IAS 7: Cash Flow Statements

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The objective of IAS 7 is to require the presentation of information about the historical changes in cash and cash equivalents of an enterprise by means of a cash flow statement which classifies cash flows during the period according to operating, investing and financing activities.

Fundamental Principle in IAS 7

All enterprises that prepare financial statements in conformity with IAS are required to present a cash flow statement. [IAS 7.1]

The cash flow statement analyses changes in cash and cash equivalents during a period. Cash and cash equivalents comprise cash on hand and demand deposits, together with short-term, highly liquid investments that are readily convertible to a known amount of cash, and that are subject to an insignificant risk of changes in value. Guidance notes indicate that an investment normally meets the definition of a cash equivalent when it has a maturity of three months or less from the date of acquisition. Equity investments are normally excluded, unless they are in substance a cash equivalent (e.g. preferred shares acquired within three months of their specified redemption date). Bank overdrafts which are repayable on demand and which form an integral part of an enterprise's cash management are also included as a component of cash and cash equivalents. [IAS 7.7-8]

Presentation of the Cash Flow Statement

Cash flows must be analysed between operating, investing and financing activities. [IAS 7.10]

Key principles specified by IAS 7 for the preparation of a cash flow statement are as follows:

Operating activities are the main revenue-producing activities of the enterprise that are not investing or financing activities, so operating cash flows include cash received from customers and cash paid to suppliers and employees. [IAS 7.14]

Investing activities are the acquisition and disposal of long-term assets and other investments that are not considered to be cash equivalents [IAS 7.6]

Financing activities are activities that alter the equity capital and borrowing structure of the enterprise [IAS 7.6]. 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 [IAS 7.31].

Cash flows arising from taxes on income are normally classified as operating, unless they can be specifically identified with financing or investing activities [IAS 7.35]. For operating cash flows, the direct method of presentation is encouraged, but the indirect method is acceptable [IAS 7.18]

The 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 expenses xx,xxx

Interest paid xx,xxx

Income taxes paid xx,xxx

Net cash from operating activities xx,xxx

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 cash flow statement under the indirect method would appear something like this:

Profit before interest and income taxes xx,xxx

Add back depreciation xx,xxx

Add back amortisation of goodwill 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

Operating, investing and financing cash flows

• Cash flows arising from taxes on income are normally classified as operating, unless they can be specifically identified with financing or investing activities. [IAS 7.35]

• For operating cash flows, the direct method of presentation is encouraged, but the indirect method is acceptable. [IAS 7.18]

• Cash flows relating to extraordinary items should be classified as operating, investing or financing as appropriate and should be separately disclosed. [IAS 7.29]

• The exchange rate used for translation of transactions denominated in a foreign currency and the cash flows of a foreign subsidiary should be the rate in effect at the date of the cash flows. [IAS 7.25]

• Cash flows of foreign subsidiaries should be translated at the exchange rates prevailing when the cash flows took place. [IAS 7.26]

• As regards the cash flows of associates and joint ventures, where the equity method is used, the cash flow statement should report only cash flows between the investor and the investee; where proportionate consolidation is used, the cash flow statement should include the venturer's share of the cash flows of the investee. [IAS 7.37-38]

• Aggregate cash flows relating to acquisitions and disposals of subsidiaries and other business units should be presented separately and classified as investing activities, with specified additional disclosures. The aggregate cash paid or received as consideration should be reported net of cash and cash equivalents acquired or disposed of [IAS 7.39]

• Cash flows from investing and financing activities should be reported gross by major class of cash receipts and major class of cash payments except for the following cases, which may be reported on a net basis: [IAS 7.22-24]

• Cash receipts and payments on behalf of customers (for example, receipt and repayment of demand deposits by banks, and receipts collected on behalf of and paid over to the owner of a property).

• Cash receipts and payments for items in which the turnover is quick, the amounts are large, and the maturities are short, generally less than three months (for example, charges and collections from credit card customers, and purchase and sale of investments) cash receipts and payments relating to fixed maturity deposits cash advances and loans made to customers and repayments thereof investing and financing transactions which do not require the use of cash should be excluded from the cash flow statement, but they should be separately disclosed elsewhere in the financial statements. [IAS 7.43]

• The components of cash and cash equivalents should be disclosed, and a reconciliation presented to amounts reported in the balance sheet. [IAS 7.45]

• The amount of cash and cash equivalents held by the enterprise that is not available for use by the group should be disclosed, together with a commentary by management. [IAS 7.48]

External Links

• [a summary for IFRSs and IASs]

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