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Chapter
5 /
Cash Flow Statements (lAS 7)
41
assets and liabilities are used to convert the accrual basis net income (loss) for the year to arrive at
cash flows from operating activities.
Case Study 4
Facts
Excellent Inc. has pro vided the fo llowing informatio n an d re que sts you to pre pare the ope rati ng
ac tivi ties of the cash flow statement under the ind irect method :
Net income before taxes
Depreciation on property. plant. and equipment
Loss on sale of building
Interest expense
Interest payab le, beginn ing of the year
Interest payable, end of the year
Income taxes paid
Accounts receivable, begin ning of the year
Accounts receivable, end of the year
Inventory, beginning of the year
Inventory, end of the year
Accounts payable , beginn ing of the year
Account s payable, end of the year
$400,000
200,000
100,000
150,000
100,000
50,000
100,000
500,000
850,000
500,000
400,000
200,000
500,000
Required
Please prepare th e ope rati ng ac tivi ties sectio n of th e cash flo w stateme nt using th e ind irect method.
Solution
$600 000
200,000
100,000
~
850,000
(350,000)
100,000
300000
900,000
(200000)
(100 000)
$400,000
Increase io accounts receivab le
Decrease in inventories
Increase in acco unts payable
Cash generated from operations
Interest paid
Income taxes paid
Net cash flows from operating activi ties
Cas h Flow Sta tement- Ind irect Method (Opera ting Activities Section)
Cash fl ows from operating activities:
Net income before income taxes
Adjustments for:
Depreciat ion
00
property, plant, and equipment
Loss on sale of building
Interest expense
12. REPORTING CASH FLOWS ON A GROSS BASIS VERSUS A NET BASIS
12.1 Financial Institutions
lAS 7 permit s financial institutions to report cash flows arising from certain activities' on a net ba–
sis. These activities, and the related conditions under which net report ing would be acceptable, are
set out below:
(a) Cash receipts and payments on behalf of customers when the cash flows reflect the activi–
ties of the customers rather than those of the bank; for example, the acceptance and repay–
ment of demand deposits
(b) Cash flows relating to deposits with fixed maturity dates
(c) Placements and withdrawals of deposits from other financial institutions
(d) Cash advances and loans to bank custome rs and repayments thereon
12.2 Entities other than Financial Institutions
In case of cash flows of entities other than financial institutions, the preference is clearly for the
"gross" cash receipt s and cash payment s. This way the cash inflows and cash outflows are each
separately presented instead of being presented as net amounts. Doing this gives the users of finan–
cial statements more meaningful information. To understand this better, let us look at an example:
Report ing the net change in long-term loans payable would not reveal the cash inflows and the cash
outflows relating to the loans and may obscure the true financ ing activities of the entity. Thus,