Chapter 6 - Recognition and Measurement ● The basic principle of income recognition is that

income shall be recognized when earned.

Recognition ● Revenue is generally recognized at the point of
sale because this is when the entity transfers
Recognition is the process of including in the financial
significant risks, rewards, and control of the
statements an item that meets the definition of an asset,
goods to the buyer.
liability, equity, income, or expense.
● This aligns with the legal transfer of ownership.

Carrying Amount – The value at which an asset, ● However, under certain conditions, income may

liability, or equity is recognized in the statement of be recognized at different stages:

financial position. ○ Point of Production – If the market price

is guaranteed
Link Between Financial Statements (agriculture, mining).
Recognition connects the elements of financial ○ During Production – For long-term
statements by ensuring that an item recognized in one contracts
statement (financial position or financial performance) is
(construction), revenue is recognized
also recognized in the other, maintaining consistency.
progressively.
○ Point of Collection – When collectability
● Recognition of Income = Increase in asset or
is uncertain, income is recognized when
decrease in liability.
cash is received.
● Recognition of Expense = Decrease in asset or
increase in liability.
Expense Recognition

Recognition Criteria
● Expense recognition principle states that
expenses should be recognized when incurred.
● Only items that meet the definition of an asset,
● This principle follows the matching principle,
liability, or equity are recognized in the
which ensures that expenses are recorded in the
statement of financial position.
same period as the revenues they help generate.
● Only items that meet the definition of income or
● Businesses must recognize costs when they
expense are recognized in the statement of
contribute to earning revenue, not necessarily
financial performance.
when they are paid.
● In some circumstances, items are recognized
only when their recognition provides users of
Three Applications of the Expense
financial statements with information that is both
Recognition Principle
relevant and faithfully represented.
● Recognition no longer focuses solely on the 1. Cause and Effect Recognition
probability of economic benefits flowing to or
from the entity and on whether the cost can be ● Expenses are recognized when the related

measured reliably. revenue is recognized

● Based on the direct association between
Income Recognition expenses and specific income.

Point of Sale Income Recognition

 ● Commonly referred to as the matching of cost It occurs when:

with revenue (simultaneous recognition)

● The entity losses control of a asset
Examples:
● The entity no longer has an obligation for a
liability.
➔ Cost of goods sold (COGS) - inventory cost is
expensed when sold. Measurement - refers to quantifying financial statement
➔ Doubtful accounts, warranty expenses, and sales elements in monetary terms.
commissions.
The Revised Conceptual Framework identifies two
2. Systematic and Rational Allocation categories of measurement:
1. Historical Cost - The original acquisition cost of an
● Expenses are allocated over the periods they
asset or liability, including transaction costs.
benefit.
● used when there is no direct association with
specific revenue.
● Applied to costs that provide benefits over Entry Price or Entry Value
multiple periods.
● Asset - Cost incurred to acquire or create the
Examples: asset.
● Liability - Consideration received to incur the
➔ Depreciation (property, Plant and liability.
Equipment)
➔ Amortization (Intangible Assets) Financial assets and liabilities measured at amortized
➔ Prepaid Expenses (Rent, Insurance, etc.) cost (reflecting discounted future cash flows). Historical

Cost Updated
3. Immediate Recognition

1. For Assets:
● Expenses are recognized immediately when:
★ No future economic benefit is expected.
● Depreciation & Amortization (reducing asset
★ The cost does not qualify or ceases to
value over time.
qualify as an asset.
● Disposal of Asset (partial or full sale)
● Impairment (permanent decline in value)
Examples:
● Accrued interest (reflecting financing component)
➔ Operating Expenses (Salaries, administrative ● Amortized Cost Measurement (for financial
expenses, advertising, selling expenses) assets).
➔ Losses (Disposal of assets, sale of investments,
2. For Liabilities:
casualty losses)
➔ Legal Settlements (Lawsuit payments, worthless
● Settlement of obligations (payment made)
intangibles)
● Onerous Liability (increased value due to
unfavorable changes)
Derecognition - Is the removal of all or part of an asset
● Accrued Interest (reflecting financing component)
or liability from the statement of financial position.
 ● Amortized Cost Measurement (for financial ● For Assets: Cost of an equivalent asset at the
liabilities). measurement date, including transaction costs.
● For Liabilities: Consideration that would be
Current Value
received, minus transaction costs, at the
measurement date
Current Value includes:
● Similar to historical cost, .but reflects the
1. Fair Value (Exit Price/Value) current market conditions at the measurement
date.
● For Assets - price received to sell an asset in an ● Base on entry price/value (like historical cost).
orderly market transaction.
● For Liabilities - Price paid to transfer a liability in Selecting a Measurement Basis The choice of
an orderly market transaction.
measurement basis depends on: ● Nature of the
● Fair value is Not adjusted for transaction
costs (since these relate to
information it will produce.

