Article u use
https://www.theguardian.com/australia-news/2020/sep/30/flight-centre-announces-another-91-australian-stores-will-close-as-coronavirus-ravages-businessCompany use
flights CentersomeTitle i i “c17StatementOfCashFlows_print” — 2019/9/30 — 20:52 — page 634 — #1 i i i i i i CHAPTER 17 Statement of cash flows CHAPTER AIM Ultimately, all existing and potential investors, lenders and other creditors would like to obtain cash from their investment. Consequently, information about an entity’s receipts and payments is of fundamental importance to users of financial statements. The statement of cash flows provides this information by reporting cash inflows and outflows classified into operating, investing and financing activities, and the net movement in cash and cash equivalents during the period. This chapter explains how to present a statement of cash flows in accordance with AASB 107/IAS 7 Statement of Cash Flows and demonstrates the techniques, including worksheets, that can be used to prepare a statement of cash flows for entities with complex transactions. LEARNING OBJECTIVES After studying this chapter, you should be able to: 17.1 explain the purpose of a statement of cash flows 17.2 define cash and cash equivalents 17.3 classify cash inflows and outflows into operating, investing and financing activities 17.4 contrast the direct and indirect methods of presenting cash flows from operating activities 17.5 prepare a statement of cash flows 17.6 prepare other disclosures required or encouraged by AASB 107/IAS 7. CONCEPTS FOR REVIEW Before studying this chapter, you should understand and, if necessary, revise: • accrual accounting • asset revaluations • tax-effect accounting • the statement of profit or loss and other comprehensive income • the statement of financial position. Pdf_Folio:634 © John Wiley & Sons Australia, Ltd. Not for resale or distribution. Any unauthorised distribution or use will result in legal action. Loftus, Janice. Financial Reporting, 3rd Edition, Wiley, 2019. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/vu/detail.action?docID=5986314. Created from vu on 2020-09-21 07:31:24. C op yr ig ht © 2 01 9. W ile y. A ll rig ht s re se rv ed . i i “c17StatementOfCashFlows_print” — 2019/9/30 — 20:52 — page 635 — #2 i i i i i i 17.1 Purpose of a statement of cash flows LEARNING OBJECTIVE 17.1 Explain the purpose of a statement of cash flows. The overall purpose of a statement of cash flows is to present information about the changes in cash and cash equivalents of an entity during the period, classified by operating, investing and financing activities. The statement of cash flows can assist investors, creditors and other users of financial statements to evaluate: • the entity’s ability to generate cash and cash equivalents • the entity’s ability to affect the amount, timing and certainty of generating future cash flows • the entity’s need to utilise cash and cash equivalents. The classification of cash flows as arising from operating activities, investment activities and finance activities is useful in analysing the movement in cash and cash equivalents during the period. In the long term, the entity’s ability to generate cash flows from operating activities in order to finance investment and pay dividends is critical to its survival. When an entity borrows money to finance investments in its operating capacity, it needs to generate sufficient cash flows from its operations to service its debt (i.e. interest and repayments) and pay dividends to its shareholders. Users of financial statements can compare cash generated from operating activities with expected cash outflows for loan repayments, dividends and planned investments. When used in conjunction with other financial statements, information about cash flows assists users of financial statements to: • predict future cash flows • evaluate an entity’s financial structure (including liquidity) and its ability to meet its obligations and to pay dividends • understand the reasons for the difference between profit or loss for a period and the net cash flow from operating activities (the reasons for the differences are often helpful in evaluating the quality of earnings of an entity) • compare the operating performance of different entities (because net operating cash flows reported in the statement of cash flows are unaffected by different accounting choices and judgements under accrual accounting used in determining the profit or loss of an entity) • develop models to assess and compare the present value of the expected future cash flows of different entities. LEARNING CHECK The statement of cash flows reports on changes in cash and cash equivalents, classified as arising from: – operating activities – investing activities – financing activities. The statement can be used to assess: – the ability of an entity to generate cash and cash equivalents – the entity’s need to utilise cash and cash equivalents – the entity’s ability to affect the timing, amount and certainty of future cash flows. 17.2 Defining cash and cash equivalents LEARNING OBJECTIVE 17.2 Define cash and cash equivalents. Cash and cash equivalents are defined in paragraph 6 of AASB 107/IAS 7 as follows. Cash comprises 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 an insignificant risk of changes in value. Paragraph 7 ofAASB107/IAS 7 explains that cash equivalents are held for the purpose ofmeeting short- term cash commitments, and not for investment or other purposes. Cash equivalents must be convertible into a known amount of cash. This means the amount of cash that will be received must be known at the time of the initial investment. Since a cash-equivalent investment must by definition be readily convertible Pdf_Folio:635 CHAPTER 17 Statement of cash flows 635 © John Wiley & Sons Australia, Ltd. Not for resale or distribution. Any unauthorised distribution or use will result in legal action. Loftus, Janice. Financial Reporting, 3rd Edition, Wiley, 2019. