IAS 7 STATEMENT OF CASH FLOWS
LEARNING OBJECTIVE
I. OPERATING ACTIVITY UDNER DIRECT METHOD
II. INDIRECT METHOD
III. INVESTING ACTIVITY
IV. FINANCING ACTIVITY
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I. OPERATING ACTIVITY UDNER DIRECT METHOD
Operating activities are the principal revenue-producing activities of the business, and this is further adjusted to deduct interest paid and tax paid.
Investing activities are cash spent on on-current assets, proceeds of sale of non-current assets and income from investments.
Financing activities include the proceeds of issue of shares and long-term borrowings made or paid.
Cash is defined as cash in hand and bank current account balances, including overdrafts.
Cash equivalents are defined as current asset investments (short-term, highly liquid investments, e.g. a 30 day bond).
The gross cash flows necessary for the direct method can be derived:
(1) from the accounting records of the entity by totaling the cash receipts and payments directly, or
(2) from the opening and closing statements of financial position and statement of profit or loss for the year by constructing summary control accounts for:
– sales ( to derive cash received from customers)
– purchases ( to derive cash payments to suppliers)
– Wages ( to derive cash paid to and on behalf of employees).
Note: there are two methods for operating activities: direct and indirect method.
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