the transaction, not the asset/liability itself). ● Relevance and faithful representation for
financial statement users.
Three Tiers of fair Value
● Facts and circumstances of the transaction.

❖ Competitive market (market price in an active

Historical cost is the most commonly used
market)
measurement basis because:
❖ Similar item (using comparable market price)
❖ Model value (estimated using valuation models, ● it is simpler and less costly to measure.
such as present value of cash flows). ● it is well understood and verifiable.

2. Value in Use (For Assets) - present value of The IASB did not mandate a single measurement
expected cash flows from using an asset and its basis, as different basis provided useful information in
ultimate disposal. different situations.

● Includes transaction costs on disposal Chapter 7 - Presentation and Disclosure Concepts of

● Excludes transaction costs on Capital
acquisition
Presentation and Disclosure - are essential for
● Exit price or exit value measurement.
effectively communicating financial information in
3. Fulfillment Value (For Liabilities) - present value of financial statements.
expected cash outflows to settle a liability.
importance of Effective Communication in Financial
● Includes transaction costs on Statements
settlement.
● Enhances relevance and faithful
● Excludes transaction costs on incurring the
representation of assets, liabilities, income, and
liability.
expenses.
● Exit price or exit value measurement.
● Improves understandability and comparability
● Current Cost (Liquidation Value) of financial information.
 ● Avoids duplication, which can make financial ● it summarizes large volumes of detail, making
statements less clear and harder to interpret. information more useful.
● Prevents excessive detail that may reduce clarity.
Classification - sorting of financial elements (assets,
liability, equity, income and expenses) based on shared Balance Reuired:
characteristics.
● Avoid too much detail (which can overwhelm
Purpose users.)
● Avoid too much aggregation (which may hide
● Prevents obscuring relevant information and
important details).
enhances understandability.
● Ensures faithful representation and Applications:
comparability.
● Statement of Financial Position &
Examples: Performance - provides summarized information

● Notes to Financial Information - provides more

★ Assets and Liabilities: Current vs.
detailed breakdowns.
Noncurrent.

Capital Maintenance
★ Equity Components: Separate disclosure of
ordinary share capital, preference share capital,
The financial performance of an entity is determined
share premium, and retained earnings (due to
using two approaches:
legal or regulatory requirements).
1. Transaction Approach - Traditional income
Classification of Income and Expenses Income and
statement preparation.

Expense are classified into:

2. Capital Maintenance Approach - Net income is
the amount that can be distributed while maintaining the
A. Profit or Loss (Income Statement) - Primary
initial capital.
source of financial performance information.

An entity is considered “well-off” at the end of the year if

B. Other Comprehensive Income (OCI) - includes
it can distribute its earnings without reducing its initial
certain items excluded from profit or loss.
capital.
Statement of Financial Performance
Two Concepts of Capital Maintenance
● Refers to both the Income Statement and the
1. Financial Capital Maintenance - Capital is
Statement of Other
synonymous with net assets or equity based on
Comprehensive Income (OCI).
historical cost.
● OCI items may later be reclassified (recycled) to
profit or loss oe retained earnings.
GAAP Basis

