The document discusses the statement of cash flows, explaining that it classifies cash inflows and outflows into operating, investing, and financing activities. It defines cash and cash equivalents, describes the format of the statement of cash flows using an example, and explains how the statement is prepared and used for decision making. The statement of cash flows provides important information about a company's cash generation and cash usage to evaluate its liquidity and ability to meet financial obligations.

1. Principle of Accounting
Chapter 11
Statements of Cash Flows
BA. in International Business
Foreign Trade University

2. Outline
 The role of the statement of cash flows
 Classification of cash flows
 The concept of cash
 The format of the statement of cash flows
 Preparing a statement of cash flows
 Cash flows and decision making

3. The role of the statement of
cash flows
 The statement of cash flows concentrates
on movements of cash in and out of the
business entity.
 It provides information relating to areas:
 The net cash inflows generated by trading
operations
 The firm’s ability to meet obligations to
creditors and bankers
 The firm’s long-term capital and debt
arrangements
 Cash flows resulting from investing activities.

4. Classification of cash flows
 Operating activities examine the cash
flows resulting from revenues and
expenses.
 Investing and financing activities
highlight the changes in items reported in
the statement of financial position.

5. Operating activities
 Cash inflows
 Cash sales
 Receipts from customers
 Cash outflows
 Payments to suppliers
 Payments to employees
 Payments for operating expenses
 Payments for tax
 Payments for interest

6. Investing activities
 Cash inflows
 Sale of non-current assets
 Sale of investments
 Cash outflows
 Purchase of non-current assets
 Purchase of investments

7. Financing activities
 Cash inflows
 Cash contribution by owner
 Proceeds from loan
 Cash outflows
 Cash drawings by owner
 Repayment of loan (principal)

8. Examples of cash flows by classification
Activity Examples Effect on Related B/S a/c
cash
Operating Collection from customers Inflow Debtors
Payment to suppliers Outflow Creditors
Payment of wages Outflow Wages payable
Investing Purchase of non-current assets Outflow Plant, equipment
Sales of non-current assets Inflow Plant, equipment
Financing Capital contributions of cash Inflow Capital
Withdrawal of cash by owner Outflow Drawings
Taking out loans Inflow Loan payable
Loan repayments Outflow Loan payable

9. The concept of cash
 Cash includes all cash on hand and any other cash
equivalents held by a firm.
 The definition of cash means cash on hand, cash at
bank and cash held with non-banking financial
institutions on an at-call basis.
 Cash equivalents extends this definition to include
items such as short-term cash deposits, bills
receivable and other short-term investments (bank
bills, treasury bills).
 Short-term investments can include investments
with a maturity ranging from at-call up to two or
three months.
 Overdrafts should also be included under the
definition of cash and cash equivalents.

10. The format of the statement of
cash flows
Grech’s Sports Store: Statement of cash flows for year ended
31.12.05
Cash flows from operating activities
Receipts from customers 100,000
Payments to suppliers and employees (73,000)
Net cash provided by operating activities 27,000
Cash flows from investing activities
Proceeds from sale of shop fittings 1000
Payments for shop fittings (5,000)
Net cash used in investing activities (4,000)

11. The format of the statement of
cash flows (cont’d)
Cash flows from financing activities
Loan from bank 10,000
Repayments of loan (5,000)
A. Grech – cash withdrawals (29,500)
Net cash used in financing activities (24,500)
Net increase (decrease) in cash held (1,500)
Cash held at the beginning of the year 2,000
Cash held at the end of the year 500

12. Preparing a statement of cash flows
 A statement of cash flows can be prepared from
either the two cash journals or a statement of
receipts and payments.
 Both journals and the statement of receipts and
payments provide a summary of all cash flow
transactions for the period.
 Cash flows are classified under the heading
operating, investing and financing.

13. Cash flows and decision making
 The statement of cash flows provides
management with information that demonstrates
the effects of its decision-making on the cash
resources of the firm.
 A statement of cash flows can be compared with
previous result, therefore statement of cash flows
for consecutive periods are often prepared.
 This allows for easy comparison and highlights
changes in various activities and identifies trends.

14. Practice questions
Exercise 11.1
Exercise 11.2
Exercise 11.3

15. Homework
Exercise 11.4
Exercise 11.5
Exercise 11.6
Exercise 11.7