Accounting 2 (cashflow) (1) asif naji.docx

Cash flow (accounting )
:Maju:
Cash flow statement ias
7
Accounting ‘2’
Group members are :
sarah Hassan fa16-bbah-0041
faizan Khalil fa16-bbah-0058
syed khizer ali
fa16-bbah-0074
1

ACKNOWLEDGEMENT

Every project big or small is successful largely due to the effort of
a number of wonderful people who have always given their
valuable advice or lent helping hand. I sincerely appreciate the
inspiration; support and guidance of all those people who have
been instrumental in making this Accounting project related
to 'CASHFLOW' a success.
We are extremely grateful to MUHAMMAD ALI JINNAH
UNIVERSITY for the confidence bestowed on us and entrusting
our knowledge. At this juncture we feel deeply honored in
expressing our sincere thanks to SIR ASIF NAJI for making the
resources available at right time and providing guidance and
valuable insights leading to the successful completion of
our project.

We certify that this report is our own work and that all sources of
information used in this report have been fully acknowledged.
2

: index :
s.no# TOPIC PAGE#
001 ACKNOWLEDGENMENT 2 pg
002 INTERNATIONAL ACCOUNTING STANDERDS 4 pg
003 HISTORY IAS 7 5 pg
004 STATEMENT OF CASH FLOW 6 pg
005 METHODS OF FORMULATING CASHFLOW 7 pg
006 DIRECT METHOD 8 pg
007 ADVANTAGE OF DIRECT METHOD AND
INDIRECT METHOD
9 pg
008 OTHER SOURCES FOR CASH FLOW
PREPRATION
11 pg
009 CASH FLOW TRANSACTION 12 pg
010 USING OF CASH FLOW STATEMENT 15 pg
011 LIMITATION OF CASH FLOW STATEMENT 16 pg
012 CONCLUSION 17 pg
013 REFERENCES 18 pg
3

INTERNATIONAL ACCOUNTING STANDARDS
International Accounting Standards (IASs) were issued by the
antecedent International Accounting Standards Council (IASC),
and endorsed and amended by the International Accounting
Standards Board (IASB). They also reissue standards in this
series where it considers it appropriate. Our reports main focus
will be on:
June 1976 Exposure Draft E7 Statement of Source and
Application of Funds
October 1977 IAS 7 Statement of Changes in Financial Position
July 1991 Exposure Draft E36 Cash Flow Statements
December 1992 IAS 7 (1992) Cash Flow Statements
1 January 1994 Effective date of IAS 7 (1992)
6 September 2007 Retitled from Cash Flow
Statements to Statement of Cash Flows as a
consequential amendment resulting from
revisions to IAS 1
16 April 2009 IAS 7 amended by Annual improvements
IFRSs 2009 with respect to expenditures that do
not result in a recognize asset.
1 July 2009 Effective date for amendments from IAS
27(2008) relating to changes in ownership of a
subsidiary
1 January 2010 Effective date of the April 2009 revisions to IAS 7
29 January 2016 Amended by Disclosure initiative
(Amendments of IAS 7)
1 January 2017 Effective date of the January 2016 revisions to
IAS 7
4

IAS 7 :Statement of Cash Flows (1992)
HISTORY IAS 7
OBJECTIVES OF IAS 7
The objective of IAS 7 is to require the presentation of information
about the historical changes in cash and cash equivalents of an entity by
means of a statement of cash flows, which classifies cash flows during
the period according to operating, investing, and financing activities.
Information about the cash flows of an entity is useful in providing users
of financial statements with a basis to assess the ability of the entity to
generate cash and cash equivalents and the needs of the entity to
utilize those cash flows. The economic decisions that are taken by users
require an evaluation of the ability of an entity to generate cash and
cash equivalents and the timing and certainty of their generation.
FUNDAMENTAL PRINCIPLE OF IAS 7
● All entities that prepare financial statements in conformity with
IFRSs are required to present a cashflows. (IAS 7.1
● The statement of cash flows shall report cash flows during the
period classified by operating, investing and financing activities.
5