Aggregation - is the grouping of similar assets,

● Does not require adjustments for price level
liabilities, equity, income, and expenses into
changes.
classifications.
 ● Capital is maintained if the entity earns enough and services. It considers the need to replace these
revenue to replace used resources. assets to ensure that the entity can continue its
➢ If an entity has positive earnings, it has operations effectively.
successfully replaced all used resources.
Productive Assets includes:
➢ Income can be distributed as dividends without
reducing the beginning capital. ● Inventories
● Property, Plant and Equipment
Example:

Costs for productive assets must be maintained to

An entity uses P500,000 of resources to generate
ensure that physical capital is preserved.
revenue, If revenue = P500,000 (with no other
expenses), net income is zero. This means capital is
Physical capital is expressed as net assets in terms of
maintained since resources used were fully replaced.
current cost (the cost required to replace theses assets
Net Income under Financial Capital at present market prices). Example:

Net income occurs when the net assets at the end of Resources used is P500,000 for generating revenue
the year exceed the net assets at the beginning of and the cost to replace is P550,000, under the physical
the period, after excluding owner distributions and capital concept, the entity needs P550,000 in revenue
contributions. to maintain its capital at the same level as the beginning
of the year.
Format:
Chapter 8 - Presentation of Financial
Net Assets - beginning Statements (SFP)
Add: Net Income
Financial Statement - are structure reports that
Additional Capital present a entity's financial accounting process and
Total serve as the primary means of communicating financial
information to users.
Less: Dividends

Net Assets - Ending General Purpose of Financial Statements

● Intended for users who cannot demand

● Net Assets = Total Assets - Total customized financial reports.

Liabilities ● Directed to all common users, such as

● This approach is also known as Net Assets investors, creditors, regulators, and the public.

Approach since it focuses on changes in net

Components of Financial Statements
assets.
● Net income is the increase in net assets 1. Statement of Financial Position (Balance
excluding owner transactions (investments & Sheet) - shows the entity's assets, liabilities, and equity
dividends). at specific date.

Physical Capital Concept - focuses on maintaining the

physical productive assets required to produce goods
2. Income Statement - Reports revenue, Frequency of Reporting
expenses, and net income or loss for a period.
Financial statements must be presented at least
3. Statement of Comprehensive Income - annually.
includes net income plus other comprehensive income
If the reporting period changes (longer or shorter than
items.
one year), the entity must disclose:
4. Statement of Changes in Equity - explains
a. The period covered by the financial statements.
changes in owners’ equity over a period.

b. Reasons for using a different period.

5. Statement of Cash Flows - Shows cash inflows
and outflows from operating, investing, and financing
c. A statement that amounts may not be comparable to
activities.
previous reports.

6. Notes to Financial Statements - provide

Statement of Financial Position - is a formal statement
explanations of accounting policies and additional
that presents the financial position of an entity at a
financial details.
specific point in time. It includes:

OBJECTIVE OF FINANCIAL STATEMENTS - is to

1. Assets – What the entity owns.
provide useful information about an entity’s:
2. Liabilities – What the entity owes.
● Financial position (what it owns and owes)
● Financial performance (profitability) 3. Equity – The owner's residual interest.
● Cash flows (movement of money)
● Investors, creditors, and analysts use this
This information helps users (investors, creditors) make statement to evaluate:
informed economic decisions. ● Liquidity (ability to meet short-term obligations)
● Solvency (long-term financial stability).
Additionally, financial statements reflect how
management has used the resources entrusted to them Classification of Assets
(stewardship).
1. Assets – Economic resources owned by the entity. 1. Current Assets

2. Liabilities – Obligations or debts owed. 2. Noncurrent Assets

3. Equity – Owners' interest in the entity. This classification helps distinguish short-term,
circulating assets (working capital) from long-term,
4. Income and Expenses – Revenues, costs, gains, and operational assets.
losses.
Operating Cycle
5. Owner Transactions – Contributions and
distributions. ● The time between acquiring an asset and
converting it into cash.
6. Cash Flows – Movement of money in and out of the ● If an entity’s operating cycle is unclear, it is
entity.
assumed to be 12 months. Current Assets
1. It is cash or a cash equivalent, unless restricted for (c) It is due for settlement within 12 months after the
settlement of liabilities beyond 12 months. reporting period.

