This document provides an overview of Chapter 8 which covers statement of cash flows. It defines operating, investing and financing activities and provides examples of cash flows for each. It discusses the purposes of the cash flow statement and the direct and indirect methods for reporting cash flows from operating activities. The document also covers the treatment of special items like foreign currency cash flows, interest and dividends, taxes and non-cash transactions.

1. FINANCIAL ACCOUNTING AND ANALYSIS
CHAPTER 8

2. CHAPTER 8
STATEMENT OF CASH FLOWS
CHAPTER 8

3. LECTURE SUB-TOPICS
CHAPTER 8
01 Introduction 02
Cash and Cash
Equivalents 03
Purposes of Cash
Flow Statement
04
Operating
Activities
08
Reporting Cash Flows
from Investing
Activities
06 Financing Activities
07
Reporting Cash Flows
from Operating
Activities
05 Investing Activities
09
Reporting Cash Flows
from Financing
Activities
10
Treatment of Special
Items 11
Format of Cash Flow
Statement (Direct
Method)
12
Format of Cash Flow
Statement (Indirect
Method)

4. START WITH WHY??
CHAPTER 8

5. START WITH WHY??
CHAPTER 8

6. PURPOSES OF CASH FLOW STATEMENT
USING THE CASH FLOW STATEMENT, SHAREHOLDERS, LENDERS AND OTHER USERS
CAN ASSESS:
1. WHETHER THE ENTITY WILL BE ABLE TO GENERATE POSITIVE CASH FLOWS IN
THE FUTURE.
2. WHETHER THE ENTITY WILL BE ABLE TO MEET ITS OBLIGATIONS AND PAY
DIVIDENDS.
3. WHETHER THE ENTITY NEEDS TO RAISE MORE FUNDS.
4. WHY THERE IS A DIFFERENCE BETWEEN THE AMOUNT OF NET INCOME AND
RELATED NET CASH FLOWS FROM OPERATING ACTIVITIES.
5. THE EFFECT OF ENTITY’S INVESTING AND FINANCING ACTIVITIES ON ITS CASH
AND OTHER ACCOUNTS.
6. THE REASONS BEHIND CHANGE IN THE BEGINNING AND ENDING BALANCE OF
CASH AND CASH EQUIVALENTS.
CHAPTER 8

7. CASH FLOW STATEMENT
CHAPTER 8

8. 1. WHAT IS OPERATING ACTIVITY?
• OPERATING ACTIVITIES ARE THE PRINCIPAL REVENUE PRODUCING
ACTIVITIES OF AN ENTERPRISE, AND INCLUDE ACTIVITIES THAT
ARE NOT INVESTING OR FINANCING ACTIVITIES
CHAPTER 8

9. 1. WHAT IS OPERATING ACTIVITY?
• SOME EXAMPLES OF CASH FLOWS FROM OPERATING ACTIVITIES ARE:
1. CASH RECEIPTS FROM SALE OF GOODS OR RENDERING OF
SERVICES.
2. CASH RECEIPTS FROM ROYALTIES, FEES, COMMISSION AND OTHER
REVENUE.
3. CASH PAYMENT TO SUPPLIERS FOR GOODS AND SERVICES.
4. CASH PAYMENT TO AND ON BEHALF OF EMPLOYEES.
5. CASH RECEIPTS AND CASH PAYMENTS OF AN INSURANCE ENTITY
FOR PREMIUMS AND CLAIMS, ANNUITIES AND OTHER POLICY
BENEFITS.
6. CASH PAYMENT OR REFUND OF INCOME TAXES UNLESS THEY CAN
BE SPECIFICALLY IDENTIFIED WITH FINANCING AND INVESTMENT
ACTIVITIES.
CHAPTER 8

10. 2. WHAT IS INVESTING ACTIVITY?
• CASH FLOWS FROM INVESTING ACTIVITIES ARISE FROM PURCHASE AND
SALES OF FIXED ASSETS AND FINANCIAL ASSETS.
CHAPTER 8

11. 2. WHAT IS INVESTING
ACTIVITY?
SOME EXAMPLES OF INVESTING ACTIVITIES ARE:-
• CASH PAYMENTS TO PURCHASE PROPERTY, PLANT AND
EQUIPMENT, INTANGIBLES AND OTHER LONG-TERM INVESTMENTS.
• CASH RECEIPTS FROM SALE OF PROPERTY, PLANT AND
EQUIPMENT, INTANGIBLES AND OTHER LONG-TERM INVESTMENTS.
• CASH ADVANCES AND LOANS MADE TO OTHER PARTIES.
• CASH RECEIPTS FROM REPAYMENT OF ADVANCES AND LOANS
MADE TO OTHER PARTIES.
• THESE ALSO INCLUDE RECEIPT OF DIVIDENDS AND INTEREST.
CHAPTER 8

12. 3. WHAT IS FINANCING
ACTIVITY?
• FINANCING ACTIVITIES ARE ACTIVITIES THAT RESULT IN CHANGES IN
THE SIZE AND COMPOSITION OF THE OWNER’S CAPITAL.
CHAPTER 8