● Cash flows are inflows and outflows of cash and cash equivalents.
Cash comprises cash on hand and demand deposits. Cash
equivalents are short-term, highly liquid investments that are
readily convertible to known amounts of cash and which are
subject to an insignificant risk of changes in value.
● Cash basis of accounting is followed for statement of cashflow.
STATEMENENT OF CASHFLOW
The Statement of Cash Flows is a financial statement that provides an
overview of the cash inflows and outflows of the business during a
certain period of time. Statement of cash flows is created in order to
show a summary of the transactions that have affected the cash
holdings of the organization during a certain period.
REASONS FOR PREPARING CASHFLOW
The cash flow statement is a key accounting report. One could
show the most fantastic performance according to the income
statement with huge profits, and yet have nothing left in the
bank. In this situation the business would not survive. How
could this occur? It could occur if all your sales have been made
on credit. And it could occur if additionally you weren't
monitoring the cash flows of your business.
In real life this extreme situation would rarely occur, but this
example serves to explain that the cash situation of a business
is key. And the cash flow statement, which shows us what the
business has been doing with its cash - provides vital
information. So yes, cash is king - in the business world and even
in accounting.
6

METHODS OF FORMULATING
CASHFLOW
INDIRECT METHOD: Starts with a company’s net income and
then makes adjustments for all non-cash transactions followed by
adjustments from all cash transactions. A transaction that increases
an asset account is subtracted from net income, while a transaction
that increases a liability account is added to net income. Under the
indirect method, you can convert accrual-basis net income (or loss)
into cash flow through numerous additions and deductions.
Statement of Cash Flows Indirect Method Example:
For example, Lowry Locomotion constructs the following statement of cash
flows using the indirect method:
Lowry Locomotion
Statement of Cash Flows
for the year ended 12/31x1
Cash flows from operating activities
Net income $3,000,000
Adjustments for:
Depreciation and amortization $125,000
Provision for losses on accounts receivable 20,000
Gain on sale of facility (65,000)
80,000
Increase in trade receivables (250,000)
Decrease in inventories 325,000
Decrease in trade payables (50,000)
25,000
7

Cash generated from operations 3,105,000
DIRECT METHOD: More simply lists cash receipts and
payments by their respective categories – cash inflows are listed as
positive entries and cash outflows are listed as negative entries.
Statement of Cash Flows Direct Method Example:
Lowry Locomotion constructs the following statement of cash flows using the
direct method:
Lowry Locomotion
for the year ended 12/31/x1
Cash flows from operating activities
Cash receipts from customers $45,800,000
Cash paid to suppliers (29,800,000)
Cash paid to employees (11,200,000)
Cash generated from operations 4,800,000

Interest paid (310,000)
Income taxes paid (1,700,000)
Net cash from operating activities $2,790,000
8

ADVANTAGES OF DIRECT METHOD:
The advantage of the direct method over the indirect method is
that it reveals operating cash receipts and payments. The
standard-setting bodies encourage the use of the direct method,
but it is rarely used, for the excellent reason that the information
in it is difficult to assemble; companies simply do not collect and
store information in the manner required for this format. Using
the direct method may require that the chart of accounts be
restructured in order to collect different types of information.
Instead, they use the indirect method, which can be more easily
derived from existing accounting reports.
ADVANTAGES OF INDIRECT METHOD:
The principle advantage of indirect method is that it focuses on the
differences between net income and net cash flow from operating activities.
That is, it provides a useful link between the statement of cash flows and
the income statement and balance sheet. Many companies contend that
it is less costly to adjust net income to net cash flow from operating
activities than it is to report gross operating cash receipts and payments.
Supporters of the indirect method also state that the direct method, which
effectively reports income statement information on a cash rather than an
accrual basis, may erroneously suggest that net cash flow from operating
activities is as good as, or better than, net income as a measure of
performance.
CAHFLOW STATEMENT USING INDIRECT
Unlike other major financial statements, statement of cash flows is not
prepared from the adjusted trial balance. The information to prepare this
statement usually comes from three sources. These are:
1. Comparative balance sheets: That provide the amount of the
changes in assets liabilities, and equities from the beginning to the
9

end of the period.
EXAMPLE:
To illustrate indirect method of statement cash flows, we will use the first
year of operation for tax Consultants Inc. The company started on 1st
January 2003, When it issued 60,000 shares of $1 par value common stock
for $60,000 cash. The company rented its office space and furniture and
equipment, and it performed tax consulting services throughout the first
year. The comparative balance sheets at the beginning and end of the year
2003 appear as follows:
Tax Consultants Inc.
Comparative Balance Sheets
Assets Dec. 31, 2003 Jan. 1, 2003
Change
(Increase/Decrease)
Cash $49,000 $-0- $49,000 Increase
Accounts receivable 36,000 -0- 36,000 Increase

Total $85,000 -0-

Liabilities and
Stockholders' Equity
Accounts payable $5,000 $-0- $5,000 Increase
Common stock ($1 par) 60,000 -0- 60,000 Increase
Retained earnings 20,000 -0- 20,000 Increase

