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2. Proceeds from disposal of debt instruments of other entities
3. Proceeds from the sale of equity instruments of other entities
Cash Outflows
1. Purchase of property, plant, and equipment
2. Acquisition of debt instruments of other entities
3. Purchase of equity instruments of other entities (unless held for trading purposes or considered to be cash equivalents)
FINANCING ACTIVITIES
Financing activities include obtaining resources from and returning resources to the owners. Also included in this category is obtaining resources through
borrowings (short-term or long-term) and repayments of the amounts borrowed.
Common examples of cash flows relating to financing activities are
Cash Inflows
1. Proceeds from issuance of share capital
2. Proceeds from issuing debt instruments (debentures)
3. Proceeds from bank borrowings
Cash Outflows
1. Payment of dividends to shareholders
2. Repayment of principal portion of debt, including finance lease obligations
3. Repayment of bank borrowings
NONCASH TRANSACTIONS
IAS 7 requires that noncash investing and financing activities should be excluded from the statement of cash flows and reported “elsewhere” in the financial
statements, where all relevant information about these activities is disclosed. This requirement is interpreted as the necessity to disclose noncash activities in the
footnotes to financial statements instead of including them in the statement of cash flows.
Common examples of noncash activities are
1. Conversion of debt (convertible debentures) to equity
2. Issuance of share capital to acquire property, plant, and equipment
Facts
CASE STUDY 2
On January 1, 2009, Dramatic Inc. issued convertible bonds with conversion to take place on or before the expiry of two years from the date of issuance of
the debt. On December 15, 2010, the board of directors of Dramatic Inc. decided to convert the bonds at year-end and issue equity shares.
Required
How would Dramatic Inc. treat this transaction in its cash flow preparation?
Solution
On conversion of the bonds into equity, it would appear that two types of cash flows have occurred: a cash inflow resulting from increase of share capital
and a cash outflow due to repayment of debt. However, these are noncash activities, and no cash flows have occurred. The Standard mandates that such
noncash activities be disclosed in the footnotes to the financial statements.
DIRECT VERSUS INDIRECT METHOD
Financial statement preparers have a choice between the direct and the indirect method in presenting the operating activities section of the statement of cash flows.
IAS 7 recommends the direct method of presenting net cash from operating activities. In practice, however, preparers of financial statements prefer to present the
statement of cash flows under the indirect method rather than the recommended direct method (possibly due to the ease of preparation).
The direct method presents the items that affected cash flow and the amounts of those cash flows. Entities using the direct method normally report these major