1. This statement deals with the presentation of a statement which summarizes for the period the resources made available to finance the activities of an enterprise and the uses to which such resources have been put. The title ‘Statement of Cash Flows’ is descriptive of a statement with an objective, and is adopted for use in this statement.

Cash Instead of Working Capital

2. There is a trend in practice towards statement of change in financial position that focus on cash flows, and it is agreed that a statement of cash flows is more useful to help investors, creditors, and others assess future cash flows, provide feedback about actual cash flows, evaluate the availability of cash for dividends and investment and the enterprise’s ability to finance growth from internal sources, and identify the reasons for differences between net income and net cash flows.

3. To achieve the objectives the statement should focus on flows of cash rather than flows of working capital. The usefulness of working capital as a concept of funds generally is questionable since positive working capital does not necessarily indicate liquidity nor does negative working capital necessarily indicates illiquidity.

4. There are, however, certain specialized forms of businesses, for example, financial institutions and insurance companies, where the cash flow method of presentation may not be appropriate due to the specialized nature of their operations. In such cases other appropriate methods of presentation should be considered.

5. A business enterprise with turnover of $500,000 or more, that provides a set of financial statements that reports both financial position and results of operation shall also provide a statement of cash flows for each period for which the income statement is provided. The inclusion of such a statement is useful to improve the understanding of the operations and activities of an enterprise for the reporting period.

6. The statement of cash flows is prepared from financial data generally identifiable in the income statement, balance sheet and related notes. However, the statement of cash flows presents information which may not be readily available in a usable form in the other two statements. Sufficient information is generally given to enable the reconciliation of the amounts the statement of cash flows to the related amounts in other statements.

7. For purposes of this statement, the term ‘funds’ generally refers to cash and cash equivalents.

8. Cash is the most useful concept of funds because decisions of investors, creditors, and others focus on assessment of future cash flows.

9. The purpose of the statement of cash flows is to report cash receipts and cash payments during a period, classified into meaningful categories.

10. Cash includes not only currency on hand but demand deposits with banks or other financial institutions. For purposes of this statement, cash equivalents are short-term, highly liquid investments that are both readily convertible to known amounts of cash and near their maturity that they present little risk of changes in value. Classification of cash equivalents should be consistent.

11. The statement of cash flows shall classify cash receipts and cash payments as resulting from investing, financing or operating activities.

12. There are two principal alternatives for reporting net cash flows from operating activities. The direct method shows as its principal components operating cash receipts and payments, such as cash received from customers and cash paid to suppliers and employees, the sum of which is net cash flow from operating activities. The indirect method starts with net income and adjusts for revenue and expense items that were not the result of operative cash transactions in the current period to reconcile it to net cash flow from operating activities. The indirect method does not disclose operating cash receipts and payments. This information indicates the extent to which an enterprise has generated cash from or used cash in its operations. Operating activities include all transactions and others that are not defined as investing or financing activities.

Cash provided from operating activities are generally the cash effects of transactions and other events that influence the determination of net income.

13. The principal advantage of the direct method is that it shows operating cash receipts and payments. The principal advantage of the indirect method is that it focuses on the difference between net income and net cash flow from operating activities.

14. The reconciliation of net income to net cash flow from operating activities shall be provided regardless of whether the direct or indirect method of reporting net cash flow from operating activities is used. That reconciliation shall separately report all major classes of reconciling items. For example. major classes of deferrals of past operating cash receipts and payments and accruals of expected future operating cash receipts and payments, including at a minimum changes during the period in receivables pertaining to operating activities, in inventory, and in payables pertaining to operating activities, shall be separately reported. Enterprises are encouraged to provide further breakdowns of those categories that they consider meaningful. For example, changes in receivables from customers for an enterprise’s sale of goods or services might be reported separately from changes in other operating receivables. In addition, if the indirect method is used, amounts of interest paid (net of amounts capitalized) and income taxes paid during the period shall be provided in related disclosures.

15. If the direct method of reporting net cash flow from operating activities is used, the reconciliation of net income to net cash flow from operating activities shall be provided in a separate schedule. If the indirect method is used, the reconciliation may be either reported within the statement of cash flows or provided in a separate schedule, with the statement reporting only the net cash flow from operating activities. If the reconciliation is presented in the statement of cash flows, all adjustments to net income to determine net cash flow from operating activities shall be clearly identified as reconciling items.

