pald nlne monLhs' and one day
afLer Lhe reporLlng perlod Lhen Lhere could be parL of Lhe prevlous year's Lax llablllLy conLalned ln Lhe currenL year's llablllLy
1he sLaLemenL of cash flows however wlll conLaln Lhe acLual Lax pald ln Lhe year

As you can see from Lhe examples above LransacLlons wlLhln a compleLe seL of flnanclal sLaLemenLs wlll ofLen be represenLed
dlfferenLly for example lf we conslder sales revenue from 1 !anuary Lo 31 uecember

Sales revenue conLrlbuLes Lo revenue ln Lhe sLaLemenL of comprehenslve lncome

Sales revenue conLrlbuLes Lo recelpLs from recelvables ln Lhe sLaLemenL of cash flows

Sales revenue conLrlbuLes Lo recelvables ln Lhe sLaLemenL of flnanclal poslLlon aL Lhe perlod end

resenLaLlon

LnLlLles reporLlng under ll8S are mandaLorlly requlred Lo prepare a sLaLemenL of cash flows ln accordance wlLh lAS 7 prlnclples
1hls ls a noLable dlfference ln comparlson Lo currenL uk CAA (l8S 1) under l8S 1 a company LhaL meeLs Lhe 'small company'
crlLerla does noL have Lo prepare such a sLaLemenL Lhough Lhe proposal ls Lo make Lhe sLaLemenL of cash flows a mandaLory
sLaLemenL when ll8S for SML's becomes operaLlonal for Lhe resL of Lhe uk

LnLlLles who prepare a sLaLemenL of cash flows under lAS 7 are requlred Lo prepare such a sLaLemenL under Lhree headlngs

CperaLlng acLlvlLles
lnvesLlng acLlvlLles
llnanclng acLlvlLles
Agaln Lhere ls a noLable dlfference beLween lAS 7 requlremenLs and l8S 1 requlremenLs l8S 1 requlres a much more deLalled
breakdown of headlngs wlLhln Lhe sLaLemenL by vlrLue of elghL headlngs Lhough for Lhe purposes of lAS 7

CperaLlng acLlvlLles are Lhe dayLoday revenueproduclng acLlvlLles See llgure 1 and llgure 2 below

lnvesLlng acLlvlLles are Lhe acqulslLlon and dlsposal of longLerm asseLs LhaL are noL consldered Lo be cash equlvalenLs 1hese
can comprlse

AcqulslLlon of properLy planL and equlpmenL (L)
ulsposals of L
lnvesLlng ln long Lerm lnvesLmenLs
AcqulslLlons and dlsposals of subsldlarles/[olnL venLures/assoclaLes
llnanclng acLlvlLles are Lhose acLlvlLles whlch change Lhe caplLal and borrowlng sLrucLure of Lhe reporLlng enLlLy Lxamples of
such flnanclng acLlvlLles are

Loans Laken ouL ln Lhe year
roceeds from share lssues
8uy back of equlLy shares
8edempLlon of preference shares/debenLures
LnLlLles have Lhe cholce of preparlng Lhe sLaLemenL of cash flows under Lwo meLhods Lhe 'dlrecL' meLhod and Lhe 'lndlrecL'
meLhod

1he dlrecL meLhod ls rarely used ln pracLlce and sLudenLs are urged Lo refer Lo Lhelr syllabus Lo deLermlne wheLher or noL Lhls
meLhod ls examlnable CerLaln bodles do noL examlne Lhls meLhod numerlcally buL candldaLes are requlred Lo have an
awareness of how Lhls meLhod works

1he dlrecL meLhod shows each ma[or class of gross cash recelpLs and gross cash paymenLs ln oLher words lL Lakes such ma[or
classes of recelpLs and paymenLs 'dlrecL' from Lhe cash book hence belng referred Lo as Lhe 'dlrecL' meLhod A Lyplcal
lllusLraLlon of Lhls ls as follows

llgure 1

Cash recelpLs from cusLomers $x

Cash pald Lo suppllers $x

Cash pald Lo employees $x

Cash pald for oLher operaLlng expenses $x

lnLeresL pald $x

1ax pald $x

neL cash from operaLlng acLlvlLles $x


1he lndlrecL meLhod ls Lhe mosL frequenLly examlned and Lhe mosL commonly used ln pracLlce 1he lndlrecL meLhod ad[usLs
operaLlng proflL for Lhe effecLs of noncash LransacLlons and can be lllusLraLed as follows



llgure 2

roflL from operaLlons $x

Ad[usLmenLs for

uepreclaLlon $x

AmorLlsaLlon $x

Caln on dlsposal of L ($x)

