In the instance of when non-cash assets such as non-current assets decreases, this would happen if for example the business sell their equipment non-current asset. When the business sells their asset, the buyer will provide the business with cash cash inflow in exchange for purchasing the equipment.
On the other hand, cash decreases when liabilities decrease, equity decrease and non-cash assets increase. For example, if a business pays back the loan that it borrows from the bank, there will be a cash outflow decrease from the business to the bank to settle the loan obligation i.
This is similar in the case of when equity decreases. For example, if a business buy backs its shares, there is a cash outflow from the business to the shareholders for the purchase of shares by the business. In the instance of when non-cash assets such as non-current assets increases, this would happen if for example the business buys new equipment non-current asset.
When the business buys the equipment, there is a cash outflow from the business to the seller of the asset for the purchase of the equipment by the business. Another way of thinking of cash flows is to ask what is happening to CASH? Is cash coming into the business cash receipts or going out of the business cash payments?
Cash Inflows increases include cash receipts from: — Customers who purchased inventory on credit Accounts Receivable — Sale of Property, Plant and Equipment PPE — Issuance of shares or bonds — Borrowing money in the form of a loan Cash Outflows decreases include cash payments for: Purchase of inventory Payment to employees for their services Purchase of Property, Plant and Equipment PPE Repayment of loans or bonds Buy-back of shares Payment of cash dividends So that the statement of cash flows is as informative as possible, the cash flow statement groups and reports the cash inflows and outflows outlines above in three distinct activities: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities.
Cash Flows from Operating Activities Cash flows from operating activities arise from the activities a business uses to produce net income — i. For example, operating cash flows include cash sources from sales and cash used to purchase inventory and to pay for operating expenses such as salaries and utilities. Operating cash flows also include cash flows from rent paid, interest revenue, interest expense, and tax paid.
Operating cash flows are reported first on the statement of cash flows. This is followed by cash flows from investing activities. They can usually be identified from changes in the property, plant and equipment PPE or Fixed Assets section of the balance sheet.
Some examples of investing cash flows are payments for the purchase of land, buildings, equipment, and other investment assets and cash receipts from the sale of land, buildings, equipment, and other investment assets. After reporting on investing cash flows, cash flows from financing activities are reported. Cash Flows from Financing Activities Cash flows from financing activities are cash transactions related to the business raising money from debt or shares, or repaying that debt — i.
Embedded leases of laptops for its employees as part of an IT service arrangement. The company applies the low-value lease exemption to the laptop leases. Question: How are the various lease payments classified in the statement of cash flows?
Interpretive response: Following the adoption of AASB 16, there are flow on impacts to the classification of lease payments in the statement of cash flows. However, variable lease payments, amounts paid for low-value leases and short-term leases that are not capitalised as part of lease liability are included in cash outflows of operating activities.
CRYPTOCURRENCY REPRANDING EVENT
Cash and Cash Equivalents 7. Cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes. For an investment to qualify as a cash equivalent it must be readily convertible to a known amount of cash and be subject to an insignificant risk of changes in value.
Therefore, an investment normally qualifies as a cash equivalent only when it has a short maturity of, say, three months or less from the date of acquisition. Equity investments are excluded from cash equivalents unless they are, in substance, cash equivalents, for example in the case of preferred shares acquired within a short period of their maturity and with a specified redemption date.
Bank borrowings are generally considered to be financing activities. In these circumstances, bank overdrafts are included as a component of cash and cash equivalents. A characteristic of such banking arrangements is that the bank balance often fluctuates from being positive to overdrawn. Cash flows exclude movements between items that constitute cash or cash equivalents because these components are part of the cash management of an entity rather than part of its operating, investing and financing activities.
Cash management includes the investment of excess cash in cash equivalents. Presentation of a Cash Flow Statement The cash flow statement shall report cash flows during the period classified by operating, investing and financing activities.
An entity presents its cash flows from operating, investing and financing activities in a manner which is most appropriate to its business. Classification by activity provides information that allows users to assess the impact of those activities on the financial position of the entity and the amount of its cash and cash equivalents.
