Statement of Cash Flows

Objective A-C: Profit vs. Cash Flow

Profit and cash flow are different concepts. A business can be profitable but cash-poor (or vice versa) because:

• Depreciation reduces profit but is not a cash outflow
• Credit sales increase profit but cash is not received until later
• Credit purchases increase cost of sales but cash is not paid until later
• Capital expenditure reduces cash but is not an immediate expense (it's capitalised)
• Loan repayments reduce cash but are not expenses

Management must control cash flow because a business that runs out of cash cannot pay its employees, suppliers, or lenders — even if it is profitable on paper. Cash flow management involves forecasting, monitoring, and optimising the timing of cash inflows and outflows.

Objective D-G: The Statement of Cash Flows

IAS 7 requires the statement of cash flows to classify cash flows into three categories:

Operating Activities

Cash flows from the entity's principal revenue-generating activities. Calculated using the indirect method:

Profit before tax X
Adjustments for:
Depreciation/amortisation X
Loss on disposal (or deduct gain) X/(X)
Finance costs X
Investment income (X)
Working capital changes:
Increase in inventories (X)
Increase in receivables (X)
Increase in payables X
---
Cash generated from operations X
Interest paid (X)
Tax paid (X)
---
Net cash from operating activities X

Investing Activities

Cash flows from acquiring and disposing of long-term assets:

• Purchase of PPE (outflow)
• Proceeds from sale of PPE (inflow)
• Purchase of investments (outflow)

Financing Activities

Cash flows from changes in equity and borrowings:

• Proceeds from share issues (inflow)
• Loan proceeds (inflow)
• Loan repayments (outflow)
• Dividends paid (outflow)