The Statement of Cash Flows Reports

What is a use of Statement of Cash Flows Reports ?

The balance sheet is considered as a snapshot of the entity’s financial resources and obligations at a particular time. The statement of profit and loss can reflect the financial performance for the period. These two components of financial statements can be based on the accrual basis of accounting.

The statement of a cash flows can include only inflows and outflows of cash and cash equivalents; it also excludes transactions that is not affecting cash receipts and payments.

During the reporting period, the information on cash flows can be useful for assessing sources of generation and deployment of cash and cash equivalents. The statement of a cash flows can basically also be used for comparison with earlier reporting periods of the same entity and other entities for the same reporting period.

As according to the Ind AS 7, Statement of Cash Flows can prescribe principles and guidance on preparing and presenting the cash flows of an entity from operating activities, investing activities and financing activities for a reporting period.

Meaning of Statement of Cash Flows Reports

A cash flow statement, in simple words, is a statement, which provides details about how an entity generates the cash during the particular reporting period and how it is applied. While doing so, it considers the opening balances of cash and cash equivalents, by adding the cash which is generated, deduction of the cash payments and reconciles it with closing balances of cash and cash equivalents. The cash flows are classified into the following three main categories:

(a)         Cash flows from Operating Activities.

(b)         Cash flows from Investing Activities.

(c)          Cash flows from Financing Activities.

Objective of the The Statement of Cash Flows Reports

Ind AS 7 have specified the following objectives of the Statement of Cash Flows:

For providing details about any historical changes in cash and cash equivalents-

The cash flow statement aims at providing information about how the cash has been generated during the year and for what purposes it has been utilized. The information will be provided for the current year and immediate previous year.

To assess the ability for generating cash and cash equivalents-

The cash flow statement is deliberate to provide the stakeholders about the efficiency of generating cash and cash equivalents of the company. Some companies may also seems like profitable as per profit and loss accounts, but whether they have enough cash to pay their debts and creditors has to be assessed using a cash flow statement.

For understanding the timing and certainty of their generation-

The historical analysis of the cash flow statement can set the trend regarding the years in which a company could generate a fair amount of cash flows and the probability of generating it.

BENEFITS OF CASH FLOW INFORMATION

Providing information about enabling evaluation of changes in net assets and financial structure-

The cash flow statement can reconcile the cash and cash equivalents opening balances with the cash and cash equivalents closing balances, giving the reasons for the changes during the year for free cash flow. Thus, it also provides a clear picture of cash inflows and outflows that have taken place during the reporting period.

Assesses the ability to manage the cash and to make free cash flow-

The stakeholders get an idea about the source of generation of cash and how it can be used. The information can give a fair idea about the efficiency and ability of the company to generate cash. Cash flow statements can also indicate whether the company could generate sufficient cash or not.

Assessing and a comparing on the basic present value of future cash flows-

The past trends of cash flows can help the company for predicting the future cash flow. Such information can be useful while the evaluation of the projects on capital budget or valuation of shares. Thus, it can form the base for future projects and can be discounted using discounting techniques.

Compares the efficiency of different entities for free cash flow-

Accounting profits of various entities might be having different assumptions, policies and definitions. However, cash flows can be calculated by the usage of the same technique. Finally, all different assumptions across the companies will meltdown, and the entity will reach a common comparable base of cash and cash equivalents.

SCOPE Cash Flow Statement

An entity should create a statement of cash flows by following the unavoidable points of this type of Standard and should present it as an integral part for each period of the financial statements for which financial statements are presented. The Standard requires that all entities to a present a statement of cash flows in AS.

Whether it is small or big, whether it’s a manufacturing or service organization or trading concern, every organization requires cash for running its business. The cash is also required for various future investments. Cash would also be required for payment of dividends, repayment of loans as well. Thus, any organization is required to generate cash and utilizes cash continuously.

Banks and Financial institutions are also cannot be an exception to the same. Even if they are dealing with the financial product, accept deposits and give loans day in and day out, they need to generate cash profit for their organization. They needed for making investments in terms of new branches, setups etc. Thus, a statement of cash flow is equally important for Banking and Financial Institutions as well.

DEFINITIONS  or  What is cash flow ?