16. Items which do not relate to the ordinary activities of an enterprise are often presented in the income statement separately from income from the ordinary activities. This practice improves the usefulness of the financial statements. For similar reasons such items are presented separately in the statement of cash flows either individually or as a single amount. For the purposes of this statement these items are referred to as ‘extraordinary’.

17. When extraordinary items are presented separately in a statement of cash flows they also are adjusted to the extent that they do not involve a movement of cash and cash equivalents in the current period.

18. Investing activities include making and collecting loans and acquiring and disposing of debt or equity, and fixed assets and other productive assets, that is, assets held for or used in the production of goods or services by the enterprise.

Cash flows used in investing activities include:

(a) Loans made by the enterprise and payments to acquire debt Instruments of other entities;

(b) Share acquisition in other enterprises;

(c) Purchase of fixed assets or other productive assets.

 

19. Financing activities include resources from owners or shareholders such as the proceeds of share issues, the payments of dividends or other distributions to owners, proceeds and repayment of long-term borrowings, and proceeds and repayment of bond issues.

20. To achieve the objective of the statement of cash flows, it is necessary to disclose separately the investment and financing aspects of each type of transaction. For example, the proceeds on disposal of long-term assets.

21. Generally, both investing cash inflows and outflows and financing cash inflows and outflows shall be reported separately in a statement of cash flows - for example, outlays for acquisitions, proceeds of sale of property, plant, and equipment; proceeds of borrowings shall be reported separately from repayment of debt, and proceeds from issuing stock shall be reported separately from outlays to re-acquire the enterprise’s stock.

22. Information about all investing and financing activities of an enterprise during a period that affect recognized assets or liabilities but that do not result in cash receipts or cash payments in the period shall be reported in related disclosures. Those disclosures may be either narrative or summarized in a schedule, and they shall clearly relate to the cash and non-cash aspects of transactions involving similar items. Examples of non-cash investing and financing transactions are converting debt to equity, acquiring assets by assuming directly related liabilities, such as purchasing a building by incurring a mortgage to the seller; obtaining an asset by entering into a hire purchase arrangement, and exchanging non-cash assets or liabilities for other non-cash assets or liabilities. Some transactions are part cash and part non-cash; only the cash portion shall be reported in the statement of cash flows.

23. A statement of cash flows of an enterprise with foreign currency transactions or foreign operations shall report the reporting currency equivalent of foreign currency cash flows using the exchange rates at the time of the cash flows. An approximately weighted average rate for the period may be used for translation if the result is substantially the same as if the rates at the dates of the cash flows were used.

24. The statement of cash flows should reflect the reporting currency equivalent of cash receipts and payments that occur in a foreign currency. The statement shall report the effect of exchange rate changes on cash balances held in foreign currencies as a separate part of the reconciliation of the change in cash and cash equivalents during the period.

25. Exchange rate changes do not themselves give rise to cash flows, and their effects on items other than cash thus have no place in a statement of cash flows.

26. If a consolidated balance sheet and a consolidated income statement are presented, a statement of cash flows shall also be presented on a consolidated basis.

27. In the statement of cash flows the amounts included in cash flows from or used in operations as a result of an investment in an investee company using the equity method of accounting should be restricted to the dividends received or currently receivable. This is based on the view that the unremitted earnings of such an investee company do not represent current resources available to the investor. Under this method the adjustments described in paragraph 12 include the portion of the income from the investee company that does not involve a movement of funds.

28. The acquisition or disposal of subsidiaries may be presented in the consolidated statement of cash flows as a single amount. Alternatively, the amounts of the individual assets and liabilities acquired or disposed of may be included with the separate net cash flow of each asset and liability dealt with in the statement.

29. Under both methods of presenting the acquisition or disposal of subsidiaries the following supplementary information is presented either in the statement of cash flow, or by way of note:

30. The indirect method of reporting net cash flow from operating activities is the preferred form of presentation.

31. When a net change in working capital is presented as a single amount in the statement of cash flows, additional disclosure regarding changes in individual working capital items is often presented.

Standard Accounting Practice 3.22 comprises paragraphs 32 to 38 of this statement. The Standard should be read in the context of paragraphs 1 to 31 of this statement and of the preface to the Statement of Standard Accounting Practice 3.1.

32. A statement of cash flows for a period shall report net cash provided or used by operating, investing, and financing activities and the net effect of those flows on cash and cash equivalents during the period in a manner that reconciles beginning and ending cash and cash equivalents.

