IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

Chapter 5 / Cash Flow Statements (lAS 7)

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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

$400,000 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

200,000 100,000 ~ 850,000 (350,000) 100,000 300000 900,000 (200000) (100 000)

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

$600 000

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,