CHAPTER 18

Statement of
cash flows

LEARNING
OBJECTIVES
1. Explain the reasons for preparing a statement
of cash flows
2. Describe the general format of the statement of
cash flows
3. Define the concept of cash in accordance with
IAS 7/AASB 107 Statement of Cash Flows
4. Classify cash inflows and cash outflows into
operating, investing and financing activities
5. Prepare a statement of cash flows for a sole
trader using the direct method by analysing
cash records and other financial statements

PURPOSE OF THE
STATEMENT OF CASH FLOWS

Evaluate entitys financial structure

Assess ability to generate cash
Check accuracy of past predictions
Examine relationship between
profitability and net cash flow
Evaluate changes in net assets of
the entity
Compare performance with other
entities
Evaluate ability to adapt to change

GENERAL FORMAT OF THE

STATEMENT OF CASH FLOWS
Refer AASB 107 Statement of
Cash Flows
Required disclosures
Gross cash inflows and outflows
Classified by activity type
Reconciled to movement in cash for the
period
Cash from operations reconciled to
operating profit

Explanatory notes

TYPICAL FORMAT FOR

STATEMENT OF CASH FLOWS

CONCEPT OF CASH
FORM
CASH ON
HAND

Cash
Demand
deposits

CASH
Short-term
EQUIVALENT highly liquid
S
investments

EXAMPLES

CONDITIONS

Notes
Coins
Demand
deposits

Banks bills

Non-bank bills
Deposits on

short-term
money market

None

Readily
convertible
Short-term (<
3 months)
Insignificant
risk of change
in value

CLASSIFICATION OF CASH
FLOW ACTIVITIES
AASB 107 requires reporting of
cash inflows and cash outflows in
three broad categories
Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities

PREPARING A STATEMENT OF
CASH FLOWS DIRECT METHOD

Alternative methods to determine

cash flows:
Analyse, summarise and classify the cash
transactions and determine the non-cash
transactions affecting assets and liabilities
OR
Analyse the other financial reports (income
statement and balance sheet)

ANALYSIS OF CASH
AND OTHER RECORDS
Step 1: Ascertain net cash provided
from operating activities
Step 2: Ascertain net cash provided
from investing activities
Step 3: Ascertain net cash provided
from financing activities
Step 4: Ascertain net cash increase
(decrease) for the year
Step 5: Reconcile cash at end of
year with beginning of year

CASH FLOWS FROM

OPERATING ACTIVITIES
CASH INFLOWS
From sale of goods or
services
From cash advances and
loans made by financial
institutions relating to the
entity's main revenueproducing activities

CASH OUTFLOWS
To suppliers for goods
To employees for services
To other persons/entities for
expenses
To lenders for interest and
other borrowing costs
To government for income
tax, GST and other fees and
charges
To other persons/entities for
materials and contracts

ANALYSIS OF FINANCIAL
STATEMENTS - STEP 1
Step 1: Cash flows from
operating activities
Direct method:
Major classes of operating revenues and
expenses are reported as gross inflows
and outflows from operations
Adjust sales, COS and other operating
items for non-cash items (accruals) and
non-operating items
Favoured by AASB 107

Analysis of Financial Reports

- Direct method

Step 1: Ascertain net cash

provided from operating activities
by calculating:
1. cash receipts from customers
2. payments to suppliers & employees (break this
into two entries)
3. other revenue items affecting cash flows

To do this we need to look at both the

Income statement and Balance Sheet
(Financial position) statement

Louise
Louise Martin
Martin
Comparative
ComparativeStatements
Statementsof
ofFinancial
FinancialPosition
Position
(Balance
(BalanceSheet)
Sheet)
30 June
30 June
2015
2016
Cash at bank
$ ------$ 540
Accounts receivable
4 290
3 150
Inventory
6 000
6 600
Prepaid insurance
300
360
Equipment
19 200
25 500
Accumulated depn -equipment
(6 000)
(7 500)
Land
20 400
24 000
Motor vehicles
14 550
15 600
Accumulated depn motor vehicles
(5 490)
(6 300)
TOTAL ASSETS
$53 250
$61 950
Bank overdraft
Accounts payable
Long term mortgage
Louise Martin , Capital
TOTAL EQUITY

$ 300
6 150
14 100
32 700
$32 700

$ ------7 950
18 900
35 100
$35 100

Louise
Louise Martin
Martin
Income
Income statement
statement
for
for the
the year
year ended
ended 30
30 June
June 2016
2016

