Study notes

Section 1. Introdution

CashFlow statement

Cashflow statment provides information about a company‛s cash reciept and cash payment during a
accounting period.

It show how these cash flows link the ending cash balance to the beginning cash balances shown on the company‛s balance
sheet.

AnalAnalysing the cashflow statement the information allow the analyst to answer such question as;

- Does the company generate enough cash from it operations to pay for its new investments. or is the company relying on
new debts issuance to finance them.
- Does the company pay it dividends to common shareholder using cash generated from operations, from selling assets,
or from issuing debts.

Section 2. Components and Format of the cashflow statements Cashflow structure
Two Presentation format
Operating Activities
- Direct Method + Investing activities
- Indirect Method + Financing activities
= Changes in the cash balances
- Standard for Cashflow - IFRS - 7 ( IAS no 7). ________________________

+ Beginning Cash balance
+ Ending Cash balances

1. Operating Activities - Company‛s day to day activities that create revenues, such as selling inventory,and providing
Services. Cash inflow resulting from cash sales and from collection of accounts recievables.

2. Investing activites - Include purchasing and selling investments. Investment include property, plant and
equipments: intangible assets.

3. Financing activities - Inlcuding obtaining or repaying capital, Such as equity and longterm debt.
The 2 primary source of capital are shareholders and creditors.

Under IFRS there is some flexibilty in reporting some item of cashflow , particulary Interest and Dividends. IAS no 7.

For an financial institution Interest paid and recieved would normally be classified as operating activities, for other entities
alternative classsifications may be appropriate. For this reason , Under IFRS, interest recieved may be classified either
as an operating activity or as an investing activity.Interest paid may be classified as either an operating activity or as a
financing activity.

Dividend recieved and Paid ( IFRS) - Operating activities or Investing activities.

Companies must use consistent classification from year to year and disclose where the amount are reported.

Under USGAAP classification:

- Interest recieved and Interest Paid is always reported as operating activities.
- Dividend recieved are always reported under operating activities.
- Dividend paid are always reported under Financing activities.

Non cash transactions is any transaction that does not involve an a inflow or outflow of cash.

Topic IFRS ( IAS no 7) US GAAP ( FAS No 95)
Classification of Cashflows :
Interest recieved Operating & Financing activities Operating activities
Interest paid Operating & Financing activities Operating activities
Dividend Recieved
Dividend Paid Operating & Financing activities Operating activities
Bank Overdraft
Taxes Paid Operating & Financing activities Financing activities

Format of statements Considered part of cash Not consider part cash and
equivalents cash equivalents and classified
Disclosures as financing
Generally operating, but a
portion can be allocated to Operating
investing or financing if it can be
specifically identified with these
categories.

Direct and Indirect : direct is encourage Direct or indirect: direct is
encourage. if direct is used
Tax cash flow must be seperatley the reconciliation of net income
disclosed in the cash flow statement and operating cash flowmust
also be provided.

Interest and taxed paid must
be disclosed in footnotes. if
not presented on the
statement of cashflow

Direct Method and Indirect Method of Cashflow

Direct Method: In other words, the direct method eliminates any impact of accruals and shows
only cash receipts and cash payments. The primary argument in favor of the direct method is
that it provides information on the specifi c sources of operating cash receipts and payments
in contrast to the indirect method, which shows only the net result of these receipts and payments.
Just as information on the specifi c sources of revenues and expenses is more useful
than knowing only the net result — net income — the analyst gets additional information from
a direct - format cash fl ow statement. The additional information is useful in understanding
historical performance and in predicting future operating cash flows.

InDirect Method: shows how cashflow from operating can be obtained from reported net income as a result of series
of adjustments. The indirect format beging with Netcome. To reconcile with operating cashflow, adjustment are made
for non cash items. for nonoperating items, and for the net changes in operating accruals.