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Cash Flow Statement Part 1 Notes

Accounting Notes > Accounting (Special Edition) Notes

This is an extract of our Cash Flow Statement Part 1 document, which we sell as part of our Accounting (Special Edition) Notes collection written by the top tier of Acca students.

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Cash Flow Statements - Part 1 http://www.youtube.com/watch?feature=player_embedded&v=YZsClB_OOA0

Upon completion of this lesson you will be able to prepare statement of cash flows (Operating) for an entity using Direct method and compare the usefulness of cash flow information with that of an income statement. Definition A cash flow statement shows the change in cash and cash equivalents of a company under the category of operating, investing and financing activities. Cash and cash equivalents include cash in hand, bank, short-term liquid investments (bonds, securities) that are freely switch into cash. In other words Cash flow statement also known as statement of cash flows evaluates the change in cash and cash equivalents during a period, it classifies the cash inflows and outflows in operating, investing and financing activities so that it can be analyzed clearly from which type of activity cash is flowing inwards and outwards, the format of cash flow statement is given later in these notes. Any Items will not be included in cash flow statement that does not involve cash for e.g. depreciation expense. These are known as Non cash activities. Why is it important?
Cash is the lifeblood of any business, this makes the statement of cash flow highly important for decision makers e.g. shareholders, potential investors etc. They will analyses the liquidity position, solvency and also the increase/decrease in cash and cash equivalents from the operations, investments and financing of an entity with the help of cash flow statement. Profits and cash are not same; therefore income statement solely is not sufficient for reporting purpose. Statement of cash flows helps the decision makers for their future decisions e.g. further investment, divesting or simply retaining the current holding in the business. IAS 7 Statement of Cash Flows requires an entity to present a statement of cash flows as an integral part of its primary financial statements. Lecture Notes Cash flow statement must be prepared in the following order: (1) Operating activities. (2) Investing activities. (3) Financing activities. Key principles specified by IAS 7 for the preparation of a statement of cash flows are as follows:

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(1) Operating activities are the main revenue generating activities of the business; it contains cash received from customers and cash paid to suppliers and workers.

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(2) Investing activities includes purchase and sale of long lived assets & other investments that are not cash equivalents.

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(3) Financing activities are activities that alter the equity and debt structure of the company.

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Note:IAS allows Interest & dividends received and paid may be classified as operating,

investing, or financing cash flows, provided that they are classified consistently from period to period but US GAAP strictly classifies these items as operating activities The direct method of presentation is recommended for cash flows from operating activities, but the indirect method can be used. The results will be the same using any method either direct or indirect.

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The operating cash flows of the cash flow statement (IAS 7: Direct Method)

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Cash received from customers

less

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Cash paid to suppliers

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(xxx)

less

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Cash paid to workers

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(xxx)

less

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Cash paid for other operating expenses

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(xxx)

less

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Interest paid

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(xxx)

less

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Income taxes paid

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(xxx)

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Net cash flow from Operating activities

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xxx Formulas to find out various operating cash inflows and outflows.

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xxx

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