Accounting is 7 slides project

Editor's Notes

• #3: IAS 7 Statement of Cash Flows requires an entity to present a statement of cash flows as an integral part of its primary financial statements. Cash flows are classified and presented into operating activities (either using the 'direct' or 'indirect' method), investing activities or financing activities, with the latter two categories generally presented on a gross basis.     IAS 7 was reissued in December 1992, retitled in September 2007, and is operative for financial statements covering periods beginning on or after 1 January 1994.
• #4: The preparation of the statements of cash flow refers to the inflow & outflow of cash of an organization. An organization has various types of activities by which the inflow & outflow of cash occurs. The activities are mainly consisting operating, investing & the financing activities of a firm. The firm pays to several parties & also receipts from various sources. Here, I have tried to determine the main source of activities receipts & payments for which the cash is disbursed or received. The payment & also receipt occurred through cash are the main concern of the study. The accounting standard IAS 7 requires reporting entities to present information about historical changes in cash and cash equivalents through cash flow statements.
• #5: The preparation, presentation & also the disclosure of the significant accounting rules & also the policies are obligatory for every firm to maintain in the financial statements. The cash flow statements is one of the five mandatory parts of financial statements that is must for all types of firms to prepare by following the guidelines referred into the IAS (International Accounting Standards). Cash Flow statement is also needed to prepare by following International Accounting Standards – 7. Each & every firm must need to prepare the cash flow statements to show the amounts of cash inflow & outflow in the organizations. The three parts of the cash flow statements represent the amount of the cash flow from operating, investing & financing activities of the concerned firm. Here my objective is to determine the process of the preparation the statement of cash flow, presentation of the information in relation to the transactions & also the disclosure of such information as per the International Accounting Standards (IAS) – 7 that contains the cash flow statements matter. The statement of cash flows is THE ONLY statement ignoring an accrual basis and based on a CASH basis. All other financial statements follow an accrual principle and it means that we have lots of non-cash transactions in our financial statements that we need to eliminate for cash flows. Exactly the process of eliminating non-cash transactions and showing pure cash movements may give you headaches because the numbers sometimes do not balance. But before I’ll show you perfectly clean starting point for your cash flow preparations, let’s dive a bit deeper into the standard IAS 7 Statement of cash flows and see how IFRS want us to present cash.
• #6: Here, the investment with short maturity (up to 3 months) would qualify for cash equivalent – for example, state treasury note. However, most shares and other equity instruments are excluded from cash equivalents. Please note that the movements between cash and cash equivalents is a part of cash management and are not shown in the operating, financing or investing part of the statement of cash flows. So if your company buys the state treasury bill with short maturity date, then this movement is not shown (it appears as the cash and cash equivalents have not moved at all).
• #7: In financial accounting, a cash flow statement, also known as statement of cash flows or funds flow statement, is an integral part of financial statement that shows how changes in balance sheet accounts and income statements items affect cash and cash equivalents and breaks the analysis down to operating, investing, and financing activities. Essentially, the cash flow statement is concerned with the flow of cash in and cash out of the business. The statement captures both the current operating results through Income statement and the accompanying changes in the balance sheet. As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay short term liabilities & bills. International Accounting Standard 7 (IAS 7) is the International Accounting Standard that deals with the preparation, presentation & disclosure of the relevant information of the cash flow statements. Every company must have to prepare the cash flow statement by following the IAS-7.
• #8: The cash flow statement is needed to prepare to show the cash inflow &outflow in an organization occurred through the operating, investing & financing activities. The cash flow statement, previously known as the flow of Cash statement, reflects a firm’s liquidity to pay the short term obligations. The balance sheet is a snapshot of a firm’s financial resources and obligations at a single point of time, and the income statement summarizes a firm’s financial transactions over an interval of time. These two financial statements reflect the accrual basis accounting used by firms to match revenues with the expenses associated with generating those revenues. The cash flow statement includes only inflows and outflows of cash and cash equivalents; it excludes transactions that do not directly affect cash receipts and payments & the non-cash items such as depreciation, amortization & depletion of fixed assets of both tangibles & intangibles & write-offs on bad debts or credit losses to name a few. The cash flow statement is a cash basis report on three types of financial activities: operating activities, investing activities, and financing activities. Non-cash activities are usually reported in footnotes.
• #9: Cash flow statements include the cash related activities of the entity that is affiliated to the operation, investment & finance. These three kinds of cash flow statement activities are correlated to each other. They usually depend on and affect each other. The cash flow forecast should take this into account, and offer a complete picture of where cash will come from and how it will be used for the period being forecast.  The relationships between the different cash flow activities may depend on the nature of the business, size of the entity, capacity to perform, stages of development of the business, and general economic conditions, or conditions within the market or industry in which the business operates.
• #10: However, operating activities generally result from profit making activities and the examples are: Cash receipts from the sale of goods and the rendering of services; Cash receipts from royalties, fees, commissions and other revenue; Cash payments to suppliers for goods and services; Cash payments to and on behalf of employees; Cash receipts and cash payments of an insurance entity for premiums and claims, annuities and other policy benefits; Cash payments or refunds of income taxes unless they can be specifically identified with financing and investing activities; and cash receipts and payments from contracts held for dealing or trading purposes.
