The objective of cash flow is to require the presentation of information about cash and cash equivalent of the entity.
Cash and cash equivalent: Cash and cash equivalent are;
- Short term (where the original maturity is 3 months or less, irrespective of maturity timing post balance date)
- Highly liquid investments
- Readily convertible to known amounts of cash
- Subject to insignificant risk of changes in value
Components: The cash flow statement has three main components;
- Operating activities:
Revenue producing activities of the entity is operating activities.
- Investing activities:
Activities that related to acquisition and disposal of long term assets and other activities that is not included in cash and cash equivalent.
- Financing activities:
Activities that cause changes to contributed equity and borrowings of the entity.
Cash flow from operating activities can be calculated from both methods;
- Direct Method:
Whereby major classes of gross cash receipts and gross cash payments are disclosed
- Indirect Method:
Where profit or loss is adjusted with
- working capital changed
- non-cash items and
- items associated with investing or financing activities