OPERATING REVENUE
Sales revenue
Less: Cost of Goods Sold
Gross Profit
OPERATING EXPENSES
Less: Expenses (including depreciation)
PROFIT

$16 800
5 100
11 700
8 610
$3 090

Cash from Operations

First line -Receipts from
customers
First construct a T account for
Accounts receivable
Put in the opening and closing figures
from the comparative balance sheets
Credit
sales
increas
e the
accoun
ts
receiva
ble

Accounts Receivable
Opening
Balance
Sales

4,290 Cash
16,800 Closing
Balance
21090

17,94
0
3,150
21090

15

Cash from Operations

Second line Cash paid to
suppliers

You will need to construct 2 T

accounts
The first for inventory to determine
how much inventory was purchased, the
second for accounts payable to
COGS
determine how much was paid.
reduce
Put in the opening
and closing figures
s
Inventory
invent
from
comparative
Opening
6,000 balance
Cost of Sales sheets
5,100 ory
Balance

Purchases

5,700 Closing
Balance
11,700

6,600
11,700

Cash from Operations

Second line Cash paid to
suppliers
Next prepare an accounts
payable T account

This is to calculate how much of the

purchases were PAID this period
(remember purchases can be bought by
Credit
Purchas
cash or credit)
Accounts Payable
Cash

3,900 Opening
Balance

Ending Balance

7,950 Purchases
11,850

es
6,150 increase
account
s
5,700 payable

11,850
17

Cash from Operations

Third line Cash paid for other
expenses
First take the total expenses from the
income statement. If there is interest or
income tax expense leave that out at
this stage.
Second you need to take out the
depreciation expense as this is non cash.
To do this simply deduct the opening and
closing balances from the accumulated
depreciation accounts. (provided no NCAs
were sold this period)
18

Cash from Operations

Third line Cash paid for other
expenses

Operating expenses from income

statement

$8,610

Less: Depreciation*

(2,310)

If depreciation is not provided as in this case, it can be

19
determined by subtracting beginning and ending

Cash from Operations

Third line Cash for other
expenses
Next prepare a prepaid
insurance T account

This is to calculate how much of the

prepaid insurance was paid for in cash
First put in what you know the opening
balance, thePrepaid
closing
balance and the
Expenses
total
Opening
300
Balance
Cash paid

60 Ending Balance
360

360
360
20

Cash from Operations

Third line Cash for other
expenses
Operating Expenses
from income

$8,610

statement
Less: depreciation expense (non-cash
item)
Add: accrued expense paid

Cash paid to suppliers and employees

for other expenses

(2,310)
60

$6,360

21

Completing the CFS

Cash from Operations

LOUISE MARTIN
Statement of Cash Flows
for the year ended 30 June 2014

Cash flows from operating

activities:

$17,940

Cash paid to suppliers for stock

(3,900)

Cash paid to other suppliers and

employees

(6,360)

Cash receipts from customers

Net cash from operating

activities

$7
680
22

Now try Ex 18.2 p 795

Complete the T accounts to
prepare Cash from Operations
Receipts from customers=
Payments to suppliers=
Payments for other expenses=
Net cash from operations=

23

To confirm the cash from

Ops amount
Indirect method:
Accrual basis
operating profit is
reconciled to net
cash flow from
operating activities
by:
adding back
deferrals
deducting
accruals

INDIRECT
Operating Profit
Plus: Depreciation and
Loss on asset disposals
Less: Gain on asset
disposals
Less: Increase in current
assets and Decrease in
current liabilities
Plus: Increase in current
liabilities and Decrease in
current assets
= Cash from operations

24

CASH FLOWS FROM

INVESTING ACTIVITIES
CASH INFLOWS

CASH OUTFLOWS

From sale of property, plant To purchase property, plant

and equipment
and equipment
From sale of shares and
To purchase shares and
debentures of other entities
debentures of other entities
From repayment of
To lend money to other
advances and loans to
entities
other entities
From interest received [or
operating activity]
From dividends received [or
operating activity]

Cash From Investing

Step 2: Ascertain net cash provided

from investing activities by
calculating:
1. Amount paid for purchase of Non Current assets
2. Amount received from sale (proceeds of sale) of Non Current
Assets
3. Amount paid for purchase of investments
4. Amount received from sale (Proceeds of sale) of investments

To do this we need to look at both the Income

(Financial performance) statement and Balance
Sheet (Financial position) statement