• #11: Examples of cash flows classified in investing activities are: Cash payments to acquire property, plant and equipment, intangibles and other long-term assets (including capitalized development costs and self-constructed PPE); Cash receipts from sales of PPE, intangibles and other long-term assets; Cash payments to acquire and cash receipts from sales of equity or debt instruments of other entities and interests in joint ventures (but not for trading or dealing purposes); Cash advances and loans made to other parties, and cash receipts from their repayment (other than advances and loans made by a financial institution – these would go to operating part); Cash payments for and cash receipts from various derivative contracts except when the contracts are held for dealing or trading purposes, or the payments are classified as financing activities.
• #12: Examples of cash flows arising from financing activities are: Cash proceeds from issuing shares or other equity instruments; Cash payments to owners to acquire or redeem the entity’s shares; Cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short-term or long-term borrowings; Cash repayments of amounts borrowed; and Cash payments by a lessee for the reduction of the outstanding liability relating to a finance lease.
• #13: A statement of cash flow can be benefited in various ways for the form. It includes all the cash related transaction of the firm both inflow to firm & outflow from the firm.  It shows the amount of receipts & payments in the organization under the different headings of activity. We can gather an idea about the overall situations of cash movements in & out of the firm that helps us to predict the future cash flow & can help to allocate budget for different sources of activities.  Cash flow statement, a mandatory one for every firm to maintain, when used in conjunction with the rest of the financial statements, provides information that enables users to evaluate the changes in net assets of an entity, its financial structure (including its liquidity and solvency) and its ability to affect the amounts and timing of cash flows in order to adapt to changing circumstances and opportunities. Cash flow information is useful in assessing the ability of the entity to generate cash and cash equivalents and enables users to develop models to assume and compare the present value of the future cash flows of different entities. It also enhances the comparability of the reporting of operating efficiency by different entities because it reduces the effects of using different accounting treatments for the same transactions and events.
• #14: Survival in business depends on the ability to generate cash. Many businessmen quote ‘Cash is King’ and it is hard to disagree. Cash flow accounting directs attention towards this critical issue. Cash flow is more comprehensive than ‘profit’ which is dependent on accounting conventions and concepts. Creditors (long and short-term) are more interested in an entity’s ability to repay them than in its profitability. Whereas ‘profits’ might indicate that cash is likely to be available, cash flow accounting is more direct with its message. Cash flow reporting can provide a better means of comparing the results of different companies than traditional profit reporting. Cash flow reporting satisfies the needs of all users better; For management, it provides the sort of information on which decisions should be taken: (in management accounting, ‘relevant costs’ to a decision are future cash flows); traditional profit accounting does not help with this type of decision-making. For shareholders, and auditors, cash flow accounting can provide a satisfactory basis for stewardship accounting. As described previously, the information needs of creditors and employees will be better serviced by cash flow accounting. Cash flow forecasts are easier to prepare, as well as more useful, than profit forecasts. They can in some respects be audited more easily than accounts based on the accruals concept. The accruals concept is confusing and cash flows are more easily understood by non-accountants. Cash flow accounting should be both retrospective and include a forecast for the future. This is of great informational value to all users of accounting information. Forecasts can subsequently be monitored by the publication of various statements which compare actual cash flows against the forecast.
• #15: The preparation of the cash flow statement is very much important in financial reporting. Cash flow statement is one of the integral parts of the financial statement. The cash flow statement is also prepared for a specific purpose as like as the statement of financial position, statement of changes in owner’s equity. Each statement has the unique goal of preparation. By following the cash flow statement the firm can use its cash effectively. The inward & outward can be known & also the movement can be predicted form the cash flow statement. The amount of receipts & payments of the cash from each of activity including operating, investing & financing can be assessed. The ability to meet the current obligation is from the liquidity can be measured. So the statement of cash flow plays a viable rule in the financial statement reporting.  
• #16: In every business organization the preparation of the cash flow statement plays a vital role for the as it refers to determine the movements of cash for various purpose. Cash as the most liquid asset of an entity is needed to maintain as best possible way. Excess cash kept in hand causes the increase in interest cost & also security problem. On the other hand lack of cash in hand can lead a firm disastrous conditions as it cannot pay its short term obligations that hampers the reputation of the entity. By maintaining a separate account for cash items we can easily use it in best possible way. The cash flow statement can help to do that in a compatible way
• #17: Cash flow statement preparation is the purpose of determining the cash movements of the entity from & to the entity as the cash is the most liquid asset of the entity. It relates only to the cash basis accounting. It does not consider the noncash items as it can be the most viable activities of the entity. Such as the issuance of bonus share, issuance of share to obtain the long term asset of the entity are the transactions that has no impact on the cash balance but it has an impact on the business operation. So cash flow statement does not cover a large part of the organizations activity. After all it plays a viable rule for an entity accounting procedure.