2. It is held for trading purposes. (d) The entity does not have the right to defer
settlement for at least 12 months.
3. It is expected to be realized within 12 months after
the reporting period. Examples:

4. It is expected to be sold or used up within the ● Accounts payable

normal operating cycle. ● Short-term loans and overdrafts
● Current portion of long-term debt
Noncurrent Assets
● Accrued expenses

Residual classification – Any asset not meeting the ● Unearned revenue (deferred income to be
recognized within a year)
criteria of a current asset is considered noncurrent.

Examples of noncurrent assets: 2. Noncurrent Liabilities - Liabilities not classified as

current are considered noncurrent liabilities.
a. Property, Plant, and Equipment (PPE) – Buildings,
machinery, land. Examples:

b. Long-term Investments – Stocks, bonds, or other ● Long-term debt (excluding the portion due within
financial assets held beyond 12 months. a year)
● Finance lease liabilities
c. Intangible Assets – Patents, trademarks, goodwill.
● Deferred tax liabilities

d. Deferred Tax Assets – Future tax benefits. ● Long-term obligations to

company officers
e. Other Noncurrent Assets – Assets that do not fit into ● Long-term deferred revenue
the above categories but are not expected to be
liquidated within 12 months. Equity is the residual interest in assets after
deducting liabilities.
Classification of Liabilities
It represents the net assets or owners' claim in the
➢ Liabilities are classified into current liabilities and business.
noncurrent liabilities based on when they are
expected to be settled. Equity in Different Business Structures:

1. Current Liabilities - according to PAS 1, paragraph ● Sole Proprietorship: Owner’s Equity

69, a liability is classified as current if: ● Partnership: Partners’ Equity
● Corporation: Stockholders’ or
(a) It is expected to be settled within the entity's
Shareholders’ Equity
normal operating cycle. Under PAS 1, paragraph 7, individuals who hold equity
instruments (e.g., shares) are referred to as owners.
(b) It is primarily held for trading.
Currently Maturing Long-Term Debt
A liability is classified as current if it is due for settlement Only covenants that must be complied with on or
within 12 months after the reporting period, even if: before the reporting date affect the classification of a
liability as current or noncurrent.
(a) The original term was for more than 12 months.
Covenants that must be complied with after the
(b) The entity has an agreement to refinance or reporting date do not affect classification but must be
reschedule payment after the reporting period but disclosed in the notes to financial statements.

before the financial statements are authorized for

Scenario Classification
issue.
Liability is due within Current
12 months.
Exception:
Refinancing is Current
If the refinancing or rescheduling is completed on or completed after the
reporting date
before the end of the reporting period, the liability is
classified as noncurrent because the entity has secured Refinancing is Noncurrent
completed on
long-term financing. or before the
reporting date,
Covenants in Borrowing Agreements
Covenant is Current
breached, and lender
Covenants are conditions set by lenders that borrowers can demand payment
must comply with to maintain their loan agreements.
Covenant is met by Noncurrent
These conditions may include: the end of the
reporting period.
● Restrictions on additional borrowing.
Covenant must be Disclose, but does
● Limitations on dividend payments. met after the not affect
reporting period classification.
Requirements to maintain specific financial ratios, Shareholders’ Equity - represents the owners’ residual

such as a minimum working capital level or debt-to- interest in a corporations net assets.

equity ratio.
Shareholders Ewuity = Total Assets - Total

Effect of Covenant Violations on Liability Liabilities

Classification
Philippine IAS Term Description
Term
If a borrower fails to meet a covenant, and the lender
Capital Stock Share Capital Total value of
has the right to demand immediate repayment, the
shares
liability is classified as current. issued by a
corporation.
If a borrower complies with all covenants by the end of Subscribed Subscribed Shares that
the reporting period, the liability is classified as capital stock share capital investors
noncurrent. have agreed
to purchase
but have not
IASB Amendment on Covenant Compliance yet fully paid.