This information may also be used to evaluate the relationships among those activities. A single transaction may include cash flows that are classified differently. For example, when the cash repayment of a loan includes both interest and capital, the interest element may be classified as an operating activity and the capital element is classified as a financing activity. Operating Activities The amount of cash flows arising from operating activities is a key indicator of the extent to which the operations of the entity have generated sufficient cash flows to repay loans, maintain the operating capability of the entity, pay dividends and make new investments without recourse to external sources of financing.
Information about the specific components of historical operating cash flows is useful, in conjunction with other information, in forecasting future operating cash flows. Cash flows from operating activities are primarily derived from the principal revenue-producing activities of the entity.
Therefore, they generally result from the transactions and other events that enter into the determination of profit or loss. Examples of cash flows from operating activities are: a cash receipts from the sale of goods and the rendering of services; b cash receipts from royalties, fees, commissions and other revenue; c cash payments to suppliers for goods and services; d cash payments to and on behalf of employees; e cash receipts and cash payments of an insurance entity for premiums and claims, annuities and other policy benefits; f cash payments or refunds of income taxes unless they can be specifically identified with financing and investing activities; and g cash receipts and payments from contracts held for dealing or trading purposes.
Some transactions, such as the sale of an item of plant, may give rise to a gain or loss which is included in the determination of profit or loss. However, the cash flows relating to such transactions are cash flows from investing activities.
An entity may hold securities and loans for dealing or trading purposes, in which case they are similar to inventory acquired specifically for resale. Therefore, cash flows arising from the purchase and sale of dealing or trading securities are classified as operating activities. Similarly, cash advances and loans made by financial institutions are usually classified as operating activities since they relate to the main revenue-producing activity of that entity.
Investing Activities The separate disclosure of cash flows arising from investing activities is important because the cash flows represent the extent to which expenditures have been made for resources intended to generate future income and cash flows. Examples of cash flows arising from investing activities are: a cash payments to acquire property, plant and equipment, intangibles and other long-term assets.
When a contract is accounted for as a hedge of an identifiable position, the cash flows of the contract are classified in the same manner as the cash flows of the position being hedged. Financing Activities The separate disclosure of cash flows arising from financing activities is important because it is useful in predicting claims on future cash flows by providers of capital to the entity. Reporting Cash Flows from Operating Activities An entity shall report cash flows from operating activities using: a the direct method, whereby major classes of gross cash receipts and gross cash payments are disclosed.
Under the direct method, information about major classes of gross cash receipts and gross cash payments may be obtained either: a from the accounting records of the entity; or b by adjusting sales, cost of sales interest and similar income and interest expense and similar charges for a financial institution and other items in the income statement for: i changes during the period in inventories and operating receivables and payables; ii other non-cash items; and iii other items for which the cash effects are investing or financing cash flows.
An entity shall report separately major classes of gross cash receipts and gross cash payments arising from investing and financing activities, except to the extent that cash flows described in paragraphs 22 and 24 are reported on a net basis. Reporting Cash Flows on a Net Basis Cash flows arising from the following operating, investing or financing activities may be reported on a net basis: a cash receipts and payments on behalf of customers when the cash flows reflect the activities of the customer rather than those of the entity; and b cash receipts and payments for items in which the turnover is quick, the amounts are large, and the maturities are short.
Examples of cash receipts and payments referred to in paragraph 22 a are: a the acceptance and repayment of demand deposits of a bank; b funds held for customers by an investment entity; and c rents collected on behalf of, and paid over to, the owners of properties. Examples of cash receipts and payments referred to in paragraph 22 b are advances made for, and the repayment of: a principal amounts relating to credit card customers; b the purchase and sale of investments; and c other short-term borrowings, for example, those which have a maturity period of three months or less.
Cash flows arising from each of the following activities of a financial institution may be reported on a net basis: a cash receipts and payments for the acceptance and repayment of deposits with a fixed maturity date; b the placement of deposits with and withdrawal of deposits from other financial institutions; and c cash advances and loans made to customers and the repayment of those advances and loans.
