Preparing the cash flow statement


Preparing the cash flow statement

 IFRS under International Accounting Standard lay down a format for the cash flow statement which identifies separately the main activities resulting in cash inflows or outflows. The standard requires that three separate categories of cash flow should normally be shown on the face of the cash flow statement. These are:

A]    Operating activities that are the net cash flows which have been generated or used for the normal operations during the period.

B]    Investing activities, which are proceeds from the sale of Non Current Assets and investments in other entities. Payments to acquire Non Current Assets and investments in other entities will also be included

C]    Financing activities, which is receipts from the issue of shares, loans and debentures. Payments to redeem shares of the company and repayments of amounts borrowed will be shown. Also included are any expenses incurred in the issue of shares, loans or debentures.

Not only does the guideline require that each of these categories be separately identified (unless there are no material cash flows to be reported under them) but also the categories must be shown on the cash flow statement in the stipulated order, Whatever classification chosen has to be applied in a consistent manner year after year. For example if ‘interest received’ is presented as a cash from investment activities in year 1, the same classification should be followed from year to year, even though standard allows ‘interest received’ to be presented as a cash flow from operating activities or as cash flow from investing activities.
Interest and dividends received and paid may be classified as operating, investing, or financing cash flows, provided that they are classified consistently from period to period. Cash flows arising from taxes on income are normally classified as operating, unless they can be specifically identified with financing or investing activities.

A single transaction may include cash flows that are classified partly as one type of activity and partly as another category. For example cash payment made toward repayment of a bank loan has two components: the repayment of principle portion of the loan, which is classified as a financing activity and payment of interest which is classified as an operating activity.

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