Preferred Preference Shares with

Stock Share Capital special
privileges
 International Financial Reporting Standards
(priority
in (IFRS) disclosure requirements.
dividends).
Forms of SFP
Common Ordinary Standard
Stock Share Capital shares
representing Report Form - Presents assets, liabilities, and equity in
ownership in a vertical (top-to-bottom) sequence.
a company.

Additional Share Amount Account Form - Follows the traditional T-account

format, with assets on the left and Liabilities + equity
paid-in Capital Premium received from
shareholders on the right.
above the
par value of In the Philippines, the common practice is to present
shares.
current assets before noncurrent assets, current
Retained Accumulated Cumulative liabilities before noncurrent liabilities, and equity after
Earnings Profits net income
liabilities.
(defiit) (losses) retained in
the company. PAS does not prescribe the order or the format of the

Retained Appropriation Portion of SFP.

Earnings Reserve retained
Appropriated earnings set Chapter 9 - Presentation of Financial Statements
aside for
(Income Statement )
specific
purposes.
The Income Statement (also called the Statement of
Revaluation Revaluation Gains from
Surplus Reserve revaluation of Financial Performance) is a formal financial
assets statement that summarizes a
(property,
equipment) company’s revenues, expenses, gains, losses, and
Treasury Treasury Company's net income or loss over a specific period.
Stock Share own shares
repurchased
It measures financial performance based on:
from the
market.
Notes to Financial Statements - provides explanatory ➢ Revenue generation – income earned from

details that supplement the information presented in operations and other sources.

financial statements. ➢ Resource utilization – how effectively the

company uses assets to generate profits.
Purpose of Notes to FS
Income Statement also:
● To enhanced understandability of financial
reports. ● Evaluates profitability – shows whether the
● To disclose information that is not included company is making or losing money.
directly in the financial statements but is ● Assesses operational efficiency – helps
essential for decision-making. determine if the entity is using its resources
● To comply with Philippine Financial Reporting effectively.
Standards (PFRS) and ● Predicts future performance – provides
insights into future revenue and expenses.
 ● Determines cash flow potential – useful for 2. Administrative Expenses - These are costs
forecasting future cash inflows. associated with running and managing the business.
Examples include:
Sources of Income
➢ Office salaries and general executive expenses
1. Sales of Merchandise - Revenue from selling
➢ Expenses related to the accounting and credit
goods. gross sales are adjusted for sales returns,
department
allowances, and discounts to arrive at net sales.
➢ Office supplies used

2. Rendering of Services - Revenue from ➢ Certain taxes and contributions

providing services, such as professional fees, media ➢ Professional fees (such as legal and audit fees)

advertising commissions, admission fees, and ➢ Depreciation of office buildings and office

tuition fees. equipment

➢ Amortization of intangible assets
3. Use of Entity Resources - Income from others ➢ Allowance for doubtful accounts (bad debts)
using the company's assets, such as interest income,
rent income, royalty income, and dividend income. 3. Other Expenses - These are costs that do not directly
relate to selling or administrative functions. Examples
4. Disposal of Resources (Non-product Sales) - include:
Gains from selling assets other than inventory, such as
➢ Losses on the sale of trading
sale of investments or PPE.
investments
Components of Expense: ➢ Losses on the disposal of property, plant, and
equipment
● Cost of goods sold or cost of sales ➢ Losses on the sale of noncurrent investments
● Distribution costs or selling expenses ➢ Casualty losses due to disasters like floods,
● Administrative expenses earthquakes, or fires
● Other expenses
● Income tax expense 4. No More Extraordinary Items

Classifications of Expenses Under accounting standards (PAS 1, paragraph 87),

companies cannot classify any income or expense as
1. Distribution Costs - These are costs directly related “extraordinary.” All financial transactions should be
to selling, advertising, and delivering goods to recorded under the appropriate categories in the income
customers. Examples include: statement or statement of comprehensive income.

