cash flow statement

Cash flows are inflows and outflows of cash and cash equivalents.  Cash comprises cash on hand and demand deposits.  Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Information about the cash flows of an entity is useful in providing users of financial statements with a basis to assess the ability of the entity to generate cash and cash equivalents and the needs of the entity to utilise those cash flows.  The economic decisions that are taken by users require an evaluation of the ability of an entity to generate cash and cash equivalents and the timing and certainty of their generation. The cash flow statement shall report cash flows during the period classified by operating, investing and financing activities.

Operating activities

Operating activities are the principal revenue-producing activities of the entity and other activities that are not investing or financing activities.  Cash flows from operating activities are primarily derived from the principal revenue-producing activities of the entity.  Therefore, they generally result from the transactions and other events that enter into the determination of profit or loss. The amount of cash flows arising from operating activities is a key indicator of the extent to which the operations of the entity have generated sufficient cash flows to repay loans, maintain the operating capability of the entity, pay dividends and make new investments without recourse to external sources of financing.  An entity shall report cash flows from operating activities using either: 

(a) the direct method, whereby major classes of gross cash receipts and gross cash payments are disclosed; or

(b) the indirect method, whereby profit or lossis adjusted for the effects of transactions of a non-cash nature, any deferrals or accruals of past or future operating cash receipts or payments, and items of income or expense associated with investing or financing cash flows.

Investing activities

 Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.  The separate disclosure of cash flows arising from investing activities is important because the cash flows represent the extent to which expenditures have been made for resources intended to generate future income and cash flows. The aggregate cash flows arising from acquisitions and from disposals of subsidiaries or other business units shall be presented separately and classified as investing activities.

Financing activities

Financing activities are activities that result in changes in the size and composition of the contributed equity and borrowings of the entity.  The separate disclosure of cash flows arising from financing activities is important because it is useful in predicting claims on future cash flows by providers of capital to the entity. An entity shall report separately major classes of gross cash receipts and gross cash payments arising from investing and financing activities. Investing and financing transactions that do not require the use of cash or cash equivalents shall be excluded from a cash flow statement.  Such transactions shall be disclosed elsewhere in the financial statements in a way that provides all the relevant information about these investing and financing activities

property plant and equipment

Property plant and equipment (PPE) are tangible assets that an entity holds for its own use or for rental to others, and that the entity expects to use during more than one period.     IAS 16 refers to tangible non-current assets as property, plant and equipment (PPE) and recognises that they possess a physical substance, are held for use in the production of goods or delivery of services or for an administrative purpose, and are expected to be used for more than one accounting period. In practice this definition causes few problems. PPE includes freehold and leasehold land, buildings and plant and machinery. The objective of IAS 16 is to prescribe in relation to PPE the accounting treatment for:

The recognition of assets;

The determination of their carrying amounts; and

The depreciation charges and any losses relating to them

 The cost of PPE can be measured reliably in the case of an acquired asset by the cost of the market transaction (purchase price). The directly attributable costs of bringing the asset to the location and the condition for use will include incidental costs of acquisition, such as import duties, site preparation and professional fees such as architects’ fees. The inclusion of these costs should cease once substantially all activities necessary to get the asset ready for use are completed, even if the asset has not yet been brought into use. Costs that would be excluded include: cost of opening new facility, administration and general overhead costs and cost of introducing new products. Where, as a result of the acquisition of an item of PPE, an obligation arises to dismantle it at the end of its useful life and/or to restore the site, then that obligation must be recorded as a liability at the same time the asset is recognised (e.g. decommissioning costs associated with nuclear power stations). In the case of a self-constructed asset, the cost of the acquired materials, labour and other costs must be recognised.

Depreciation

IAS 16 requires that each part of an item of PP&E with a cost that is significant in relation to

the total cost of the item be depreciated separately . Significant parts of an item of PP&E

that have the same useful lives and depreciation methods may be grouped in determining

depreciation.An entity allocates the depreciable amount of an asset (or each significant part, as applicable)on a systematic basis over its useful life. The depreciation method used should reflect thepattern in which the asset’s future economic benefits are expected to be consumed by the entity . The residual value and the useful life of an asset must be reviewed at least at each financial year end and any changes from previous estimates are accounted for prospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors the depreciation method applied to an asset be reviewed at least at each financial year end and, if there has been a significant change in the expected pattern of consumption of the future economic benefits embodied in the asset,the method must be changed to reflect the changed pattern. Such a change is also to be accounted for as a change in accounting estimate (but if the method is changed for a reason other than a change in the consumption pattern, this would still be considered a change in accounting policy, which requires retroactive application).When an item of property, plant, and equipment is revalued, any accumulated depreciation at the date of the revaluation is treated in one of two ways

a) restated proportionately with the change in the gross carrying amount of the asset so that the carrying amount of the asset after revaluation equals its revalued amount. This International Accounting Standard 16 , Property, Plant and Equipment method is often used when an asset is revalued by means of applying an index to determine its depreciated replacement cost; or

b) eliminated against the gross carrying amount of the asset and the net amount restated to the revalued amount of the asset. This method is often used for buildings.

bank reconciliation statement

Bank reconciliation statement is a report which compares the bank balance as per company's accounting records with the balance stated in the bank statement.
It is normal for a company's bank balance as per accounting records to differ from the balance as per bank statement due to timing differences. Certain transactions are recorded by the entities that are updated in the bank's system after a certain time lag. Likewise, some transactions are accounted for in the bank's financial system before the company incorporates them into its own accounting system. Such timing differences appear as reconciling items in the Bank Reconciliation Statement.
The purpose of preparing a Bank Reconciliation Statement is to detect any discrepancies between the accounting records of the entity and the bank besides those due to normal timing differences. Such discrepancies might exist due to an error on the part of the company or the bank.
Importance of bank reconciliation
§ Preparation of bank reconciliation helps in the identification of errors in the accounting records of the company or the bank.
§ Cash is the most vulnerable asset of an entity. Bank reconciliations provide the necessary control mechanism to help protect the valuable resource through uncovering irregularities such as unauthorized bank withdrawals. However, in order for the control process to work effectively, it is necessary to segregate the duties of persons responsible for accounting and authorizing of bank transactions and those responsible for preparing and monitoring bank reconciliation statements.
§ If the bank balance appearing in the accounting records can be confirmed to be correct by comparing it with the bank statement balance, it provides added comfort that the bank transactions have been recorded correctly in the company records.
§ Monthly preparation of bank reconciliation assists in the regular monitoring of cash flows of a business.
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Following is a sample Bank Reconciliation Statement:
ABC LTD

Bank Reconciliation Statement as at 31 December 2011  
Balance as per corrected Cash Book 1 xxx  
Add:  
Unpresented Cheques 2 xxx  
Less:  
Deposits in Transit 3 (xxx)  
Errors in Bank Statement 4 (xxx)  
 
Balance as per Bank Statement xxx
Balance as per corrected cash book
This is the starting point of a bank reconciliation. Corrected bank balance is calculated by adjusting the cash book ledger balance for transactions that are recorded by the bank but not by the entity as shown below:

Balance as per Cash Book xxx  
Add:  
Direct Credits 5 xxx  
Interest on Deposit 6 xxx  
Less:  
Bank Charges 7 (xxx)  
Direct Debits 8 (xxx)  
Standing Order 9 (xxx)  
Errors in Cash Book 10 (xxx)  
 
Balance as per corrected Cash Book xxx