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Lecture Framework of financial reporting - Lecture 30

The main contents of the chapter consist of the following: Statement of cash flows – IAS 7, adjustments to profit before tax, investing activities, financing activities, advantages of the statement of cash flows, limitations of the statement of cash flows,. | Revise lecture 30 1 Statement of cash flows – IAS 7 2 Statement of cash flows – IAS 7 Although IAS 7 does not prescribe a format for statements of cash flows, it does require the cash flows to be classified into: Operating activities Investing activities Financing activities 3 Adjustments to profit before tax Depreciation Depreciation is not a cash flow. Capital expenditure will be recorded under ‘investing activities’ at the time of the cash outflow. Depreciation has to be added back to reported profit in deriving cash from operating activities. 4 Adjustments to profit before tax Profit / loss on disposal on non-current asset When a non-current asset is disposed of: The cash inflow from sale is recorded under ‘investing activities’ A loss on disposal is added to profit in deriving cash from operating activities. Similarly, a profit on disposal is deducted from profit. 5 Adjustments to profit before tax Change in receivables An increase in receivables is a deduction from profit in deriving cash from operating activities. Similarly, a decrease in receivables is an addition to profit. 6 Adjustments to profit before tax Change in inventory An increase in inventory is a deduction from profit in deriving cash from operating activities. Similarly, a decrease in inventory is an addition to profit. 7 Adjustments to profit before tax Change in payables An increase in payables is an addition to profit in deriving cash from operating activities. Similarly, a decrease in payables is a deduction from profit 8 Adjustments to profit before tax Interest paid and income taxes paid The final adjustments to find cash flow from operating activities are: Deduct interest paid Deduct interest element of finance lease payments Deduct income taxes paid 9 Investing activities Investing cash flows include: Cash paid for property, plant and equipment and other non-current assets Cash received on the sale of property, plant and equipment and other non-current assets Cash paid for investments . | Revise lecture 30 1 Statement of cash flows – IAS 7 2 Statement of cash flows – IAS 7 Although IAS 7 does not prescribe a format for statements of cash flows, it does require the cash flows to be classified into: Operating activities Investing activities Financing activities 3 Adjustments to profit before tax Depreciation Depreciation is not a cash flow. Capital expenditure will be recorded under ‘investing activities’ at the time of the cash outflow. Depreciation has to be added back to reported profit in deriving cash from operating activities. 4 Adjustments to profit before tax Profit / loss on disposal on non-current asset When a non-current asset is disposed of: The cash inflow from sale is recorded under ‘investing activities’ A loss on disposal is added to profit in deriving cash from operating activities. Similarly, a profit on disposal is deducted from profit. 5 Adjustments to profit before tax Change in receivables An increase in receivables is a deduction from profit in .