Statement of cash flow is part of a financial statements that shows the cash inflow and cash outflow of an entity. It is the third components in a financial statement.
Terms Used in Statement of Cash Flow
(1) Cash comprises cash on hand and demand deposits.
(2) 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.
(3) Cash flows are inflows and outflows of cash and cash equivalents.
(4) Operating activities are the principal revenue-producing activities of the entity and other activities that are not investing or financing activities.
(5) Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.
(6) Financing activities are activities that result in changes in the size and composition of the contributed equity and borrowings of the entity.
Items in the cash flow statement according to International Accounting Standard 1
(1) Operating Activities
(a) cash receipts from the sale of goods and the rendering of services;
(b) cash receipts from royalties, fees, commissions and other revenue;
(c) cash payments to suppliers for goods and services;
(d) cash payments to and on behalf of employees;
(e) cash receipts and cash payments of an insurance entity for premiums and claims, annuities and other policy benefits;
(f) cash payments or refunds of income taxes unless they can be specifically identified with financing and investing activities; and
(g) cash receipts and payments from contracts held for dealing or trading purposes.
(2) Investing activities
(a) cash payments to acquire property, plant and equipment, intangibles and other long-term assets. These payments include those relating to capitalised development costs and self-constructed property, plant and equipment;
(b) cash receipts from sales of property, plant and equipment, intangibles and other long-term assets;
(c) cash payments to acquire equity or debt instruments of other entities and interests in joint ventures(other than payments for those instruments considered to be cash equivalents or those held for dealing or trading purposes);
(d) cash receipts from sales of equity or debt instruments of other entities and interests in joint ventures (other than receipts for those instruments considered to be cash equivalents and those held for dealing or trading purposes);
(e) cash advances and loans made to other parties (other than advances and loans made by a financial institution);
(f) cash receipts from the repayment of advances and loans made to other parties (other than advances and loans of a financial institution);
(g) cash payments for futures contracts, forward contracts, option contracts and swap contracts except when the contracts are held for dealing or trading purposes, or the payments are classified as financing activities; and
(h) cash receipts from futures contracts, forward contracts, option contracts and swap contracts except when the contracts are held for dealing or trading purposes, or the receipts are classified as financing activities.
(3) Financing activities
(a) cash proceeds from issuing shares or other equity instruments;
(b) cash payments to owners to acquire or redeem the entity’s shares;
(c) cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short or long-term borrowings;
(d) cash repayments of amounts borrowed; and
(e) cash payments by a lessee for the reduction of the outstanding liability relating to a finance lease.
Net Cash Flow
This is the difference between the cash inflow and cash outflow for each of the activity. If the cash inflow is higher than the cash outflow, it is called positive net cash flow. If the cash inflow is lower than the cash outflow, it is called negative net cash flow.
The final total after computing for each activity is refers to cash and cash equivalent.
Method of Presenting Statement of Cash Flow
Direct Method: In this method, major classes of gross cash receipts and gross cash payments are disclosed in the statement of cash flow under the operating activities.
Indirect Method: In this method, profit or loss is adjusted for the effects of transactions of a non cash nature, any deferrals or accruals of past or future operating cash receipts or payments, and items of income or expense associated with investing or financing cash flows.