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/vu/detail.action?docID=5986314. Created from vu on 2020-09-21 07:31:24. C op yr ig ht © 2 01 9. W ile y. A ll rig ht s re se rv ed . i i “c17StatementOfCashFlows_print” — 2019/9/30 — 20:52 — page 636 — #3 i i i i i i to cash and have an insignificant risk of changing in value, an investment will qualify as a cash equivalent only if it has a short maturity (usually three months or less). Examples of cash and cash equivalents include: • cash on hand • cash at bank • short-term money market securities • 90-day term deposits. Equity investments typically do not qualify as cash equivalents, but it is necessary to consider their substance; equity instruments such as preference shares acquired shortly before their specified maturity date may fall within the definition of cash equivalents. Bank borrowings are ordinarily classified as a financing activity, except for bank overdrafts that are repayable on demand and which form an integral part of an entity’s cash management. Such overdrafts may fluctuate from being overdrawn to being positive. In Australia, bank overdrafts are often included as a component of cash and cash equivalents. Thus, the amount of cash and cash equivalents reported in the statement of cash flowsmay differ from ‘cash and short-term deposits’ reported in the statement of financial position because cash and cash equivalents may include a bank overdraft, which would be reported as a liability in the statement of financial position. This is illustrated in figure 17.1 in the reconciliation between cash and cash equivalents reported in the statement of cash flows and related items reported in the statement of financial position. FIGURE 17.1 Composition of cash and cash equivalents 2021 2020 $’000 $’000 Cash and short-term deposits 4 500 4900 Bank overdraft (1 200) (1 100) Cash assets 3 300 3800 The definitions of cash and cash equivalents used in AASB 107/IAS 7 are summarised in figure 17.2. FIGURE 17.2 Concepts of cash and cash equivalents used in AASB 107/IAS 7 Form Conditions Examples Cash Cash on hand Notes and coins Demand deposits Call deposits held at financial institutions Cash equivalents Short-term, highly liquid investments Readily convertible into known amounts of cash and subject to an insignificant risk of change in value Bank bills Non-bank bills Deposits on short-term money market, such as 7-day deposits Bank overdraft Repayable on demand and form an integral part of an entity’s cash management Cheque account that is in overdraft The statement of cash flows reports on changes in aggregate cash and cash equivalents. Therefore, movements between items classified as cash and cash equivalents, such as a transfer from cash at bank to a 90-day term deposit, are not reported in the statement of cash flows. LEARNING CHECK The statement of cash flows reports on movements in cash and cash equivalents. Cash equivalents are short-term highly liquid investments that are readily convertible into known amounts of cash, and which are subject to an insignificant risk of changes in value. Bank overdrafts are considered part of cash and cash equivalents if the overdrafts are repayable on demand and form an integral part of the entity’s cash management function. Pdf_Folio:636 636 Financial reporting © John Wiley & Sons Australia, Ltd. Not for resale or distribution. Any unauthorised distribution or use will result in legal action. Loftus, Janice. Financial Reporting, 3rd Edition, Wiley, 2019. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/vu/detail.action?docID=5986314. Created from vu on 2020-09-21 07:31:24. C op yr ig ht © 2 01 9. W ile y. A ll rig ht s re se rv ed . i i “c17StatementOfCashFlows_print” — 2019/9/30 — 20:52 — page 637 — #4 i i i i i i 17.3 Classifying cash flow activities LEARNING OBJECTIVE 17.3 Classify cash inflows and outflows into operating, investing and financing activities. Cash flow activities reported in the statement of cash flows are classified into operating activities, investing activities and financing activities. Paragraph 6 of AASB 107/IAS 7 defines these activities as follows. Operating activities are the principal revenue-producing activities of the entity and other activities that are not investing or financing activities. Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Financing activities are activities that result in changes in the size and composition of the contributed equity and borrowings of the entity. Only expenditures that result in a recognised asset in the statement of financial position are eligible for classification as investing activities. For example, Green Ltd incurs expenditure of $50 000 on research for a carbon-neutral air conditioner. Expenditure incurred in the research phase must be recognised as an expense in accordance with AASB 138/IAS 38 Intangible Assets. Accordingly, the cash paid in relation to the research project is not classified as an investing cash flow because it has not resulted in the recognition of an asset in the statement of financial position of Green Ltd. Note that the operating activities category is a default category because it includes all activities that are not classified as either investing activities or financing activities. Figure 17.3 provides a summary of the typical cash receipts and payments of an entity, classified by activity. FIGURE 17.3 Typical cash receipts and payments classified by activity Cash inflows Cash outflows Operating activ- ities