Examples of investing activities in the statement of cash flows
Operating activities — the indirect method and direct method There are two different ways of starting the cash flow statement, as IAS 7, Statement of Cash Flows permits using either the 'direct' or 'indirect' method for operating activities. The direct method is intuitive as it means the statement of cash flow starts with the source of operating cash flows.
This is the cash receipts from customers. The operating cash out flows are payments for wages, to suppliers and for other operating expenses which are deducted. Finally the payments for interest and tax are deducted. Alternatively, the indirect method starts with profit before tax rather than a cash receipt. The profit before tax is then reconciled to the cash that it has generated.
This means that the figures at the start of the cash flow statement are not cash flows at all. In that initial reconciliation the profit before tax is adjusted for expenses that have been charged against profit that are not cash out flows; for example depreciation and losses on disposal of non-current assets, have to be added back, and non-cash income; for example, investment income and profits on disposal of non-current assets are deducted. The changes in inventory, trade receivables and trade payables working capital do not impact on the measurement profit but these changes will have impacted on cash and so further adjustments are made.
For example, an increase in the levels of inventory and receivables will have not impacted on profit before tax but will have had an adverse impact on the cash flow of the business. Thus, in the reconciliation process, the increases in inventory and trade receivables are deducted from profit before tax. Conversely, decreases in inventory and trade receivables are added back to the profit before tax.
The opposite is applicable for trade payables. Finally, the payments for interest and tax are presented — usually as a further deduction. For example, cash generated from the sale of goods revenue and cash paid for merchandise expense are operating activities because revenues and expenses are included in net income. Investing activities A section of the statement of cash flows that includes cash activities related to noncurrent assets, such as cash receipts from the sale of equipment and cash payments for the purchase of long-term investments.
Noncurrent assets include 1 long-term investments; 2 property, plant, and equipment; and 3 the principal amount of loans made to other entities. For example, cash generated from the sale of land and cash paid for an investment in another company are included in this category. Note that interest received from loans is included in operating activities.
Note that interest paid on long-term debt is included in operating activities. Figure Likewise, payments of cash for interest on loans with a bank or on bonds issued are also included in operating activities because these items also relate to net income. Question: Which section of the statement of cash flows is regarded by most financial experts to be most important?
Answer: The operating activities section of the statement of cash flows is generally regarded as the most important section since it provides cash flow information related to the daily operations of the business. The operating activities section allows stakeholders to assess the ongoing viability of the company. We discuss how to use cash flow information to evaluate organizations later in the chapter. Business in Action A review of the statements of cash flows for both companies reveals the following cash activity.
Positive amounts are cash inflows, and negative amounts are cash outflows. Amounts are in millions. It is interesting to note both companies spent significant amounts of cash to acquire property and equipment and long-term investments as reflected in the negative investing activities amounts. For both companies, a significant amount of cash outflows from financing activities were for the repurchase of common stock.
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Cash Flows: Investing ActivitiesFIBONACCI FOREX PDF
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