➢ Salesmen’s salaries and commissions Additional Disclosure on the Face of the

➢ Traveling and marketing expenses Statements
➢ Advertising and publicity
➢ Freight out (cost of shipping goods to customers) Net income or net loss and Total
➢ Depreciation of delivery and store equipment Comprehensive Income attributed separately to:
● Noncontrolling interest
(minority shareholders)
● Owners of the parent company
 Comprehensive Income - The Conceptual Framework
Forms of Income Statement PAS 1, paragraph 99, introduces the term comprehensive income, which
states that an entity must present an analysis of represents the total change in an entity's equity during a
expenses using a classification that provides the most period, excluding transactions with owners (issuing
reliable and relevant information. shares or paying dividends).

There are two ways to present an income statement: Components of Comprehensive Income 1. Profit or
1. Functional Presentation (Cost of Goods Sold Loss - The total income minus expenses for the period.
Method) - It classifies expenses by function within the
business. It includes Represents the net income or net loss, which is the
final result of the traditional income statement.
● Cost of goods sold (COGS) 2. Other Comprehensive Income (OCI) - Items that
● Distribution costs (selling expenses) bypass profit or loss but still affect equity.

● Administrative expenses
● Other expenses Examples include:

This format helps assess profitability and how efficiently ● Unrealized gains/losses on financial assets

resources are used. measured at fair value.

Requires additional disclosure of expenses like ● Foreign currency translation adjustments.

depreciation, amortization, and employee benefits. ● Changes in revaluation surplus for property,
plant, and equipment.

2. Natural Presentation (Nature of Expense ● Actuarial gains/losses on pension plans.

Method) - Groups expenses by their nature, rather

than by function. Profit or Loss vs. Comprehensive Income

Expenses are presented as separate line items, without Profit or Loss → Measures operational performance

being assigned to specific functions. It includes: (revenues & expenses).

Comprehensive Income → Includes profit or loss +

● Depreciation and amortization
other gains/losses that directly affect equity.
● Raw material purchases
● Employee benefits expense
This distinction helps users assess the full financial
● Transport costs impact of an entity's activities beyond the standard net
● Advertising costs income.

This method provides transparency in the composition Other Comprehensive Income (OCI) - includes items of
of expenses. income and expense that are not recognized in profit or
loss under accounting standards. These are gains and
Both formats are acceptable, and the choice depends losses that bypass the income statement but still impact
on which method is more useful for users of financial equity.
statements.

Common Components of OCI

1. Unrealized gains or losses on equity ● Helps assess an entity’s ability to generate
investments measured at fair value through OCI. cash and meet obligations.
2. Unrealized gains or losses on debt ● Evaluates how cash is being used in operations,
investments measured at fair value through OCI. investments, and financing activities.
3. Foreign currency translation adjustments
from financial statements of foreign operations. Cash and Cash Equivalents
4. Revaluation surplus from the revaluation of
property, plant, and equipment. The Statement of Cash Flows focuses on changes in
5. Unrealized gains or losses from cash flow an entity’s cash and cash equivalents, which include:
hedges (derivative contracts).
6. Remeasurements of defined benefit pension 1. Cash
plans, including actuarial gains or losses. ● Cash on hand
7. Changes in fair value of financial liabilities ● Demand deposits
due to changes in credit risk. 2. Cash Equivalents
● Short-term, highly liquid investments that:
Statement of Comprehensive Income - To provide a ○ Are easily convertible into a known
broader view of financial performance, the Statement amount of cash.
of Comprehensive Income is prepared alongside the ○ Have insignificant risk of value
income statement. changes.
○ Have a maturity of three months or less
Structure of the Statement of Comprehensive from the date of acquisition.
Income:

According to PAS 7, paragraph 7, an investment

1. Net Income or Net Loss (from the income statement). qualifies as a cash equivalent only if acquired three
2. Other Comprehensive Income (OCI): months or less before its maturity date.
● List all OCI components individually.
3. Total Comprehensive Income: Bank overdraft - repayable on demand are considered
● Sum of net income and OCI. part of cash and cash equivalents when they are an
integral part of the entity’s cash management.
This statement helps users see the full financial impact
of an entity’s activities, beyond just net income.
In such cases, the bank balance frequently fluctuates
between positive and overdrawn.
Chapter 10 - Statement of Cash Flows