13. 3. WHAT IS FINANCING ACTIVITY?
EXAMPLES OF FINANCING ACTIVITIES ARE:
• CASH PROCEEDS FROM ISSUING SHARES OR OTHER EQUITY
INSTRUMENTS.
• CASH PAYMENTS TO OWNERS TO ACQUIRE OR REDEEM THE ENTITY’S
SHARES.
• CASH PROCEEDS FROM ISSUING DEBENTURES, LOANS, BONDS,
MORTGAGES AND OTHER SHORT- OR LONG-TERM BORROWINGS.
• CASH REPAYMENTS OF AMOUNTS BORROWED.
CHAPTER 8

14. CASH AND CASH EQUIVALENTS
• CASH INCLUDES CASH AND CASH EQUIVALENTS.
• TWO ACCOUNTING STANDARDS AS-3 “CASH FLOW STATEMENT” AND
IND AS-7 “STATEMENT OF CASH FLOWS” ISSUED BY THE ICAI,
CONTAIN GUIDELINES FOR THE PREPARATION OF CASH FLOW
STATEMENT.
• IND AS-7 INCLUDES BANK OVERDRAFTS.
CHAPTER 8

15. CHAPTER 8

16. REPORTING CASH FLOWS FROM OPERATING
ACTIVITIES
• CASH FLOWS FROM OPERATING ACTIVITIES CAN BE CALCULATED USING EITHER THE
DIRECT METHOD OR THE INDIRECT METHOD
• DIRECT METHOD: IN THE CASE OF DIRECT METHOD, GROSS CASH RECEIPTS AND
GROSS CASH PAYMENTS ARE SHOWN UNDER MAJOR CLASSES
• INDIRECT METHOD: UNDER THE INDIRECT METHOD, THE NET PROFIT OR LOSS
DISCLOSED BY THE INCOME STATEMENT IS ADJUSTED FOR:
1. NON-CASH ITEMS SUCH AS DEPRECIATION, PROVISIONS AND UNREALIZED
FOREIGN EXCHANGE GAINS OR LOSSES.
2. CHANGE IN CURRENT ASSETS AND CURRENT LIABILITIES.
3. ANY DEFERRALS OR ACCRUALS OF PAST OR FUTURE OPERATING CASH RECEIPTS
OR PAYMENTS.
4. ALL OTHER ITEMS THAT AFFECT INVESTING OR FINANCING CASH FLOWS.
CHAPTER 8

17. REPORTING CASH FLOWS FROM
OPERATING ACTIVITIES – DIRECT
METHOD
CHAPTER 8

18. FORMAT OF CASH FLOW STATEMENT (DIRECT
METHOD)
CHAPTER 8

19. REPORTING CASH FLOWS FROM
OPERATING ACTIVITIES – INDIRECT
METHOD
CHAPTER 8

20. COMPREHENSIVE FORMAT OF
CASH FLOW STATEMENT
CHAPTER 8

21. TREATMENT OF SPECIAL ITEMS
• FOREIGN CURRENCY CASH FLOWS
AN ENTITY SHOULD RECORD CASH FLOWS ARISING FROM TRANSACTIONS IN A
FOREIGN CURRENCY IN THE ENTITY’S FUNCTIONAL CURRENCY BY APPLYING TO THE
FOREIGN CURRENCY AMOUNT THE EXCHANGE RATE BETWEEN THE FUNCTIONAL
CURRENCY AND THE FOREIGN CURRENCY ON THE DATE OF CASH FLOW.
• INTEREST AND DIVIDEND:
CASH FLOWS FROM INTEREST AND DIVIDENDS RECEIVED AND PAID SHOULD BE
DISCLOSED SEPARATELY.
CASH FLOWS ARISING FROM THE INTEREST PAID, AND INTEREST AND DIVIDENDS
RECEIVED IN THE CASE OF A FINANCIAL ENTERPRISE SHOULD BE CLASSIFIED AS CASH
FLOWS ARISING FROM OPERATING ACTIVITIES.
CHAPTER 8

22. TREATMENT OF SPECIAL ITEMS
• TAXES ON INCOME:
CASH FLOWS ARISING FROM TAXES ON INCOME ARE TO BE SEPARATELY
DISCLOSED, AND NEED TO BE CLASSIFIED AS CASH FLOWS FROM
OPERATING ACTIVITIES UNLESS THEY CAN BE SPECIFICALLY IDENTIFIED
WITH FINANCING AND INVESTING ACTIVITIES.
• NON-CASH INVESTING AND FINANCING TRANSACTIONS
INVESTING AND FINANCING TRANSACTIONS THAT DO NOT REQUIRE THE
USE OF CASH OR CASH EQUIVALENTS SHOULD BE EXCLUDED FROM THE
CASH FLOW STATEMENT.
CHAPTER 8

23. TREATMENT OF SPECIAL ITEMS
• COMPONENTS OF CASH AND CASH EQUIVALENTS
AN ENTITY IS REQUIRED TO DISCLOSE THE COMPONENTS OF CASH AND
CASH EQUIVALENTS AND TO PRESENT A RECONCILIATION OF THE
AMOUNTS IN ITS STATEMENT OF CASH FLOWS WITH THE EQUIVALENT
ITEMS REPORTED IN THE BALANCE SHEET.
• OTHER DISCLOSURES
AN ENTITY IS REQUIRED TO DISCLOSE, TOGETHER WITH A
COMMENTARY BY MANAGEMENT, THE AMOUNT OF SIGNIFICANT CASH
AND CASH EQUIVALENT BALANCES HELD BY THE ENTITY THAT ARE NOT
AVAILABLE FOR USE BY THE GROUP
CHAPTER 8