CperaLlng cash flows before movemenLs

ln worklng caplLal $x


lncrease/decrease ln lnvenLorles $x/($x)

lncrease/decrease ln recelvables $x/($x)

lncrease/decrease ln payables $x/($x)

Cash generaLed by operaLlons $x


lncome Laxes pald ($x)

lnLeresL pald ($x)

neL cash from operaLlng acLlvlLles $x



1he ComplexlLles


SLudenLs ofLen sLruggle ln declpherlng when Lo add and when Lo subLracL lncreases and decreases ln worklng caplLal 1he key Lo
declpherlng when Lo add and Lo subLracL from operaLlng proflL ls Lo deLermlne Lhe effecL on Lhe cash flow

Conslder an lncrease ln lnvenLorles An lncrease ln lnvenLorles means LhaL we have spenL more cash on lnvenLorles whlch have
noL yeL Lurned lnLo recelvables and Lhus noL yeL Lurned lnLo cash 1hls Lherefore resulLs ln a cash ouLflow and ouLflows are
deducLed from operaLlng proflL Conversely lf we had a decrease ln lnvenLorles Lhen Lhls would represenL an lnflow of cash
because we have spenL less on lnvenLorles Lhan ln Lhe prevlous year 1he reducLlon ls represenLed by elLher an lncrease ln
recelvables or an lncrease ln cash (lnvenLorles Lurn lnLo recelvables and recelvables evenLually Lurn lnLo cash) Lhls known as Lhe
'order of llquldlLy'

lncreases ln Lrade recelvables demonsLraLe LhaL less cash has been recelved from Lrade recelvables Lhan Lhe prevlous year whlch
represenLs an ouLflow and Lhus a deducLlon from operaLlng proflL Conversely an lncrease ln payables means LhaL we have pald
less Lo Lrade payables Lhan ln Lhe prevlous year resulLlng ln more money belng kepL ln our bank meanlng an lnflow so an
addlLlon Lo operaLlng proflL ln summary

Cash 'lnflows' Add Lo operaLlng proflL

Cash 'ouLflows' ueducL from operaLlng proflL



lor Lhose of you sLudylng more advanced flnanclal reporLlng papers Lhen cash flows denomlnaLed ln a forelgn currency ln
respecL of a forelgn subsldlary should be LranslaLed aL Lhe raLes prevalllng when Lhe cash flows Look place AssoclaLes and [olnL
venLures can be sub[ecLed Lo Lhe 'equlLy' meLhod of accounLlng Where Lhls meLhod ls used Lhen Lhe sLaLemenL of cash flows
should only reporL Lhe cash flows beLween Lhe lnvesLor and Lhe lnvesLee (eg advance Laken or glven or dlvldend pald or
recelved) Where proporLlonaLe consolldaLlon ls used Lhen Lhe sLaLemenL should only lnclude Lhe venLurer's share of cash flows
of Lhe lnvesLee

Concluslon

1he sLaLemenL of cash flows should be a 'glfL' Lo sLudenLs of flnanclal reporLlng papers and as long as a meLhodlcal approach Lo
deallng wlLh Lhe sLaLemenL ls adopLed Lhen Lhey can be relaLlvely sLralghL forward even when lL comes Lo deallng wlLh Lhe
more complex lssues

ln a seL of flnanclal sLaLemenLs Lhe numbers are merely a form of shorLhand and ln recognlLlon of Lhls lL ls also lmporLanL LhaL
sLudenLs are able Lo noL only prepare Lhe sLaLemenL of cash flows buL LhaL Lhey are also prepared Lo be able Lo wrlLe abouL Lhe
sLaLemenL of cash flows as examlners could ask for commenLary abouL Lhe sLaLemenL of cash flows (or componenL parLs) Lo
conflrm a candldaLe's undersLandlng of Lhls prlmary sLaLemenL lnLerpreLaLlon of flnanclal sLaLemenL lnformaLlon ls as
lmporLanL as belng able Lo prepare flnanclal sLaLemenL lnformaLlon

SLeve Colllngs ls AudlL and 1echnlcal Manager aL LeavlLL Walmsley AssoclaLes and a parLner ln AccounLancySLudenLscouk Pe
also lecLures sLudenL and quallfled accounLanLs on flnanclal reporLlng and audlLlng sub[ecLs