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CASH FLOW STATEMENT

IAS 7 and GAS 4 require all enterprises to publish cash flow statement showing how cash

inflows have been generated and how they have been spent.

The objective of IAS 7 and GAS 4 is to ensure that enterprises provide information about the

historical changes in cash and cash equivalents by means of cash flow statement whichclassifies cash flows during the period between those arising from Operating, Investing and

Financing activities.

DEFINITIONS:

CASH:

It comprises of cash on hand and demand deposits.

CASH EQUIVALENTS:

They are short term, highly liquid investments that are convertible to known amounts of cash

and which are subject to insignificant risk of changes in value. Cash equivalents normally haveshort term maturity say three months or less from the date of acquisition.

INVESTING ACTIVITIES:

They are the acquisition and disposal of long-term assets and other investments not included in

the cash equivalents. It consists of all cash receipts and payment in the receipt and acquisition

of fixed assets, investment and interests received from loans as well as dividend received on

investment.

FINANCING ACTIVITIES:

They are the activities that result in changes in the size and composition of equity capital and

borrowing of an enterprise. Bank borrowings are generally considered to be financing activity.

However, if bank overdrafts are payable on demand then it should form an integral part of an

enterprises cash management. In this case the bank overdraft are included as a component of

cash and cash equivalent. It includes:

Cash paid:

1. amount borrowed

2. on to redeem a company shares and

3. cash paid on finance lease.

Cash received:

1. issue of debenture, other long term loan, overdraft not included in cash and cashequivalent.

2. shares and other equity investments

ADVANTAGE OF CASH FLOW

Cash flow cannot easily be manipulated and it is not affected by judgements.

Cash flow in conjunction with the balance sheet provides information on liquidity,

liquidity, viability and adaptability

It gives an indication of the relationship between profitability and cash generating ability

and thus the quality of profit earned.

LIMITATIONS OF CASH FLOW

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It is based on historical information and therefore do not provide complete information for

assessing future cash flows.

There is some scope of manipulation of cash flow. For example a business may delay

paying suppliers until after the year end or it may structure transactions so as to show a

favourable cash balance.

FORMAT:

CASH FLOW STATEMENT FOR THE YEAR ENDED 31ST DECEMBER, 2008

GH GH

Operating activities:

Net profit before interests, taxation and extra ordinary items 100

Add depreciation 200

300

Add: Decrease in trade receivables (subtract increases) 100

Increase in trade payables (subtract decreases) 200

Decrease in stocks/inventories (subtract increases) 300

Cash generated from trading activities before interest and tax 900

Less: Interest paid 100

Tax paid 200

Cash generated from trading activities after interest and tax 600

Investing Activities:

Add cash from sale of an investing Activity (e.g. fixed Asset) 100

Subtract cash paid on the purchase of an investing an investing activity (200)

Add Dividend / Interest received 300Net Cash flow from investing Activity 200

Financing Activities:

Less Dividend paid (100)

Add Proceeds from sale of Shares/Debenture 300

Less Payment of finance lease liability/ repayment of loan (400)

Cash paid on redemption of shares (100)

Net Cash flow from Financing Activity (300)

Net increase in Cash and Cash equivalence 500