284 Accounting: Business Reporting for Decision Making
Presentation of the statement of cash flows
The statement of cash flows can be completed by bringing together all the sections and calculating the
net increase or decrease in cash for the reporting period and ending cash balance for the year. Refer back
to the 2015 JB Hi-Fi Ltd statement of cash flows in figure 7.2. Observe how the entity has classified its
cash flows and how it has presented the total net cash flows for the period, as well as the opening and
closing cash balances.
Overall, the JB Hi-Fi Ltd statement of cash flows shows that the net cash flows from operating activities
of $179 896 000 covered the investing activities of $44 370 000 and the financing activities of $129 640 000.
The remaining $5 886 000 increased cash. Note that cash flows from financing activities would be positive
at times, to help pay for investment activity. In summary, the statement of cash flows contains:
- net cash flows from operating activities
- net cash flows from investing activities
- net cash flows from financing activities
- total net cash flow (increase or decrease in cash held for the period)
- the beginning cash balance
- the ending cash balance
- comparative figures from the previous year.
The ending cash balance should equate with the cash amount appearing in the balance sheet. The JB
Hi-Fi Ltd balance sheet reports an asset of cash and cash equivalents of $49 131 000, which reconciles
with the ending cash balance in the statement of cash flows.
To help your understanding of the purpose, use and interpretation of the statement of cash flows, it
is worthwhile appreciating how a statement of cash flows is prepared. A comprehensive example illus-
trating this process is presented next.
7.3 Preparing the statement of cash flows
LEARNING OBJECTIVE 7.3 Produce a statement of cash flows using the direct method and a
reconciliation using the indirect method.
The statement of cash flows can be prepared by analysing the cash receipts and payments records (as
was done in the Teresa’s Carpets and Rugs example presented earlier) or by evaluating the statement of
profit or loss and balance sheet. For the purposes of this chapter the latter method will be utilised.
Normally, an entity will collect information regarding its business transactions based on the accrual
method of accounting. The reasons for this have been explained in previous chapters and generally relate
to the appropriate recognition of all transactions affecting income, expenses, assets, liabilities and equity
for a given period. Recording transactions in this way helps in the preparation of the statement of profit
or loss and the balance sheet. Given that the statement of cash flows is concerned with when receipts
and payments are made and not with the recognition of income and expense transactions, there will need
to be some adjustments made to the information collected. For example, the recording of a sale does
not necessarily correspond to when cash is received. This is because the sale may be made on credit,
with the payment due a month later. The example in figure 7.2 illustrated that transactions had different
effects on the profit and cash position.
Therefore, in preparing the statement of cash flows there needs to be a conversion from the accrual
basis to the cash basis. This conversion can be approached in one of two ways. These are (1) the direct
method or (2) the indirect method. The direct method discloses major classes of gross cash receipts
and gross cash payments. The indirect method adjusts profit or loss for the effects of transactions of a
non-cash nature and deferrals or accruals of operating revenue and expenses. The International Financial
Reporting Standards (IFRS), Australian Accounting Standards and New Zealand Accounting Standards
give an entity a choice between presenting cash flows from operating activities using the direct or indi-
rect methods. In Australia and New Zealand, entities are encouraged to use the direct method.