Total $85,000 $-0-

OTHER SOURCES FOR CASHFLOW
PREPERATION
10

2. GENEARAL LEDGER : That helps getting few basic information not
provided in income statement for the year.
3. Current income statement data :That help readers determine the
amount of cash provided by or used by operations during the period
.EXAMPLE: The income statement and additional information for
tax consultants Inc. .are as follows:
Tax Consultants Inc.
Income Statement
For the year ended Dec. 31, 2003
Revenues $125000
Operating expenses 85000

Income before income taxes 40,000
Income tax expenses 6,000

Net income $34,000

4. Additional Information:
Examination of selected data indicates that a dividend of $14,000was
paid during the year.
CASHFLOW TRANSACTIONS:
A statement of cash flows categorizes all cash transactions into
one of three types of activities;
11

1. Operating activities: The cash inflows and outflows related to
transactions which are entered in determining net income.
Increase in accounts receivable: When accounts receivable increase
during the year, revenues on an accrual basis are higher than revenues on
a cash basis because goods sold on account are reported as revenues. In
other words, operations of the period led to increase revenues, but not all
of these revenues resulted in an increase in cash. Some of the increase in
revenues resulted in an increase in accounts receivable. To convert net
income to net cash flow from operating activities using indirect method, the
increase of $36000 in accounts receivable must be deducted from net
income.
Increase in accounts payable: When accounts payable increase during
the year, expenses on an accrual basis are higher than they are on a cash
basis because expenses are incurred for which payment has not been
taken place. To convert net income to net cash flow from operating
activities, the increase of $5,000 in accounts payable must be added to net
income
Net income $34,000
Adjustments to reconcile net income to
net cash provided by operating activities:

increase in accounts receivable $(36,000)
increase in accounts payable 5,000 (31,000)

Net cash provided by operating activities $3,000

2.Investing activities: These transactions involve the acquisition and sale of long-term
assets that are used by the organization, as well as non-operating investment assets.
12

EXAMPLE:
Once the net cash from operating activities is computed, the next step is to
determine whether any other changes in balance sheet accounts caused
an increase or decrease in cash.
For example, an examination of the remaining balance sheet accounts for
Tax Consultation Inc. shows that both common stock and retained earnings
have increased. The common stock increase of $60,000 resulted from the
issuance of common stock for cash. The issuance of common stock is a
receipt of cash from a financing activity and is reported as such in the
statement of cash flows. The retained earnings increase of $20,000 is
caused by two items:
1. Net income of $34000 increased earnings.
2. Dividends declared of $14,000 decreased retained earnings.
Cash Flows from Investing Activities
Issuance of common stock 60,000
Payment of cash dividends (14,000)
14,000
3. Financing activities: These transactions include cash inflows and
outflows between the business and its creditors and owners, i.e. the
sale of stock for cash.
Net cash provided by financing activities 46,000

Net increase in cash 49,000
Cash, January 1 2003 -0-

Cash, December 31, 2003 $49,000

As indicated, the $60,000 increase in common stock results in a cash inflow from a
financing activity. The payment of $14,000 in cash dividends is classified as a use of
cash from a financing activity. The $49000 increase in cash reported in the statement of
cash flows agrees with the increase of $49,000 shown as the change in the cash
13

account in the comparative balance sheet. There were no investing activity effecting
cash during the year.
Tax Consultants INC.
For the year ended December 31, 2003
Cash Flows from Operating Activities
Net income $34,000
Adjustments to reconcile net income to net
cash provided by operating activities:

increase in accounts receivable $(36,000)
increase in accounts payable 5,000 $(31,000)

Net cash provided by operating activities $3,000
Cash Flows from Investing Activities
Issuance of common stock 60,000
Payment of cash dividends (14,000)

Net cash provided by financing activities 46,000

Net increase in cash 49,000
Cash, January 1 2003 -0-

Cash, December 31, 2003 $49,000

RECOMMENDATION FOR TAX.CON. INC.
The three cash flow activity classifications prevent users of financial
statements from coming to incorrect conclusion about a business, because
of the total increase or decrease of cash during an accounting period.

