Cash Flow Statements
What the exam tests
This domain tests preparation and interpretation of a statement of cash flows under IAS 7, including operating, investing and financing activities and reconciliation of cash and cash equivalents.
Core rules
- Classify cash flows by activity, not by account name. Operating flows arise from primary revenue-producing activities; investing flows from non-current assets and investments; financing flows from equity and borrowings.
- Use the indirect method for operating cash flow: start with profit before tax, add back non-cash expenses such as depreciation, adjust for gains/losses on disposal, then adjust for working-capital changes and tax paid.
- Interest paid and dividends paid are usually financing; interest received is usually investing, but consistency and disclosure matter.
- Cash equivalents are short-term, highly liquid investments subject to insignificant risk of change in value.
Worked example
Profit before tax N500,000; depreciation N100,000; increase in receivables N80,000; increase in payables N50,000; tax paid N120,000; purchase of PPE N300,000; issue of shares N200,000; dividends paid N60,000. Operating cash flow = 500,000 + 100,000 - 80,000 + 50,000 - 120,000 = N450,000. Investing = -N300,000. Financing = 200,000 - 60,000 = N140,000. Net increase = 450,000 - 300,000 + 140,000 = N290,000.
Traps
Do not add depreciation as a cash inflow; add it back because it was deducted in profit. Do not use tax expense instead of tax paid. An increase in receivables reduces cash; an increase in payables increases cash. Do not classify asset purchases as operating.