33. The indirect method of presentation should be used in reconciling net income to net cash flow from operating activities.

34. A statement of cash flows shall be included as an integral part of the financial statements of a business enterprise. The statement of cash flows shall be presented for each period for which the income statement is presented, and where turnover is $500,000 or more.

35. Cash flows from the operating of an enterprise shall be presented in the statement of cash flows separately from the cash flows provided or used in investing and financing activities. Extraordinary items which are not part of the ordinary activities of the enterprise should be separately disclosed in the statements.

36. The effect of foreign currency rate changes on cash balances should be separately reported in the reconciliation of change in cash and cash equivalents during the period.

37. If a consolidated balance sheet and consolidated income statement are presented, a consolidated statement of cash flows shall also be presented.

Year ended December 31, 1990

Cash Flows from operating activities:

                                                                                                 $
Net income                                                                                                760,000
Adjustments to reconcile net income to net
    cash provided by operating activities:

Depreciation and amortization                                                          445,000
Provision for losses on accounts receivable                                      200,000
Gain on sale of fixed assets                                                             ( 80,000)
Undistributed earnings of associates                                                ( 25.000)

                                                                                                             1,300,000

(Increase)/decrease in current assets
    (net of effects from purchase of Ruthven Limited)
    Accounts receivable                                                                   ( 215,000)   
    Inventories                                                                                   205,000
    Prepaid expenses                                                                        ( 25,000)

lncrease/(decrease) in current liabilities
    (net of effects from purchase of.Ruthven Limited)
    Accounts payable and accrued liabilities                                      ( 250,000)
    Interest and income taxes payable                                                   50,000
    Deferred taxes                                                                              150,000
    Other liabilities                                                                                50,000

Net cash provided by operating activities                                        1,265,000

Cash flows from investing activities:

Proceeds from sale of fixed assets                                                   600,000
Payment received on note from sale of plant                                    150,000
Purchasing of fixed assets                                                          (1,000,000)
Payment for purchasing of Ruthven Limited, net of
cash acquired                                                                              ( 925,000)

Net cash used in investing activities                                            (1.175.000)

Cash flows from financing activities

Net borrowings under line-of-credit agreement                               300,000
Proceeds from issuance of long-term debt                                      400,000
Proceeds from issuance of common shares                                     500,000
Dividends paid                                                                           ( 200 000)

Net cash provided by financing activities                                               1,000.000
Net increase in cash and cash equivalents                                              1,090,000
Cash and cash equivalents at beginning of year                                          600 000
Cash and cash equivalents at end of year                                             $1,690,000

STATEMENT OF CASH FLOWS

Year ended December 31, 1990

                                                                                                                       1990     1989

Cash Flows from operating activities   

Net income                                                                                 626,000     230,400

Adjustments to reconcile income for year to net cash

provided by operating activities:

Depreciation and amortization                                           167,800     153,500

Gain on sale of fixed assets                                                (10,000)     (2,000)

Net realized gains on sale of quoted stocks                          (5,000)     (3,000)

Foreign currency loss                                                           25,000    20,000

                                                                                                          804,400     398,900

(Increase)/decrease in current assets

Inventories                                                                       (9,400)        3,600

Trade accounts receivables                                             (15,500)     (12,400)

Other accounts receivable and prepaid expenses             (13,200)    (12,500)

Increase/(decrease) in current liabilities                                   

Trade accounts payables                                                    28,300       8,500

Other accounts payable and accrued liabilities                 (10,500)     (3,200)

Notes payable                                                                      -          50,000

Taxation payable                                                               12,500     10,500

 

Net cash provided by operations                                             796,600   443,400

Cash flows from investing activities:

Cash flows from financing activities

          Net cash provided by financing activities                                550,000    800,000

Net increase in cash and cash equivalents                                     1,246,600     993,400

Cash and cash equivalents at beginning of year                               550,000    (443,400)

Cash and cash equivalents at end of year                                    $1,796,600    550,000

This illustrates a statement of cash flows for a company without subsidiaries. The illustration is intended as an example only and may provide detailed information in excess of that required for a meaningful presentation.

• Supplemental schedule of non-cash investing and financing activities;
  

The company purchased all of the equity shares of Ruthven Limited for $500,000.
In conjunction with the acquisition, liabilities were assumed as follows:
    Fair value of assets acquired             $1,580,000
    Cash paid for capital stock               $   (950,000)
    Liabilities assumed                            $    630,000