FRS 107 Statement of Cash Flow

1. Learning Outcomes: Understand the rationale and principles of SCF Able to deal with the procedures of preparing SCF FRS 107 Statement of Cash Flow

2. FRS 107 Requires companies to present SCF Provide Information on: Cash inflow, and Cash outflow ** Summary of company’s cash book Information about the changes in cash and cash equivalents during a fiscal year: Introduction

3. Rationale of SCF A user wants to assess the ability of a company in managing its cash for daily operation. Another user wants to know how much cash has been received from investments and how much cash spent for paying back loan during the year. Which financial statement provides such information? Can the income statement & balance sheet provide enough information? Cont.

4. Usefulness of SCF • SCF is more easily understood than a SCI (the profit and loss for the year is derived using the accrual concepts). • The creditors will be able to access the ability of the company to pay them • SCF reflects the importance of cash to management and external users – because the survival of a business depends on its ability to generate cash • Information in SCF is more useful and relevant for decision-making than SCI as non-cash items are excluded • Stakeholders will be able to access the stewardship function of managers.

5. Definitions • Cash • is defined as cash in hand, at bank and deposits • Cash equivalents • Are short-term, highly liquid investments, which are readily convertible to cash. • short-term investment readily convertible into a known amount of cash • not subject to significant risk of changes in value • Maturity date – not more than 3 months • e.g. short-term fixed deposits, treasury bills, marketable securities (bankers’ acceptances, negotiable certificate of deposit), bank overdrafts.

6. Presentation of SCF Shows an entity’s cash and cash equivalents, inflows (all cash receipts) & outflows (payments) from three categories of activities; Operating Investing Financing Components of the SCF

7. Operating Activities: Refers to any cash receipts & payments derived from the principal revenue-generating activities include revenues, expenses, gains & losses transactions. Indicator of the extent to which the operations of the enterprise have generated sufficient cash flows to repay loans, maintain the operating capability of the enterprise, pay dividends and make new investments without recourse to external sources of financing. Cont.

8. Cont. Examples: • Cash receipts from cash sales • Cash receipts of royalties, commission, fees and other income • Cash payments made to purchase goods and services • Cash payments made to and on behalf of employees • Cash payments and refund of taxes • Cash receipts and payments from contracts in connection with trading

9. Investing Activities: Refers to any cash receipts & payments derived from the assets & resources that are used to generate future income and cash inflow. Cash transactions involving the acquisition & disposal of non-current assets. Also related to investment in other entities & short-term investment (not cash equivalent) Indicate how far the enterprise is expanding and the implication on future cash flow or income. Cont.

10. Cont. Examples: • Cash payments to acquire tangible and intangible non-current assets such as property, plant and equipment. • Cash receipts on disposal of tangible and intangible non-current assets • Cash payments to acquire non-current investment such as equity and debt instruments • Cash receipts on sale of non-current investments • Cash advances made or repayment of advances received • Cash receipts and payments on the disposal and acquisition of current investments

11. Financing Activities: Refers to any cash receipts & payments obtained from or paid to investors and creditors – the providers of capital The information on cash flows from financing activities is important to predict the claims on future cash flows Cont.

12. Cont. • Examples: • Cash receipts from the issue of the entity’s shares • Cash payment to buy back or redeem the entity’s shares • Cash receipts on issue of debentures, loans, and other borrowings (short and long-term) • Cash payment of amounts borrowed and redemption of debentures • Cash payment of finance lease (capital payment)

13. Other Items: Interest & Dividends Interest paid & dividend paid may be classified as operating or financing activities. Argument: determining net income or cost of obtaining capital resources Interest received & dividend received may be classified as operating or investing activities. Argument: determining net income or return from investment made by entity Cont.

14. Cont. Taxes • Tax on business income – though it is part of operating activity, it is shown separately. • Tax on financing or investing activity – it is not part of operating activity • E.g. tax on gain on disposal of real property – form part of investing activity

15. Presentation of SCF An entity should report cash flows from operations using either: Direct method • major classes of gross cash receipts and gross cash payments are disclosed • Need to disclose in the notes – a statement reconciling the net profit for the period to the cash flow from operations

16. Direct Method 1)Cash receipts : cash sales + receipts from debtors (main sources of cash inflow) 2)Cash payments : cash purchase + payments to suppliers /creditors (main sources of cash outflow) 3)Payment to employees : wages and salaries 4)Payment for other expenses : as in SCI minus non-cash items

17. Cont. Indirect method • The cash flows are determined by adjusting the net profit before tax (in SCI – accrual basis) to arrive at cash flows from operations • Adjustments are made to the profit before tax for the following non-cash expenses: • Depreciation • Amortisation • Gains and losses on disposal of assets • Foreign currency gains and losses • Bad and doubtful debts

18. Cont. • Interests capitalised • Amortisation of government grants • Changes in working capital • Increase or decrease in receivables • Increase or decrease in inventories • Increase or decrease in payables

19. Indirect Method 1)Net profit before tax– taken from SCI 2)Non-cash transaction – taken from SCI 3)Changes in working capital – taken from SFP (current assets and liabilities)