Statement of Cash Flows - IAS 7

 Overview
 IAS 7 Statement of Cash Flows requires an entity to
present a statement of cash flows as an integral part
of its primary FS.
 Cash flows are classified and presented into operating
activities (either using the 'direct' or 'indirect' method),
investing activities or financing activities, with the
latter two categories generally presented on a gross
basis.
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 Objective of IAS 7

 The objective of IAS 7 is to require the presentation of

information about the historical changes in cash and
cash equivalents of an entity by means of a statement
of cash flows, which classifies cash flows during the
period according to operating, investing, and financing
activities.

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 Fundamental principle in IAS 7

 All entities that prepare FS in conformity with IFRSs

are required to present a statement of cash flows.

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 Benefits of cash flow information

 A statement of cash flows, when used in conjunction with the

rest of the FS, provides information that enables users to
evaluate the changes in net assets of an entity, its financial
structure (including its liquidity and solvency) and its ability to
affect the amounts and timing of cash flows in order to adapt
to changing circumstances and opportunities.
 Cash flow information is useful in assessing the ability of the
entity to generate cash and cash equivalents and enables
users to develop models to assess and compare the present
value of the future cash flows of different entities.
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 Benefits of cash flow information

 It also enhances the comparability of the reporting of

operating performance by different entities because it
eliminates the effects of using different accounting
treatments for the same transactions and events.
 Historical cash flow information is often used as an indicator
of the amount, timing and certainty of future cash flows.
 It is also useful in checking the accuracy of past
assessments of future cash flows and in examining the
relationship between profitability and net cash flow and the
impact of changing prices.
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 Definitions

 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.

 Cash flows are inflows and outflows of cash and cash equivalents.

 Operating activities are the principal revenue-producing activities of the

entity and other activities that are not investing or financing activities.
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 Definitions

 Investing activities are the acquisition and disposal of

long-term assets and other investments not included
in cash equivalents.
 Financing activities are activities that result in changes
in the size and composition of the contributed equity
and borrowings of the entity.

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 Presentation of a statement of cash flows

 The statement of cash flows shall report cash flows

during the period classified by:
 operating;
 investing; and
 financing activities.

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 Operating activities

 operating activities are the main revenue-

producing activities of the entity that are not investing
or financing activities, so operating cash flows include
cash received from customers and cash paid to
suppliers and employees

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 Investing activities

 investing activities are the acquisition and disposal

of long-term assets and other investments that are
not considered to be cash equivalents

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 financing activities

 financing activities are activities that alter the equity

capital and borrowing structure of the entity.
 interest and dividends received and paid may be
classified as operating, investing, or financing cash
flows, provided that they are classified consistently
from period to period.
 cash flows arising from taxes on income are normally
classified as operating, unless they can be specifically
identified with financing or investing activities.
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 for operating cash flows, the direct method of
presentation is encouraged, but the indirect method is
acceptable

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 The direct method

 The direct method shows each major class of gross

cash receipts and gross cash payments. The operating
cash flows section of the statement of cash flows
under the direct method would appear something like
this:

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 direct method

Cash receipts from customers xx,xxx

Cash paid to suppliers xx,xxx
Cash paid to employees xx,xxx
Cash paid for other operating xx,xxx
expenses
Interest paid xx,xxx
Income taxes paid xx,xxx
Net cash from operating activities xx,xxx
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 The indirect method

 The indirect method adjusts accrual basis net profit

or loss for the effects of non-cash transactions. The
operating cash flows section of the statement of cash
flows under the indirect method would appear
something like this:

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 The indirect method
Profit before interest and income taxes xx,xxx
Add back depreciation xx,xxx
Add back impairment of assets xx,xxx
Increase in receivables xx,xxx
Decrease in inventories xx,xxx
Increase in trade payables xx,xxx
Interest expense xx,xxx
Less Interest accrued but not yet paid xx,xxx
Interest paid xx,xxx
Income taxes paid xx,xxx
Net cash from operating activities xx,xxx
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 Components of cash and cash equivalents

 An entity shall disclose the components of cash and

cash equivalents and shall present a reconciliation of
the amounts in its statement of cash flows with the
equivalent items reported in the statement of financial
position.