14

USES OF CASHFLOW STATAEMENT
⮚Since a cash flow statement is based on the cash basis of accounting, it
is very useful in the evaluation of cash position of a firm.
⮚ A comparison of the historical and projected cash flow statements can
be made so as to find the variations and deficiency or otherwise in the
performance so as to enable the firm to take immediate and effective
action.
⮚ A series of intra-firm and inter-firm cash flow statements reveals
whether the firm’s liquidity (short-term paying capacity) is improving or
deteriorating over a period of time and in comparison to other firms over
a given period of time.
⮚ Cash flow statement helps in planning the repayment of loans,
replacement of fixed assets and other similar long-term planning of
cash. It is also significant for capital budgeting decisions.
⮚ It better explains the causes for poor cash position in spite of substantial
profits in a firm by throwing light on various applications of cash made
by the firm. It further helps in answering some intricate questions like
-what happened to the net profits? Where did the profits go? Why more
dividends could not be paid in spite of sufficient available profit?
⮚ . A projected cash flow statement can be prepared in order to know the
future cash position of a concern so as to enable a firm to plan and
coordinate its financial operations properly.
⮚ Cash flow analysis is more useful and appropriate than funds flow
analysis for short-term financial analysis as in a very short period it is
15

cash which is more relevant then the working capital for forecasting the
ability of the firm to meet its immediate obligations.
⮚ Cash flow statement provides information of all activities classified
under operating, investing and financing activities. The funds statement
even when prepared on cash basis, did not disclose cash flows from
such activities separately.
LIMITATIONS OF CASHFLOW
STATEMENT
⮚ Practically, cash flow statement does not help to assess liquidity or
solvency position of a firm. Proper liquidity position cannot be assessed
from the cash flow statement which presents only the cash position at
the end of the period. It only helps how much amount of obligation can
be met, i.e. Cash Flow Statement does not represent the real liquidity
position.
⮚ Cash Flow Statement actually fails to present the net income of a firm
for a period since it does not consider non-cash items which can easily
be ascertained by an Income Statement. It can be used as a
supplement to Income Statement.
⮚ Cash Flow Statement is neither a substitute of Funds Flow Statement
nor a substitute of Income Statement. The functions which are
performed by a Funds Flow Statement ,Income statement cannot be
done by a Cash Flow Statement.
⮚ Cash flows from operation does not help to assess profitability of a firm
since it neither considers the costs nor revenues.
⮚ Cash Flow Statement is prepared on the basis of historical cost and, as
such, it does not help to know the future/projected cash flows.
16

⮚ Cash Flow Statement does not measure the economic efficiency of a
firm in comparison with other inter-industry comparison is not possible,
e.g. a firm having less capital investment will have less cash flow than
the firm which has more capital investment having a higher cash flow.
CONCLUSION
A company can use a cash flow statement to predict future cash flow,
which helps with matters in budgeting. For investors, the cash flow reflects
a company's financial health: basically, the more cash available for
business operations, the better. However, this is not a hard and fast rule.
Sometimes a negative cash flow results from a company's growth strategy
in the form of expanding its operations. Complementing the balance sheet
and income statement, the cash flow statement (CFS) - a mandatory part
of a company's financial reports since 1987 - records the amount of cash
and cash equivalents entering and leaving a company. The CFS allows
investors to understand how a company's operations are running, where its
money is coming from, and how it is being spent. Now you will learn how
the CFS is structured, and how to use it as part of your analysis of a
company. The cash flow statement is distinct from the income statement
and balance sheet because it does not include the amount of future
incoming and outgoing cash that has been recorded on credit. Therefore,
cash is not the same as net income, which on the income statement and
balance sheet. By adjusting earnings, revenues, assets and liabilities, the
investor can get a very clear picture of what some people consider the
most important aspect of a company - how much cash it generates and,
particularly, how much of that cash stems from core operations.
17

REFERENCES:
http://www.accountingexplanation.com/steps_in_preparing_cash
_flow_statement.htm
http://www.accountingexplanation.com/cash_flow_statement_indi
rect_method.htm
https://books.google.com.pk/books?id=3Ki8osgX90oC&pg=PA200&lp
g=PA200&dq=essential+tools+for+preparing+cashflow&source=bl&ots
=RdtSggS1yN&sig=vWm8t3PIh8TrAAj1C3V4NuAaIvI&hl=en&sa=X&v
ed=0ahUKEwiO55CYwuzTAhWKsI8KHdQuC8sQ6AEINTAC#v=onepa
ge&q=essential%20tools%20for%20preparing%20cashflow&f=false
http://www.accountingexplanation.com/cash_flow_statement_indirect_
method.htm
http://www.yourarticlelibrary.com/accounting/cash-flow-statement/uses
-of-cash-flow-statement-9-uses-financial-analysis/67113/
http://www.yourarticlelibrary.com/accounting/cash-flow/major-limitation
s-of-cash-flow-statement-6-limitations/59519/
18

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