F7 Statement of Cash Flows

The primary purpose of a statement of cash flows is to provide relevant information about the cash receipts and cash disbursements of an enterprise during an accounting period.

The direct method reconciles net income in a separate disclosure.

When the indirect method is used, a supplemental disclosure of cash paid for interest and income taxes is required.

Conversion of debt to equity should be disclosed as supplemental information.

Cash and cash equivalent do not affect the statement of cash flows because only the form of cash held changes.

Current Asset (Operating) + Long-Term Assets (Investing) = Current Liabilities (Operating) + Long-Term Liabilities (Financing) + Equity (Financing)

The cash effects of transactions that enter into the determination of net income are included in operating activities. Bond amortization and interest expenses are part of operating activities. Dividends received are reported as operating cash inflow. Contra-assets are treated like liabilities (direct relationship).

The cash effects of acquiring and disposing of investments and property, plant, and equipment are included in investing activities. The cash effects of transactions involving making and collecting loans are included in investing activities. Investing activities includes cash flows from held-to-maturity and available-for-sale security transactions. Cash proceeds from sale of investments are investing activities. Cash paid to purchase common stock is an investing activity. Capital expenditures are reported in investing activities.

Cash effects of transactions obtaining resources from owners and providing them with a return on their investment are included in financing activities. Dividends paid is reported in financing activities. Capital lease payments are reported in financing activities. Purchase of treasury stock is a financing activity. Issuance of common stock is a financing activity.

Under IFRS, interest (and dividends) received may be reported in either operating cash flow or in investing cash flow. Interest paid may be reported in either operating cash flow or in financing cash flow. Under IFRS, dividends paid may be reported in either operating cash flow or in financing cash flow. Under U.S. GAAP, interest (and dividends) received must be reported in operating cash flow because interest (and dividend) income is reported on the income statement. Interest paid must be reported only in operating cash flow because interest expense is reported on the income statement. Under U.S. GAAP, dividends paid must be reported in financing cash flow because dividends are paid on equity and are not reported on the income statement.