FRS 107:Indirect Format Of A Cash Flow Statement And Explanation Of Terms Used In The Cash Flow Statement

Indirect Method Cash Flow Statement

		2009
Cash flows from operating activities
Profit before taxation	3,350
Adjustments for:
Depreciation Foreign exchange loss Investment income Interest expense Increase in trade and other receivables Decrease in inventories Decrease in trade payables	450 40 (500) 400 3,740 (500) 1,050 (1,740)
Cash generated from operations	2,550
Interest paid	(270)
Income taxes paid	(900)
Net cash from operating activities		1,380
Cash flows from investing activities
Acquisition of subsidiary X net of cash acquired	(550)
Purchase of property, plant and equipment	(350)
Proceeds from sale of equipment	20
Interest received	200
Dividends received	200
Net cash used in investing activities		(480)
Cash flows from financing activities
Proceeds from issue of share capital	250
Proceeds from long-term borrowings	250
Payment of finance lease liabilities	(90)
Dividends paid	(1,200)
Net cash used in financing activities		(790)
Net increase in cash and cash equivalents		110
Cash and cash equivalents at beginning of period		120
Cash and cash equivalents at end of period		230

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Explanation of terms used in a Cash Flow Statement:

• 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.

• Cash flows are inflows and outflows of cash and cash equivalents.

Operating activities are the principal revenue-producing activities of the entity and other activities that are not investing or financing activities.

More examples of cash flows from operating activities are as follows:

• cash receipts from the sale of goods and the rendering of services;

• cash receipts from royalties, fees, commissions and other revenue;

• cash payments to suppliers for goods and services;

• cash payments to and on behalf of the employees;

• cash receipts and cash payments of an insurance entity for premiums and claims, annuities and other policy benefits;

• cash payments or refunds of income taxes unless they can be specifically identified with financing and investing activities; and

• cash receipts and payments from contracts held for dealing or trading purposes.

Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.

More examples of cash flow from investing activities:

• cash payments to acquire property, plant and equipment, intangibles and other long-term assets. These payments include those relating to capitalised development costs and self-constructed property, plant and equipment;

• cash receipts from sales of property, plant and equipment, intangibles and other long-term assets;

• cash payments to acquire equity or debt instruments of other entities and interests in joint ventures (other than payments for those instruments considered to be cash equivalents or those held for dealing or trading purposes);

• cash receipts from sales of equity or debt instruments of other entities and interests in joint ventures (other than receipts for those instruments considered to be cash equivalents and those held for dealing or trading purposes);

• cash advances and loans made to other parties (other than advances and loans made by a financial institution);

• cash receipts from the repayment of advances and loans made to other parties (other than advances and loans of a financial institution);

• cash payments for futures contracts, forward contracts, option contracts and swap contracts except when the contracts are held for dealing or trading purposes, or the payments are classified as financing activities; and

• cash receipts from futures contracts, forward contracts, option contracts and swap contracts except when the contracts are held for dealing or trading purposes, or the receipts are classified as financing activities.

Financing activities are activities that result in changes in the size and composition of the contributed equity and borrowings of the entity.

More examples of cash flow from financing actitivities are:

• cash proceeds from issuing shares or other equity instruments;

• cash payments to owners to acquire or redeem the entity’s shares;

• cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short or long-term borrowings;

• cash repayments of amounts borrowed; and

• cash payments by a lessee for the reduction of the outstanding liability relating to a finance lease.