Examples of Cash Equivalents

Statement of Cash Flows - is a key financial statement
1. Three-month BSP Treasury Bill
that summarizes an entity’s operating, investing, and
2. Three-year BSP Treasury Bill purchased three months
financing activities over a specific period.
before maturity
3. Three-month time deposit
Purpose of the Statement of Cash Flows
4. Three-month money market instrument or commercial
paper
● Provides information about cash receipts and
cash payments during a period.
These instruments qualify as cash equivalents because ● Cash received from the sale of intangible
they are short-term, highly liquid, and low risk. assets.
● Cash received from selling equity or debt
Classification of Cash Flows instruments (investments in other entities).
● Cash repayments from loans or advances
Cash flows refer to the inflows and outflows of cash made to other parties.
and cash equivalents. The Statement of Cash Flows
classifies these cash movements into three main Cash outflows:
categories: ● Cash paid to acquire property, plant, and
equipment (PPE).
1. Operating Activities - include cash flows from ● Cash paid to acquire intangible
an entity’s primary revenue-generating activities. assets.
These transactions affect net income and relate to the ● Cash paid to purchase equity or debt
day-to-day operations of the business. instruments (investments in other entities).
● Cash loans and advances made to other
Examples of Operating Activities: parties (excluding financial institutions).
Cash inflows:
● Cash received from the sale of goods or This classification helps users understand how cash is
services. generated and used, making it easier to assess an
● Cash receipts from royalties, rent, fees, entity’s financial health and liquidity.
commissions, and other revenue.
● Cash receipts from securities held for trading. Financing Activities - involve cash flows related to an
entity’s equity capital and borrowings. These
Cash outflows: transactions reflect how a business raises and repays
● Cash paid to suppliers for goods purchased. funds from owners (equity financing) and creditors
● Cash payments for operating expenses (selling, (debt financing).
administrative, and other expenses).
● Cash payments for securities held for trading. Examples of Financing Activities:
● Cash payments or refunds of income taxes Cash inflows:
(unless related to financing or investing ● Cash received from the issuance of ordinary

activities). and preference shares.

● Cash received from issuing bonds, loans,

2. Investing Activities - include cash flows from notes, mortgages, and other borrowings.

the acquisition and disposal of long-term assets and

other investments not classified as cash equivalents. Cash outflows:

These typically involve nonoperating assets. ● Cash paid to buy back treasury shares.
● Cash repayments of borrowed amounts (loan

Examples of Investing Activities: repayments).

Cash inflows: ● Cash payments by a lessee for the reduction of

● Cash received from the sale of property, plant, lease liabilities.

and equipment (PPE).

Noncash Transactions The statement of cash flows ● Operating Cash Flow – If the dividends
reports only cash movements, so noncash financing received contribute to net income.
and investing transactions are disclosed separately in: ● Investing Cash Flow – If the dividends are a
1. The notes to financial statements, or return on an investment.
2. A separate schedule, ensuring transparency.
Dividends Paid
Examples of Noncash Transactions: ● Financing Cash Flow – Generally classified as
● Acquiring assets by issuing share capital. financing because dividends represent payments
● Acquiring assets by issuing bonds payable. to owners.
● Converting bonds payable into share capital. ● Operating Cash Flow – Sometimes classified
● Converting preference shares into ordinary under operating activities to help assess the
shares. entity's ability to pay dividends using operational
cash flows.
These disclosures ensure that stakeholders fully
understand how the entity is financing its operations
beyond just cash movements.

Interest Paid and Interest Received

Under PAS 7, paragraph 33, interest paid and received

can be classified in different ways depending on the
nature of the entity’s activities:

● Operating Cash Flow – If the interest affects net

income (e.g., business expenses or revenue).
● Financing Cash Flow – If the interest paid
relates to borrowing costs.
● Investing Cash Flow – If the interest received
comes from investments.

For financial institutions, interest paid and received are

typically classified under operating activities, as they
are part of core operations.

Dividends Received