Textbook Notes (378,588)
CA (167,186)
UTSG (10,973)
Rotman Commerce (1,015)
RSM220H1 (54)
Xin Baohua (17)
Chapter

CPA Summary notes.docx

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Department
Rotman Commerce
Course Code
RSM220H1
Professor
Xin Baohua

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CPA Summary Notes
Statement of Cash Flow
Objective of IAS 7
The objective of IAS 7 is to require the presentation of information about the historical changes in cash and
cash equivalents of an entity by means of a statement of cash flows, which classifies cash flows during the
period according to operating, investing, and financing activities
.
Fundamental principle in IAS 7
All entities that prepare financial statements in conformity with IFRSs are required to present a statement of
cash flows. [IAS 7.1]
The statement of cash flows analyses changes in cash and cash equivalents during a period. Cash and cash
equivalents comprise cash on hand and demand deposits, together with short-term, highly liquid
investments that are readily convertible to a known amount of cash, and that are subject to an insignificant
risk of changes in value. Guidance notes indicate that an investment normally meets the definition of a cash
equivalent when it has a maturity of three months or less from the date of acquisition. Equity investments
are normally excluded, unless they are in substance a cash equivalent (e.g. preferred shares acquired within
three months of their specified redemption date). Bank overdrafts which are repayable on demand and
which form an integral part of an entity's cash management are also included as a component of cash and
cash equivalents. [IAS 7.7-8]
Presentation of the Statement of Cash Flows
Cash flows must be analysed between operating, investing and financing activities. [IAS 7.10]
Key principles specified by IAS 7 for the preparation of a statement of cash flows are as follows:
operating activities are the main revenue-producing activities of the entity that are not investing or
financing activities, so operating cash flows include cash received from customers and cash paid to
suppliers and employees [IAS 7.14]
investing activities are the acquisition and disposal of long-term assets and other investments that are not
considered to be cash equivalents [IAS 7.6]
financing activities are activities that alter the equity capital and borrowing structure of the entity [IAS
7.6]
interest and dividends received and paid may be classified as operating, investing, or financing cash flows,
provided that they are classified consistently from period to period [IAS 7.31]
cash flows arising from taxes on income are normally classified as operating, unless they can be
specifically identified with financing or investing activities [IAS 7.35]
for operating cash flows, the direct method of presentation is encouraged, but the indirect method is
acceptable [IAS 7.18] The direct method shows each major class of gross cash receipts and gross cash
payments. The operating cash flows section of the statement of cash flows under the direct method would
appear something like this:
Cash receipts from customers xx,xxx
Cash paid to suppliers xx,xxx
Cash paid to employees xx,xxx
Cash paid for other operating expenses xx,xxx
Interest paid xx,xxx
Income taxes paid xx,xxx
Net cash from operating activities xx,xxx
The indirect methodadjusts accrual basis net profit or loss for the effects of non-cash transactions. The
operating cash flows section of the statement of cash flows under the indirect method would appear
something like this:
Profit before interest and income taxes xx,xxx
Add back depreciation xx,xxx
Add back amortisation of goodwill xx,xxx
Increase in receivables xx,xxx
Decrease in inventories xx,xxx
Increase in trade payables xx,xxx
Interest expense xx,xxx
Less Interest accrued but not yet paid xx,xxx
Interest paid xx,xxx
Income taxes paid xx,xxx
Net cash from operating activities xx,xxx
the exchange rate used for translation of transactions denominated in a foreign currency should be the rate
in effect at the date of the cash flows [IAS 7.25]
cash flows of foreign subsidiaries should be translated at the exchange rates prevailing when the cash flows
took place [IAS 7.26]
as regards the cash flows of associates and joint ventures, where the equity method is used, the statement of
cash flows should report only cash flows between the investor and the investee; where proportionate
consolidation is used, the cash flow statement should include the venturer's share of the cash flows of the
investee [IAS 7.37-38]
aggregate cash flows relating to acquisitions and disposals of subsidiaries and other business units should
be presented separately and classified as investing activities, with specified additional disclosures. [IAS
7.39] The aggregate cash paid or received as consideration should be reported net of cash and cash
equivalents acquired or disposed of [IAS 7.42]
cash flows from investing and financing activities should be reported gross by major class of cash receipts
and major class of cash payments except for the following cases, which may be reported on a net basis:
[IAS 7.22-24]
cash receipts and payments on behalf of customers (for example, receipt and repayment of demand deposits
by banks, and receipts collected on behalf of and paid over to the owner of a property)
cash receipts and payments for items in which the turnover is quick, the amounts are large, and the
maturities are short, generally less than three months (for example, charges and collections from credit card
customers, and purchase and sale of investments)
cash receipts and payments relating to deposits by financial institutions
cash advances and loans made to customers and repayments thereof
investing and financing transactions which do not require the use of cash should be excluded from the
statement of cash flows, but they should be separately disclosed elsewhere in the financial statements [IAS
7.43]
the components of cash and cash equivalents should be disclosed, and a reconciliation presented to amounts
reported in the statement of financial position [IAS 7.45]
the amount of cash and cash equivalents held by the entity that is not available for use by the group should
be disclosed, together with a commentary by management [IAS 7.48]
Provisions, Contingent Liabilities and Contingent Assets
Objective
The objective of IAS 37 is to ensure that appropriate recognition criteria and measurement bases are
applied to provisions, contingent liabilities and contingent assets and that sufficient information is disclosed
in the notes to the financial statements to enable users to understand their nature, timing and amount. The
key principle established by the Standard is that a provision should be recognized only when there is a
liability i.e. a present obligation resulting from past events. The Standard thus aims to ensure that only
genuine obligations are dealt with in the financial statements – planned future expenditure, even where
authorised by the board of directors or equivalent governing body, is excluded from recognition.
Scope
IAS 37 excludes obligations and contingencies arising from: [IAS 37.1-6]
financial instruments that are in the scope of IAS 39 Financial Instruments: Recognition and Measurement