Foreign Currency Cash Flows The cash flows of a foreign subsidiary shall be translated at the exchange rates between the functional currency and the foreign currency at the dates of the cash flows. This permits the use of an exchange rate that approximates the actual rate. For example, a weighted average exchange rate for a period may be used for recording foreign currency transactions or the translation of the cash flows of a foreign subsidiary.
However, AASB does not permit use of the exchange rate at the reporting date when translating the cash flows of a foreign subsidiary. Unrealised gains and losses arising from changes in foreign currency exchange rates are not cash flows.
However, the effect of exchange rate changes on cash and cash equivalents held or due in a foreign currency is reported in the cash flow statement in order to reconcile cash and cash equivalents at the beginning and the end of the period.
This amount is presented separately from cash flows from operating, investing and financing activities and includes the differences, if any, had those cash flows been reported at end of period exchange rates. Cash flows from interest and dividends received and paid shall each be disclosed separately. Each shall be classified in a consistent manner from period to period as either operating, investing or financing activities. The total amount of interest paid during a period is disclosed in the cash flow statement whether it has been recognised as an expense in the income statement or capitalised in accordance with the allowed alternative treatment in AASB Borrowing Costs.
Interest paid and interest and dividends received are usually classified as operating cash flows for a financial institution. However, there is no consensus on the classification of these cash flows for other entities. Interest paid and interest and dividends received may be classified as operating cash flows because they enter into the determination of net profit or loss. Alternatively, interest paid and interest and dividends received may be classified as financing cash flows and investing cash flows respectively, because they are costs of obtaining financial resources or returns on investments.
Dividends paid shall be classified as a financing cash flow because they are a cost of obtaining financial resources. Taxes on Income The cash receipts from rents and subsequent sales of such assets are also cash flows from operating activities. Therefore, cash flows arising from the purchase and sale of dealing or trading securities are classified as operating activities.
Similarly, cash advances and loans made by financial institutions are usually classified as operating activities since they relate to the main revenue-producing activity of that entity. Investing Activities 16 The separate disclosure of cash flows arising from investing activities is important because the cash flows represent the extent to which expenditures have been made for resources intended to generate future income and cash flows.
Only expenditures that result in a recognised asset in the statement of financial position are eligible for classification as investing activities. Examples of cash flows arising from investing activities are: a cash payments to acquire property, plant and equipment, intangibles and other long-term assets. When a contract is accounted for as a hedge of an identifiable position, the cash flows of the contract are classified in the same manner as the cash flows of the position being hedged.
Financing Activities 17 The separate disclosure of cash flows arising from financing activities is important because it is useful in predicting claims on future cash flows by providers of capital to the entity. The direct method provides information which may be useful in estimating future cash flows and which is not available under the indirect method. Alternatively, the net cash flow from operating activities may be presented under the indirect method by showing the revenues and expenses disclosed in the statement of comprehensive income and the changes during the period in inventories and operating receivables and payables.
Reporting Cash Flows from Investing and Financing Activities 21 An entity shall report separately major classes of gross cash receipts and gross cash payments arising from investing and financing activities, except to the extent that cash flows described in paragraphs 22 and 24 are reported on a net basis. Reporting Cash Flows on a Net Basis 22 Cash flows arising from the following operating, investing or financing activities may be reported on a net basis: a cash receipts and payments on behalf of customers when the cash flows reflect the activities of the customer rather than those of the entity; and b cash receipts and payments for items in which the turnover is quick, the amounts are large, and the maturities are short.
Examples of cash receipts and payments referred to in paragraph 22 b are advances made for, and the repayment of: a principal amounts relating to credit card customers; b the purchase and sale of investments; and c other short-term borrowings, for example, those which have a maturity period of three months or less.
This permits the use of an exchange rate that approximates the actual rate. For example, a weighted average exchange rate for a period may be used for recording foreign currency transactions or the translation of the cash flows of a foreign subsidiary. However, AASB does not permit use of the exchange rate at the end of the reporting period when translating the cash flows of a foreign subsidiary. However, the effect of exchange rate changes on cash and cash equivalents held or due in a foreign currency is reported in the statement of cash flows in order to reconcile cash and cash equivalents at the beginning and the end of the period.
