The effect of transactions on cash flows

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ACCA FA F5d Statements of cash flow

IAS 7, Statements of Cash Flows

IAS 7, Statements of Cash Flows, splits cash flows into the following headings:

  1. Cash flows from Operating Activities

  2. Cash flows from Investing Activities

  3. Cash flows from Financing Activities

ACCA FA F5d Cash flows

Cash flows from Operating activities

This is cash from operating / trading activities. 

There are two methods which can be used to find the net cash from operating activities: 

(They both give the same answer just calculated differently)

  1. The Direct Method

    Here you put the cash paid / received in directly

  2. The Indirect Method

    Here you start with a profit figure and add back non-cash items - to end up (indirectly) with cash

    The sort of items you add back include: 
    Depreciation & amortisation
    Loss on sale of NCA
    Decreases in Receivables & Inventory 
    Increases in Payables

    The sort of items you deduct include: 
    Profit on sale of NCA
    Increases in Receivables & Inventory 
    Decreases in Payables

Cash flows from Investing Activities

These are related to the buying and selling of NCA (including cash dividends / interest received from investments)

Cash flows from Financing Activities

Cash in / out due to Loans and Shares (including divs paid to ordinary shareholders)

Cashflow Statement Example

$000 $000
cash flows from operating activities
profit before taxation 3390
adjustment for:
depreciation 450
investment income -500
interest expense 400
------
3740
increase in trade and other receivables -500
decrease in inventories 1050
decrease in trade payables -1740
cash generated from operations 2550
interest paid -270
income taxes paid -900
------
net cash from operating activities 1380
cash flows from investing activities
purchase of property, plant and equipment -900
proceeds from sale of equipment 20
interest received 200
Dividends received from associates and joint ventures 200
------
net cash used in investing activities -480
cash flows from financing activities
proceeds from issue of share capital 250
proceeds from long-term borrowings 250
dividends paid* -1290
------
net cash used in financing activities -790
------
net increase in cash and cash equivalents 110
cash and cash equivalents at beginning of period 120
------
cash and cash equivalents at end of period 230
------

* This could also be shown as an operating cash flow.

Finally let's have a think where these items should go in the Cashflow...

  1. A Bonus Issue of shares 

    Nowhere - as there's no cash involved

  2. A Rights Issue of shares

    In Financing Activities (The cash Received)

  3. Revaluation of non-current assets

    Nowhere - as there's no cash involved

  4. Dividends paid

    In Financing Activities (The cash Paid)

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