The following terms can be used in this Standard with some meanings which are specified:

1. Cash comprises of a demand a deposits and cash on hand.
2. Cash equivalents are considered as a short-term, highly liquid investments that are readily convertible for knowing the amounts of cash and subject to an insignificant risk of changes in value.
3. Cash flows of cash and cash equivalents are inflows and outflows.
4. The principal revenue-producing activities of the entity and other activities are operating activities that are not investing or financing activities and help in equity Multiplier .
5. Investment activities are mainly the acquisition and a disposal of a long-term assets and also other investments not mainly included in cash equivalents.
6. Financing activities result in changes in the size and composition of the contributed equity and borrowings of the entity.

CASH AND CASH EQUIVALENTS

Cash Equivalent means investments that can be realized easily in cash in a short period from the date of investing the same.

• Purpose: Cash equivalents are held to meet short-term cash commitments rather than for investment or other purposes.

 

• Known amount of cash: This means that the cash amount received on redemption should be familiar at the time of the initial investment. The instrument is not sufficient to readily convert into cash and has a determinable market value. Instead, it means that the entity is satisfied that the risk of changes in value is insignificant at the time of the initial investment. Therefore, the amount of a cash is mainly to be received on redemption is known.

 

• Liquidity and Risk: For an investment for qualifying as a cash equivalent, it must be convertible, which is ready to a known amount of cash and be subjected to an insignificant risk of changes in value. Therefore, an investment can be normally qualified as a cash equivalent only when it is having a short maturity likely three months or less from the date of acquisition.

 

• Equity investments are a excluded from a basic cash equivalents mainly unless they are, in a substance, a cash equivalents.

 

• Bank borrowings are mainly generally is to be considered to be also financing activities. However, the bank overdrafts may be an integral part of an entity’s cash management, in which case they will be included as an important component of cash and cash equivalents. The characteristics of such banking arrangements is that the bank balance often fluctuates from being positive to overdrawn. Further, it is necessary to be noted that the bank overdraft due to the issuance of cheques at the cut-off period is not a part of cash and cash equivalent.

 

• Cash Management: Cash flows exclude movements between items that constitute cash or cash equivalents because these components are part of an entity’s cash management rather than be the part of its investing, financing and operating activities. Cash management also includes the investment of excess cash in cash equivalents.

Presentation of cash flow statement indirect method cash flow.

The statement of cash flows can be required for reporting cash flows during the period which are classified by activities such as operating, investing and financing are component of indirect method cash flow.

Operating Activities:

• Cash flows from operating activities can be primarily derived from the principal revenue-production activities of the entity, i.e., from operations of the business. Therefore, in general, they are the result of the transactions and events that can enter into the determination of profit or loss.
• The amount of cash flows can be arised from several operating activities, which can be an important indication towards the extent to which the operations of the entity have generated sufficient cash flows or not. If the cash flow from various operations is positive, it will be treated as a positive indicator.
• In contrast, negative cash flow from operations will denote that company’s ability to generate revenue from its main operations is very weak. The companies in the initial stage of their business or the companies facing economic problems will generally have a negative cash flow from operations which help us to know what is free cash flow.
• Cash flow from operations is used to maintain the operating capability of the entity, pay dividends and make a new investment without recourse to external sources of financing. Therefore, it is necessary to assess how much cash is generated by the business from operations? Are they sufficient to take care of their future investment plans? Can loans be repaid in time without default from such cash flows? Is there a sufficient amount for payment of preference dividend? Is anything left for equity shareholders after making all these payments? Answers to all these questions will can be dependent on whether the entity has generated enough cash or not.

Certain Specific Issues of operating activities-

1. Profit/ Loss on Sale of Assets= Some transactions, such as the sale of an item of plant, might give rise to a gain or loss which is included in recognized profit or loss. The cash flows can be related to such transactions are cash flows from investing activities.
2. Properties built to let out= Cash payments for manufacturing or acquiring assets which are held for renting to others and subsequently held for any sale are cash flows from operational activities. The cash receipts received from rents and subsequent sales of such assets can also be the cash flows from operating activities.

Investing Activities:

Investment means a sacrifice of current resources in a view to getting more returns in the future. All entities need some amount of investment for their future survival.

Ind AS 7 states that investing activities can represent the extent to which the expenditures are has been made for resources which are intended for generating future income and cash flows. Only expenditures are those that results in a recognized asset in the balance sheet are classified as investing activities.

When a contract have been accounted for as a fence of the position which is identifiable, the contracts of cash flows can be classified in the same manner as the cash flows of the position being hedged.