Cash from Investing- First

line
To determine the amount paid
for purchase of Non Current
Assets (NCAs)
If NO NCAs have been sold
during the year (as in this
example) compare the beginning
and ending NCA
accounts. This
Equipment
Opening
19,200
will
show purchases.
Balance

Cash
Payments

6,300 Closing
Balance
25,500

25,500
25,500

27

Cash from Investing- first

line
Land
Opening
Balance
Cash
Payments

20,400
3,600 Closing
Balance
24,000

24,000
24,000

Motor Vehicles
Opening
Balance
Cash
Payments

14,550
1,050 Closing
Balance
15,600

15,600
15,600
28

Cash from Investing- first line

(if equipment bought & sold in period)

Purchase of replacement
equipment (equipment sold
during the period)
You need to set up 2 T accounts
Equipment (or other NCA) and
related accumulated
depreciation account

29

Cash from Investing- first line

(if equipment bought & sold in period)

To work out cash paid for new

equipment and value of depreciation
Equipment
expense
Opening
Balance

xxxxx Cost of asset

xxxxxx

Cash
Purchase

xxxxx Closing
Balance

Xxxxx

sold

Accum xxxxxx
deprec- Equipment

xxxxx

Accum dep of
equip sold

xxxxxx Depreciation
expense

xxxxx

Closing
balance

Xxxxxx

xxxxxx

xxxxxx

xxxxxx

30

Cash from Investing- second

line
Proceeds of sale from
selling NCAs.
This information will be
given in the question.

31

Completing the CFS

Cash from Investing
Cash flows from investing activities
Purchase of property, plant and
equipment*
Net cash used in investing
activities

(10
950)

(10
950)

dd the cash payments for each NCA 6,300 + 3,600 +1

32

CASH FLOWS FROM

FINANCING ACTIVITIES
CASH INFLOWS
From issue of shares
From issuing debentures,
notes
From borrowing (loans,
mortgages)
From grants

CASH OUTFLOWS
To shareholders for share
buy-backs and redemption
of preference shares
To owners for dividends
paid [or operating activity]
or cash drawings
To debenture holders for
redemption of debt
To lenders to repay
borrowings

Cash from Financing

Step 3: Ascertain net cash

provided from
financing
activities
1. Amount received from issue of shares (company)
or contributions by owner (sole trader)
2. Amount paid for dividends (company) or drawings
(sole trader)
3. Amount received from borrowings
4. Amount paid to reduce borrowings

To do this we need to look at the Balance

Sheet (Financial position) statement

Cash from Financing- first

line
First item on CFS Financing Proceeds from share issue
If the example is a company compare
the opening and closing balances to
see if shares have increased
Share capital
Opening
Balance
Cash
received
Closing
Balance

xxxxx
xxxx

xxxxx
xxxxx

xxxxx

35

Cash from Financingsecond line

To determine dividends for a
company you need to set up a T
account for retained earnings
Retained earnings
Opening
Balance
Dividends
Paid

xxxxx Profit

Closing
Balance

xxxxx
xxxxx

xxxxx
xxxx

xxxxx

36

Cash from Financingsecond line

If the example is a sole trader as is
shown here, we need to compare the
opening and closing capital. For a
sole trader
we also must capture the effects of
profit and drawings
L. Martin Capital
Opening
Balance
Drawings
paid
Closing
Balance

6,690 Owner
contributions
35,100 Profit
41,790

32,700
6,000
3,090
41,790

37

Cash from Financing third

line & fourth line
Proceeds from borrowings (if
opening is less than closing)
Repayment of Borrowings (if
opening is more than closing)
Mortgage payable
Opening
Balance
Cash
received
Closing
Balance

14,100
4,800

18900

xxxxxx

18900

18900

38

Preparing the CFS

Cash from Financing
Cash flows from financing activities
Proceeds from owner contribution
Proceeds
from
long-term
borrowings
Drawings paid
Net
activities

cash

from

financing

6 000
4 800
(6
690)

4 110

39

LOUISE MARTIN
Statement of Cash Flows
for the year ended 30 June 2014

Cash flows from operating activities:

Cash receipts from customers
Cash paid to suppliers and
employees
Net
cash
from
operating
activities

Cash flows from investing activities:

Purchase of property, plant and
equipment
Net cash used in investing
activities

Cash flows from financing activities:

Proceeds
from
owner
contribution
Proceeds
from
long-term
borrowings

$17
940
(10
260)

$7 680

(10

950)
(10 950)

6 000
4 800

40