Question

1)Distinguish among the three activities reported in the statement of cash flows.

2)Why is it important to disclose certain non-cash transactions? How should they be disclosed?

Answer 1

1)THE THREE ACTIVITIES:

Cash Flow from Operating Activities:These are principal revenue generating / producing activities of a business enterprise and includes cash flows from those transactions and events that enter into determination of net profit or loss.e.g

Cash Inflows	Cash Outflows
Cash Receipt from sale of goods/rendering of services cash received from royalties, fees , commission ,etc other operating activities	Cash payments to suppliers for goods/services cash payments to employees interest and taxes paid other operating cash payments

b)Cash From Investing Activities:these activities include transaction and events that involve purchase and sale of long term productive assets such as building , land , equipment(plant and machinery) not held for resale and other investments(which are not cash equivalents)

Cash Inflows	Cash Outflows
Sale of plant & machinery and equipment sale of land & buildings	Purchase of plant & machinery and equipment Purchase of land & buildings

c)Cash Flow from financing activities:these activities result in changes in size and composition of owner's capital(including preference share capital in the case of a company) and borrowings of an enterprise

Cash Inflow	Cash Outflow
Borrowing cash from creditors Issuing common stock issuing debt securities like bonds or debentures issue	Repayment of amount borrowed Treasury stock i.e buyback of shares Payment of dividends

2)Significant financing and investing activities that do not affect cash are not reported in the body of cash flow statement rather these are reported in separate note to the financial statement.such disclosure is important to satisfy the "FULL DISCLOSURE PRINCIPLE"

Example of significant activities

• conversion of bonds into shares
• Leased Assets
• Issue of debt to purchase assets
• issue of stock to purchase assets