This amount is presented separately from cash flows from operating, investing and financing activities and includes the differences, if any, had those cash flows been reported at end of period exchange rates. Each shall be classified in a consistent manner from period to period as either operating, investing or financing activities.
However, there is no consensus on the classification of these cash flows for other entities. Interest paid and interest and dividends received may be classified as operating cash flows because they enter into the determination of net profit or loss. Alternatively, interest paid and interest and dividends received may be classified as financing cash flows and investing cash flows respectively, because they are costs of obtaining financial resources or returns on investments. Alternatively, dividends paid may be classified as a component of cash flows from operating activities in order to assist users to determine the ability of an entity to pay dividends out of operating cash flows.
Taxes on Income 35 Cash flows arising from taxes on income shall be separately disclosed and shall be classified as cash flows from operating activities unless they can be specifically identified with financing and investing activities.
While tax expense may be readily identifiable with investing or financing activities, the related tax cash flows are often impracticable to identify and may arise in a different period from the cash flows of the underlying transaction. Therefore, taxes paid are usually classified as cash flows from operating activities. However, when it is practicable to identify the tax cash flow with an individual transaction that gives rise to cash flows that are classified as investing or financing activities the tax cash flow is classified as an investing or financing activity as appropriate.
When tax cash flows are allocated over more than one class of activity, the total amount of taxes paid is disclosed. Investments in Subsidiaries, Associates and Joint Ventures 37 When accounting for an investment in an associate or a subsidiary accounted for by use of the equity or cost method, an investor restricts its reporting in the statement of cash flows to the cash flows between itself and the investee, for example, to dividends and advances.
An entity which reports such an interest using the equity method includes in its statement of cash flows the cash flows in respect of its investments in the jointly controlled entity, and distributions and other payments or receipts between it and the jointly controlled entity.
Changes in Ownership Interests in Subsidiaries and Other Businesses 39 The aggregate cash flows arising from obtaining or losing control of subsidiaries or other businesses shall be presented separately and classified as investing activities. The cash flow effects of losing control are not deducted from those of obtaining control. Accordingly, the resulting cash flows are classified in the same way as other transactions with owners described in paragraph Non-cash Transactions 43 Investing and financing transactions that do not require the use of cash or cash equivalents shall be excluded from a statement of cash flows.
Such transactions shall be disclosed elsewhere in the financial statements in a way that provides all the relevant information about these investing and financing activities. The exclusion of non-cash transactions from the statement of cash flows is consistent with the objective of a statement of cash flows as these items do not involve cash flows in the current period. Examples of non-cash transactions are: a the acquisition of assets either by assuming directly related liabilities or by means of a finance lease; b the acquisition of an entity by means of an equity issue; and c the conversion of debt to equity.
Components of Cash and Cash Equivalents 45 An entity shall disclose the components of cash and cash equivalents and shall present a reconciliation of the amounts in its statement of cash flows with the equivalent items reported in the statement of financial position. Other Disclosures 48 An entity shall disclose, together with a commentary by management, the amount of significant cash and cash equivalent balances held by the entity that are not available for use by the group.
Examples include cash and cash equivalent balances held by a subsidiary that operates in a country where exchange controls or other legal restrictions apply when the balances are not available for general use by the parent or other subsidiaries. Disclosure of this information, together with a commentary by management, is encouraged and may include: a the amount of undrawn borrowing facilities that may be available for future operating activities and to settle capital commitments, indicating any restrictions on the use of these facilities; b the aggregate amounts of the cash flows from each of operating, investing and financing activities related to interests in joint ventures reported using proportionate consolidation; c the aggregate amount of cash flows that represent increases in operating capacity separately from those cash flows that are required to maintain operating capacity; and d the amount of the cash flows arising from the operating, investing and financing activities of each reportable segment see AASB 8 Operating Segments.
An entity that does not invest adequately in the maintenance of its operating capacity may be prejudicing future profitability for the sake of current liquidity and distributions to owners. The amendments and additions to this Standard shall be applied retrospectively. An entity shall apply that amendment for annual reporting periods beginning on or after 1 January Earlier application is permitted. If an entity applies the amendment for an earlier period it shall disclose that fact and apply paragraph 68A of AASB
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