IAS 7 Statement of Cash Flows
Definition of the cash flow statement
The cash flow statement is the grouping of cash movements executed during a period, which are classified as operating, investing and financing activities.
Importance of the cash flow statement
- It provides timely information for management decision making.
- Provides information on the main cash disbursements made by the Company.
- Provides important information for forecasting future disbursements for the following year.
- Assists in making short-term investment decisions.
- Determines the Company’s ability to meet its obligations.
Methods of preparation of the cash flow statement
According to IAS 7 paragraph 18, the Company must report cash flows from operations using one of the following two methods:
- Direct method, whereby major categories of receipts and payments are presented separately on a gross basis; or
- Indirect method, which begins by presenting the profit or loss on a net basis, which is then corrected for the effects of non-cash transactions, for all types of deferred payment items and accruals that are the cause of receipts and payments in the past or in the future, as well as for items of profit or loss associated with cash flows from operations classified as investing or financing.
Classification of the cash flow statement
Cash flows from operating activities are derived primarily from transactions that constitute the entity’s principal source of revenue from ordinary activities. The principal operating activities are as follows:
- proceeds from the sale of goods and the rendering of services;
- receipts from royalties, fees, commissions and other revenues from ordinary activities;
- payments to suppliers for the supply of goods and services;
- payments to and on behalf of employees;
- receipts and payments from insurance companies for premiums and benefits, annuities and other obligations arising from policies underwritten;
- payments or refunds of income taxes, unless these can be specifically classified within investing or financing activities; and
- receipts and payments arising from contracts held for brokerage or dealing.
Disclosure of investing activities is important because such cash flows represent the extent to which expenditures have been made for resources that are expected to produce future income and cash flows. Only expenditures that result in the recognition of an asset in the statement of financial position qualify for classification as investing activities. Examples of cash flows from investing activities are as follows:
- payments for the acquisition of property, plant and equipment, intangible assets and other long-term assets.
- Proceeds from the sale of property, plant and equipment, intangible assets and other long-term assets;
The separate presentation of cash flows from financing activities is important because it is useful in forecasting cash requirements to cover commitments to the entity’s capital providers. Examples of cash flows from financing activities are as follows:
- proceeds from the issuance of shares or other equity instruments;
- payments to owners for acquiring or redeeming the entity’s shares;
- proceeds from the issuance of unsecured debentures, loans, bonds, mortgage bonds and other borrowed funds, whether long-term or short-term;
- cash repayments of borrowed funds; and
- payments made by the lessee to reduce an outstanding debt from a lease.