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 Fundamental principle in IAS 7

 All entities that prepare FS in conformity with IFRSs

are required to present a statement of cash flows.

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 Benefits of cash flow information

 A statement of cash flows, when used in conjunction with the

rest of the FS, provides information that enables users to
evaluate the changes in net assets of an entity, its financial
structure (including its liquidity and solvency) and its ability to
affect the amounts and timing of cash flows in order to adapt
to changing circumstances and opportunities.
 Cash flow information is useful in assessing the ability of the
entity to generate cash and cash equivalents and enables
users to develop models to assess and compare the present
value of the future cash flows of different entities.
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 Benefits of cash flow information

 It also enhances the comparability of the reporting of

operating performance by different entities because it
eliminates the effects of using different accounting
treatments for the same transactions and events.
 Historical cash flow information is often used as an indicator
of the amount, timing and certainty of future cash flows.
 It is also useful in checking the accuracy of past
assessments of future cash flows and in examining the
relationship between profitability and net cash flow and the
impact of changing prices.
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 Definitions

 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.

 Cash flows are inflows and outflows of cash and cash equivalents.

 Operating activities are the principal revenue-producing activities of the

entity and other activities that are not investing or financing activities.
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 Definitions

 Investing activities are the acquisition and disposal of

long-term assets and other investments not included
in cash equivalents.
 Financing activities are activities that result in changes
in the size and composition of the contributed equity
and borrowings of the entity.

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 Presentation of a statement of cash flows

 The statement of cash flows shall report cash flows

during the period classified by:
 operating;
 investing; and
 financing activities.

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 Operating activities

 operating activities are the main revenue-

producing activities of the entity that are not investing
or financing activities, so operating cash flows include
cash received from customers and cash paid to
suppliers and employees

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 Investing activities

 investing activities are the acquisition and disposal

of long-term assets and other investments that are
not considered to be cash equivalents

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 financing activities

 financing activities are activities that alter the equity

capital and borrowing structure of the entity.
 interest and dividends received and paid may be
classified as operating, investing, or financing cash
flows, provided that they are classified consistently
from period to period.
 cash flows arising from taxes on income are normally
classified as operating, unless they can be specifically
identified with financing or investing activities.
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 for operating cash flows, the direct method of
presentation is encouraged, but the indirect method is
acceptable

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 The direct method

 The direct method shows each major class of gross

cash receipts and gross cash payments. The operating
cash flows section of the statement of cash flows
under the direct method would appear something like
this:

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 direct method

Cash receipts from customers xx,xxx

Cash paid to suppliers xx,xxx
Cash paid to employees xx,xxx
Cash paid for other operating xx,xxx
expenses
Interest paid xx,xxx
Income taxes paid xx,xxx
Net cash from operating activities xx,xxx
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 The indirect method

 The indirect method adjusts accrual basis net profit

or loss for the effects of non-cash transactions. The
operating cash flows section of the statement of cash
flows under the indirect method would appear
something like this:

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 The indirect method
Profit before interest and income taxes xx,xxx
Add back depreciation xx,xxx
Add back impairment of assets xx,xxx
Increase in receivables xx,xxx
Decrease in inventories xx,xxx
Increase in trade payables xx,xxx
Interest expense xx,xxx
Less Interest accrued but not yet paid xx,xxx
Interest paid xx,xxx
Income taxes paid xx,xxx
Net cash from operating activities xx,xxx
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 Components of cash and cash equivalents

 An entity shall disclose the components of cash and

cash equivalents and shall present a reconciliation of
the amounts in its statement of cash flows with the
equivalent items reported in the statement of financial
position.

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