PAS 7 - Statement of Cash Flows

Statement of Cash Flows

• Provides information about the sources and utilization of cash and cash equivalents during the period.

Definitions

• Cash: comprises cash on hand and cash in bank.
• Cash Equivalents: short-term, highly liquid investments that are readily convertible to known amounts of cash and subject to an insignificant risk of changes in value.
• Only debt instruments acquired within 3 months or less before their maturity date can qualify as cash equivalents.
• Examples of Cash Equivalents: 1-year treasury bill acquired 3 months before maturity date, 90-day money market instrument or commercial paper, 3-month time deposit.

Purpose of Statement of Cash Flows

• Helps users assess:
  • The ability of the entity to generate cash and cash equivalents.
  • The timing and certainty of the generation of cash flows.
  • The needs of the entity to utilize those cash flows.
• Provides information on the quality of earnings of an entity.
• Enhances inter-comparability among different accounting treatments for the same transactions and events.

Classification of Cash Flows

• The statement of cash flows presents cash flows according to the following classifications:
  • Operating Activities
  • Investing Activities
  • Financing Activities

Operating Activities

• Cash flows from operating activities are primarily derived from the principal revenue-producing activities of the entity.
• Includes cash inflows and outflows on items of income and expenses, or those that enter into the determination of profit or loss.
• Examples of cash flows from operating activities:
  • Cash receipts from the sale of goods, rendering of services, or other forms of income.
  • Cash payments for purchases of goods and services.
  • Cash payments for operating expenses, such as employee benefits, insurance, and the like, and payments or refunds of income taxes.
  • Cash receipts and payments from contracts held for dealing or trading purposes.
• Special items included in operating activities:
  • Cash flows from buying and selling held for trading securities.
  • Cash flows from the acquisition, rentals, and subsequent sale of items of property, plant, and equipment to be held for rental to others.
  • Loan transactions of financial institutions.

Learn about the requirements prescribed by Pas 7 for presenting the statement of cash flows. Understand the sources and utilization of cash and cash equivalents during a period, including the definitions of cash and cash equivalents.