Accounting Notes on Cash Flows
n cash
STATEMENT OF CASH FLOW - Section -7
Why statements of cash flow? They are required by the IFRS SMEs and they show the cash generating potential of a firm. A profitable firm may lack cash. Cash flow statements show the difference between cash and profit.
Objective of Section 7: To explain the historical changes in cash and cash equivalents of an enterprise under the following activities; operating, investing and financing activities and changes in cash and cash equivalents.
Operating activities: The main revenue-producing activities of the enterprise that are not investing or financing activities, so operating cash flows include cash received from customers and cash paid to suppliers and employees
Investing activities: The acquisition and disposal of all long-term or non current assets and investment income received.
Financing activities: Activities that alter the equity capital and long-term borrowing structure of the enterprise and dividends paid
Cash & cash equivalents: Comprise cash on hand and demand deposits, together with short-term, highly liquid investments which have a maturity of three months or less from the date of acquisition. Bank overdrafts which are repayable on demand are also included as a component of cash and cash equivalents.
NOTE:
➢ cash flows arising from taxes on income are normally classified as operating.
➢ investing and financing transactions which do not require the use of cash should be excluded from the cash flow statement
How then is profit different from cash flow? 1 – Non cash expenses/revenue items:
Profit uses some expenses which are not baked by cash outflow. Examples include:
➢ Depreciation and impairment expenses ➢ Bad debts ➢ Increase/decrease in provision for bad debts
STATEMENT OF CASH FLOW - Section -7
Why statements of cash flow? They are required by the IFRS SMEs and they show the cash generating potential of a firm. A profitable firm may lack cash. Cash flow statements show the difference between cash and profit.
Objective of Section 7: To explain the historical changes in cash and cash equivalents of an enterprise under the following activities; operating, investing and financing activities and changes in cash and cash equivalents.
Operating activities: The main revenue-producing activities of the enterprise that are not investing or financing activities, so operating cash flows include cash received from customers and cash paid to suppliers and employees
Investing activities: The acquisition and disposal of all long-term or non current assets and investment income received.
Financing activities: Activities that alter the equity capital and long-term borrowing structure of the enterprise and dividends paid
Cash & cash equivalents: Comprise cash on hand and demand deposits, together with short-term, highly liquid investments which have a maturity of three months or less from the date of acquisition. Bank overdrafts which are repayable on demand are also included as a component of cash and cash equivalents.
NOTE:
➢ cash flows arising from taxes on income are normally classified as operating.
➢ investing and financing transactions which do not require the use of cash should be excluded from the cash flow statement
How then is profit different from cash flow? 1 – Non cash expenses/revenue items:
Profit uses some expenses which are not baked by cash outflow. Examples include:
➢ Depreciation and impairment expenses ➢ Bad debts ➢ Increase/decrease in provision for bad debts