muhammad zubair plz give ur coments about this.

1. Measuring cash flows
Prepared by:
Muhammad zubair
Roll# 7170
GOVERNMENT COLLEGE UNIVERSITY FAISALABAD
BANKING & FINANCE

2. History & variation
 Prior to 1988, the financial statement showing the sources and uses liquid resources
was called a “Statement of Changes in Financial Position”. Informally, this
statement was often termed as “Funds Statement”. Some companies prepared
funds statement showing the sources and uses of cash. Other companies however,
prepared funds statements showing the sources and uses of working capital or some
other type of “Liquid Resources”. As a result, “Funds Statement” or “Statement of
changes in financial position” prepared by different companies varied greatly in
content. This created difficulties for investors in comparing the Funds Statements of
different companies.
 To solve this problem the Financial Accounting Standards Board (FASB) stated that
beginning in 1988 al companies should discontinue the statement of changes in
financial position and instead prepare a “Statement of Cash Flows”.[1] The FASB
provided considerably more guidance as to the form and content of the new
statement of cash flows than it did for the old funds statement. To avoid confusion
between the old “Funds Statement” and the new statement of cash flows, the FASB
has asked companies to avoid the use of the word “Funds” in the new financial
statement. In 1992 the “International Accounting Standards Board” (IASB) issued
international accounting standard 7 (IAS 7) cash flows statements which became
effective in 1994.

[1] FASB. Statement No. 95, “Statement of Cash Flows” (Norwalk, Conn.: 1987),
Para. 34.

3. Differences between FASB & ISA 7
rules
 The Financial Accounting Standards Board (FASB) defined rules that made it
mandatory under Generally Accepted Accounting Principles (US GAAP) and (IAS 7)
rules for cash flow statements are similar, but some of the differences are:
 IAS 7 requires that the cash flow statement include changes in both cash and cash
equivalents. US GAAP permits using cash alone or cash and cash equivalents.
 IAS 7 permits bank borrowings (overdraft) in certain countries to be included in cash
equivalents rather than being considered a part of financing activities.
 IAS 7 allows interest paid to be included in operating activities or financing activities.
US GAAP requires that interest paid be included in operating activities
 US GAAP (FAS 95) requires that when the direct method is used to present the
operating activities of the cash flow statement, a supplemental schedule must also
present a cash flow statement using the indirect method. The IASC strongly
recommends the direct method but allows either method. The IASC considers the
indirect method less clear to users of financial statements. Cash flows statements are
most commonly prepared using the indirect method, which is not especially useful in
projecting future cash flows.

4. Importance:
 The official name of cash flows statement
is “Statement of Cash Flows”. It’s the third
major financial statement in accounting. It
can be prepare monthly, quarterly, half
yearly and yearly.

5. Cash flows?
 A term describing both the cash receipt
and cash payments

6. Statement of Cash Flows?
 A statement in which cash receipts and
cash payments of operating, investing and
financing activities are mentioned.

7. PURPOSE OF THE STATEMENT:
 The basic purpose of a statement of cash flows is to provide
information about the Cash Receipts and Cash Payments of a
business entity during the accounting period. A statement of cash
flows assists investors, creditors and others in assessing such
factors as:
 The company’s ability to generate positive cash flows in future
periods.
 The company’s ability to meet its obligations and to pay dividends.
 The company’s need for external financing.
 Both the cash and noncash aspects of the company’s investment
and financing transactions for the period.
 Causes of the change in the amount of cash and cash equivalents
between the beginning and at the end of the accounting period

8. Classification of Cash flows:
 Operating activities
 Investing Activities
 Financing Activities
 Effects of changes in exchange rates on
cash

9. Operating activities
 Collection from customers for sales of goods and
services
 Interest and dividends received
 Other receipts from operations
 Payments to suppliers of merchandise and
services, including payments to employees
 Payments of interest
 Payments of income taxes
 Other expenditures relating to operations

10. Investing Activities
 Cash proceeds from selling investments or
plant assets or fixed assets
 Cash proceeds from collecting principal
amounts on loans
 Payments to acquire investments or plant
assets or fixed assets
 Amounts advanced to borrowers

11. Financing Activities
 Proceeds from both short term and long
term borrowing
 Cash received from owners e.g. issuing
stocks and debentures
 Payments of amounts borrows excluding
interest payments
 Payments to owners such as cash
dividends

12. Supplementary schedule
 Companies using the direct method are
required to provide a “supplementary
schedule” illustrating the computation of
net cash flow from operating activities by
the indirect method. Therefore,
supplementary schedule is also a
compulsory part of statement of cash
flows if the company is following Direct
Method.

13. Cash and Cash Equivalents
 The “FASB” has defined “Cash” as
including both “cash and cash
equivalents”. “Cash Equivalents” are short
term highly liquid Investments, such as
money market funds, commercial paper
and treasury bills

14. Adjustments (operating activities)
• Cash received from customers
• Interest and Dividend received
• Payments for Purchases
• Cash payments for expenses

15. Cash received from customers
Net sales
Add Decrease in accounts receivable
Less Increase in accounts receivable
Net cash received from customers

16. Interest and Dividend received
Interest revenue
Add Decrease in interest receivable
Less Increase in interest receivable
Net interest received

17. Payments for Purchases
Cost of goods sold
Add increase in inventory
Less decrease in inventory
Add decrease in accounts payable
Less increase in accounts payable
Net cash payments for purchases

18. Cash payments for expenses
Expenses
Less Depreciation
Add Increase in related expense
Less Decrease in related expense
Less Increase in related liability
Add decrease in related liability
Net cash payments for expenses

19. Reporting Methods
 Direct Method
 Indirect Method

20. Direct Method
 A method of reporting net cash flows from
operating activities by listing specific types
of cash inflows and outflows. This is the
method recommended by the FASB

21. Indirect Method
 A format of reporting net cash flows from
operating activities that reconciles this
figure with the amount of net income
shown in the income statement. Both the
methods almost same, the difference is
only in calculating cash flows from
operating activities

22. Format (indirect method) for
operating activities
NET INCOME
Add depreciation, amortization of intangible and depletion
Decrease in accounts receivable
Decrease in inventories
Decrease in prepaid expenses
Increase in accounts payable
Increase in accrued exp. Payable
Increase in deferred income taxes payable
Non operating loss deducted in computing net income
Deduct
Increase in accounts receivable, inventories
Increase in prepaid expenses
Decrease in accounts P/A, accrued expenses P/A
Non cash gains included in net income
Net cash flows from operating activities
NOTE:
Remaining format same like Direct Method, therefore that is not explained.