Cash receipts in respect of sales proceeds in respect of sales of property plant and equipment and sales or redemptions of financial assets,
Cash receipts in respect of interest income earned and dividends received from investments in financial assets.
Operating activities
Definition: The activities of the entity that are not investing or financing activities.
Cash receipts and cash payments resulting from operations, items included in here are:
cash payments of salaries and wages, Financing activities
cash receipts from trade receivables/customers, government (related) bodies (employee sickness reimbursements) and other operating income (insurance claims),
cash payments to trade payable/suppliers, government (related) bodies (wage taxes, social securities, corporate income tax) and in respect of other operating expenses (rent, auditor, tax advisers etcetera), Financing activities
cash payments to third party financiers in respect of interest paid on debt loans, Financing activities
Note: Revaluations of property plant and equipment and FX translation differences (other than a reconciliation of change in cash and cash equivalents from average/transaction rates to balance sheet dates) are not included in the statement of cash flows because there is no cash flow related to such items.
Note: In the acquisition of new financial assets/subsidiaries cash and cash equivalents in subsidiaries are netted into the cash payment to acquire subsidiaries and the cash receipts in respect of sales of subsidiaries. Financing activities
Why IAS 7?
The statement of cash flows shows the ability of any company to generate cash. Financing activities
Many investors explore the statement of cash flows right after looking to the net profit figure, because they sometimes feel that the profit could be manipulated by some non-cash transactions, such as recording provisions as a just sufficient level or at a very prudent level, fair value adjustments, etc.
However, cash is cash and the statement of cash flows not only shows you how much cash the company generated over the year, but also from which source the cash was generated:
Did the company increase their sales/margins/lower costs (as evidenced in the Statement of profit or loss) and increase the generation of cash in-flows by operating activities (a potential structural improvement)?
Dis the company increase the generation of cash in-flows from operating activities by improving working capital management (a mostly short-term (one, two-time improvement)?
Did the company sell some of its non-current assets (productive property resulting in lower capacity for manufacturing, abandoned property put-out-of production, investment property or investments in equity or debt instruments and generated cash by investing activities?
Or did the company take new loans and obtain cash inflows by financing activities?
So, looking to where the cash was generated and spent is as important as assessing the state of affairs and condition of a reporting entity.
This ratio, which is expressed as a percentage of a company’s net operating cash flow to its net sales, or revenue (from the income statement), tells us how many dollars of cash are generated for every dollar of sales. Financing activities
There is no exact percentage to look for, but the higher the percentage, the better. It should also be noted that industry and company ratios will vary widely. Investors should track this indicator’s performance historically to detect significant variances from the company’s average cash flow/sales relationship along with how the company’s ratio compares to its peers. It is also essential to monitor how cash flow increases as sales increase since it’s important that they move at a similar rate over time.
Free Cash Flow
Free cash flow (FCF) is often defined as the net operating cash flow minus capital expenditures. Free cash flow is an important measurement since it shows how efficient a company is at generating cash. Investors use free cash flow to measure whether a company might have enough cash, after funding operations and capital expenditures, to pay investors through dividends and share buybacks.
To calculate FCF from the cash flow statement, find the item cash flow from operations—also referred to as “operating cash” or “net cash from operating activities”—and subtract capital expenditures required for current operations from it. Financing activities
Example Statement of cash flows
Here is the 2019 layout of an IFRS consolidated statement of cash flows with links to the IFRS standards paragraphs and some explanations to consider.
1. Cash is cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to insignificant risk of changes in value. Investments normally only qualify as cash equivalent if they have a short maturity of three months or less from the date of acquisition. Financial instruments can only be included if they are in substance cash equivalents, e.g. debt investments with fixed redemption dates that are acquired within three months of their maturity.
Expenditure on unrecognised assets to be classified as operating cash flows
2. Cash flows can only be classified as arising from investing activities if they result in the recognition of an asset in the balance sheet. Examples of expenditure that should be classified as operating cash flows on this basis are:
3. Cash inflows and outflows must generally be reported gross unless they relate to:
cash receipts and payments on behalf of customers which reflect the activities of the customer rather than the entity, or
items in which the turnover is quick, the amounts are large, and the maturities are short. Financial institutions may also report certain cash flows on a net basis.
4. IAS 7 does not specify how to classify cash flows from interest paid and interest and dividends received. IFRS Reporting Entity Corp. has chosen to present interest paid and interest received on financial assets held for cash management purposes as operating cash flows, but dividends and interest received on other financial assets as investing cash flows because they are returns on the group’s investments. Dividends paid are classified in this publication as financing cash flows, because they are a cost of obtaining financial resources. However, they could also be classified as operating cash flows, to assist users in determining the ability of an entity to pay dividends out of operating cash flows.
5. Cash flows arising from income taxes must be separately disclosed and are classified as operating cash flows unless they can be specifically identified with financing or investing activities.
6. Cash flows relating to leases must be presented as follows:
cash payments for the principal portion of the lease liabilities as cash flows from financing activities
cash payments for the interest portion consistent with presentation of interest payments chosen by the group, and
short-term lease payments, payments for leases of low-value assets and variable lease payments that are not included in the measurement of the lease liabilities as cash flows from operating activities.
7. Entities must disclose separately the net cash flows attributable to each of operating, investing and financing activities of discontinued operations. There are different ways of presenting this information, but the underlying principle is that the cash flow statement must give the cash flows for the total entity, including both continuing and discontinued operations. Entities might comply with the disclosure requirements in the following ways:
No presentation of cash flows from discontinued operations on the face of the cash flow statement (that is, gross cash flows are presented), with a breakdown between the three categories presented in the notes. This is the presentation chosen by IFRS Reporting Entity Corp., see note 15.
Cash flows from discontinued operations are split between the three relevant categories on the face of the cash flow statement, with one line being included within each category including the relevant results from discontinued operation. A total is presented for each category.
Information is presented separately for continuing and discontinued operations on a line-by-line basis, on the face of the cash flow statement. A total is presented for each category.
Acquisition of retail store furniture and fittings from lessor as lease incentive (note 8(a))
–
950
Non-cash investing and financing activities disclosed in other notes are:
Acquisition of right-of-use assets – note 8(b)
partial settlement of a business combination through the issue of shares – note 14
deferred settlement of part proceeds of the sale of the engineering division – note 15
dividends satisfied by the issue of shares under the dividend reinvestment plan – note 13(b), and
options and shares issued to employees under the IFRS Reporting Entity Corp. Employee Option Plan and employee share scheme for no cash consideration – note 21.
Financing activities
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