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Description
CPASummaryNotesStatementofCashFlowObjectiveofIAS7TheobjectiveofIAS7istorequirethepresentationofinformationaboutthehistoricalchangesincashandcashequivalentsofanentitybymeansofastatementofcashflowswhichclassifiescashflowsduringtheperiodaccordingtooperatinginvestingandfinancingactivitiesFundamentalprincipleinIAS7AllentitiesthatpreparefinancialstatementsinconformitywithIFRSsarerequiredtopresentastatementofcashflowsIAS71ThestatementofcashflowsanalyseschangesincashandcashequivalentsduringaperiodCashandcashequivalentscomprisecashonhandanddemanddepositstogetherwithshorttermhighlyliquidinvestmentsthatarereadilyconvertibletoaknownamountofcashandthataresubjecttoaninsignificantriskofchangesinvalueGuidancenotesindicatethataninvestmentnormallymeetsthedefinitionofacashequivalentwhenithasamaturityofthreemonthsorlessfromthedateofacquisitionEquityinvestmentsarenormallyexcludedunlesstheyareinsubstanceacashequivalentegpreferredsharesacquiredwithinthreemonthsoftheirspecifiedredemptiondateBankoverdraftswhicharerepayableondemandandwhichformanintegralpartofanentityscashmanagementarealsoincludedasacomponentofcashandcashequivalentsIAS778PresentationoftheStatementofCashFlowsCashflowsmustbeanalysedbetweenoperatinginvestingandfinancingactivitiesIAS710KeyprinciplesspecifiedbyIAS7forthepreparationofastatementofcashflowsareasfollowsoperatingactivitiesarethemainrevenueproducingactivitiesoftheentitythatarenotinvestingorfinancingactivitiessooperatingcashflowsincludecashreceivedfromcustomersandcashpaidtosuppliersandemployeesIAS714investingactivitiesaretheacquisitionanddisposaloflongtermassetsandotherinvestmentsthatarenotconsideredtobecashequivalentsIAS76financingactivitiesareactivitiesthataltertheequitycapitalandborrowingstructureoftheentityIAS76interestanddividendsreceivedandpaidmaybeclassifiedasoperatinginvestingorfinancingcashflowsprovidedthattheyareclassifiedconsistentlyfromperiodtoperiodIAS731cashflowsarisingfromtaxesonincomearenormallyclassifiedasoperatingunlesstheycanbespecificallyidentifiedwithfinancingorinvestingactivitiesIAS735foroperatingcashflowsthedirectmethodofpresentationisencouragedbuttheindirectmethodisacceptableIAS718ThedirectmethodshowseachmajorclassofgrosscashreceiptsandgrosscashpaymentsTheoperatingcashflowssectionofthestatementofcashflowsunderthedirectmethodwouldappearsomethinglikethisCashreceiptsfromcustomersxxxxxCashpaidtosuppliersxxxxxCashpaidtoemployeesxxxxxCashpaidforotheroperatingexpensesxxxxxInterestpaidxxxxxIncometaxespaidxxxxxNetcashfromoperatingactivitiesxxxxxTheindirectmethodadjustsaccrualbasisnetprofitorlossfortheeffectsofnoncashtransactionsTheoperatingcashflowssectionofthestatementofcashflowsundertheindirectmethodwouldappearsomethinglikethisProfitbeforeinterestandincometaxesxxxxxAddbackdepreciationxxxxxAddbackamortisationofgoodwillxxxxxIncreaseinreceivablesxxxxxDecreaseininventoriesxxxxxIncreaseintradepayablesxxxxxInterestexpensexxxxxLessInterestaccruedbutnotyetpaidxxxxxInterestpaidxxxxxIncometaxespaidxxxxxNetcashfromoperatingactivitiesxxxxxtheexchangerateusedfortranslationoftransactionsdenominatedinaforeigncurrencyshouldbetherateineffectatthedateofthecashflowsIAS725cashflowsofforeignsubsidiariesshouldbetranslatedattheexchangeratesprevailingwhenthecashflowstookplaceIAS726asregardsthecashflowsofassociatesandjointventureswheretheequitymethodisusedthestatementofcashflowsshouldreportonlycashflowsbetweentheinvestorandtheinvesteewhereproportionateconsolidationisusedthecashflowstatementshouldincludetheventurersshareofthecashflowsoftheinvesteeIAS73738aggregatecashflowsrelatingtoacquisitionsanddisposalsofsubsidiariesandotherbusinessunitsshouldbepresentedseparatelyandclassifiedasinvestingactivitieswithspecifiedadditionaldisclosuresIAS739Theaggregatecashpaidorreceivedasconsiderationshouldbereportednetofcashandcash
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