The statement of cash flows identifies cash inflows and outflows for a period, usually one year. It is based on cash accounting. Cash includes cash on hand and demand deposits, less overdrafts due within 24 hours. Cash equivalents are short-term, highly liquid investments convertible to cash within 3 months. The statement categorizes cash flows as operating, investing, or financing activities. The indirect method is used to disclose cash flows to external parties, starting with operating profit and adjusting for non-cash items and changes in working capital. Revaluations and bonus share issues are not shown as they do not impact cash.

1. Statement of Cash Flows
By Sanjaya Jayasundara

2. Meaning of Statement of Cash Flows
This is a financial statement which is prepared
by the business to identify cash inflows and
outflows for particular period. (usually for one
year)
This is based on Cash basis

3. What is Cash & Cash Equivalent
 Cash
Cash includes cash in hand and bank deposits repayable on demand, less any
overdrafts repayable on demand.
‘On demand’ is generally taken to mean within 24 hours.
 Cash Equivalents
Short-term investments that are convertible into cash without notice. They have less
than 3 months to run when acquired. Overdrafts repayable in less than 3 months
should be deducted.

4. Types of cash flows/movements
 Operating activities
Cash movements regarding the main revenue-generating activities of the company
 Investing activities
Cash movements regarding the acquisitions and disposals of tangible and intangible
non-current assets.
 Financing activities
Cash movements regarding either increase or decrease of share capital and non-
current liabilities.

5. Statement of Cash Flows
Under Direct method and Indirect method
 Direct method can be used to disclose cash movements to internal parties
 Indirect method can be used to disclose cash movements to external parties.
 IAS 7 concentrates only about indirect method.

6. Statement of Cash Flows
(Indirect method)
Operating Activities $ $
Operating Profit (PBIT) ×××
Adjustments
Depreciation/Bad Debts ×××
Loss on disposal of Non-current assets ×××
Profit on disposal of Non-current assets (×××) ×××
Operating profit before working capital changes ×××
Working Capital changes
Increase in current assets ( ×××)
Increase in current liabilities ××× ×××
Cash inflow/outflow from operating activities ×××
Interest paid (××)
Tax paid
Net Cash inflow/outflow from operating activities ×××

7. The transactions that we avoid in
statement of cash flows
 Revaluation of Non-current assets
A revaluation of non-current assets (NCA) changes a statement of financial position.
The NCA will increase in value, as will the equity of the company. However, as such a
revaluation merely involves ledger entries, there will be no movement in cash.
Therefore, there will be no entry in a statement of cash flows.
 Bonus issue of shares
Such transactions impact on the statement of financial position of a limited company,
but do not cause any movements in cash resources. The issue of bonus shares is not
shown in a statement of cash flows.

8. It is important to remember that;
 A statement of cash flows is a historical document that is prepared after the
financial year-end. A cash-flow forecast should be more properly referred to as a
cash budget and it is a prediction or estimation of probable future cash flows.
 Only cash flows arising from purchases and sales of non-current assets appear
under ’Investing activities’. Changes in current assets appear as adjustments to
the profit from operations.
 Non-cash transactions are book entries and do not involve movements in cash.

9. All the best children…!
I wish you an enjoyable learning session...!