Financing Activities:

During the lifetime of the entity, it needs money for long-term investments and working capital purposes. The company can raise the capital by way of equity or loans. Thus, the cash flows related to raising funds and redemption of funds will be covered under Cash flows from financing activities. The cost of capital is now also a generally is covered under the category of  Financing Activity.

Ind AS 7 states that the cash flows from financing activity can be useful for predicting claims on future cash flows by providing capital to the entity.

Recourse factoring:

The cash which is received by classifying as a financing cash inflow as the entity can continue for recognizing the receivables and the amount can be received from the factor is indeed a liability; the substance of the arrangement can be financing, as the entity can retain substantially all of the rewards and risk of the factored receivables.

 When the factor is collecting the cash, the liability and the receivables can be de-recognized. It is acceptable for this that can be disclosed as a non-cash transaction because the settlement of the liability and the factors which are receivables doesn’t result in a cash flows. The main net impact of these type of transactions which is on the part of cash flow statement that can be present on a cash inflow from financing, but from the original sale to the entity’s customer, there is no operating cash flow.

Non-recourse factoring:

Where an entity de-recognizes the factored receivables and receives cash from the factor, the cash receipt is classified as an operating cash inflow. It is because the entity has received cash in exchange for receivables that arose from its operating activities.

REPORTING CASH FLOW FROM OPERATING ACTIVITIES

• An entity should report cash flows operating activities by using either:

(a) According to the direct method, whereby major classes of gross cash receipts and gross cash payments are disclosed.

(b) According to the indirect method, whereby profit or loss can be adjusted for the effects of transactions of a nature of non-cash, any accruals or deferrals of past operating cash receipts or future operating cash receipts or various payments, and items of income or expenses which are associated with the investment or financing cash flows.

• Entities that are basically encouraged to a report of a cash flows from the operating activities that are using one of the direct method. The direct method can provide information that may be useful in estimating future cash flows, which cannot be available under the method which is indirect. Under the direct method, details about major classes of gross cash receipts and gross cash payments which can be obtained either by:

(a)               From the entity’s accounting records.

(b)              By the adjustments of the sales and the cost of sales and other items in the statement of profit and  loss for:

Changes made during the period of inventories and operating receivables and payables.

Other non-cash items.

Other items by which the cash can be effected by investing or financing cash flows.

• According to the indirect method, the net cash flow from the operating activities can be determined by the adjustments of profit or loss for the effects of:

(a) Various changes during the period in inventories and operating receivables and operating payables.

(b) Non-cash items like depreciation, provisions, deferred taxes, unrealized foreign currency gains and losses, and undistributed profits of associates.

(c) All other items by which the cash have been effected are investments or financing cash flows.

Otherwise, the net cash flow from operating activities can be presented under the indirect method by indicating the revenues and expenses disclosed in the profit and loss statement and the changes made during the period in operating receivable and inventories and payables in order to arrive net cash flow.

REPORTING FROM CASH FLOWS AND FINANCING AND INVESTING ACTIVITIES

An entity is required for reporting separately major classes of gross cash receipts and gross cash payments which have arising from investing and financing activities, except to the extent that cash flows are permitted to be reported on a net basis.

REPORTING CASH FLOWS ON A NET BASIS

If nothing is specifically mentioned, then as per Ind AS 7, the cash flows will be presented on Gross Basis. Gross basis means one of the receipts that would be mainly shown it a separately, and also the payments that will be basically shown separately.

FOREIGN CURRENCY CASH FLOWS

• Cash flows can be arised from the transaction in a foreign currency should be recorded in an entity’s functional currency by the application of the foreign currency amount the exchange rate between the foreign currency and the functional currency at the date of the cash flow.
• The cash flows of any of foreign subsidiary that should be mainly translated at exchange rates that are between the foreign currency and the functional currency at the dates of the cash flows.
• Unrealized of gains and a losses which are arising from a changes in overseas currency exchange rates are not cash flows. However, the effect of exchange rate can change the cash and cash equivalents which are held or due in a foreign currency for being reported in the statement of cash flows for reconciling the cash and cash equivalents at the beginning and the end of the period. This amount can be presented separately from cash flows from operating, investing and financing activities, and it also includes the differences, if any, had those cash flows been reported at the end of period exchange rates.

Treatment of differences in foreign exchange arising from unsettled transactions relating to operating activities-

Under the indirect method of preparation of a statement of cash flows, the differences in exchange that arise on translation at the balance sheet date, for monetary items that form part of operating activities, will require no adjustment in the reconciliation of profit to net cash flow from operating activities.