What are cash flows?
Cash flows are the inflows and outflows of cash, which occur in an entity from the production and sale of goods and/or services with the intention of generating a profit.
IAS 7 establishes the following definitions:
- Cash flows are the inflows and outflows of cash and cash equivalents.
- Cash comprises both cash and bank deposits on demand.
- Cash equivalents are short-term, highly liquid investments that are readily convertible to specified amounts of cash and are subject to an insignificant risk of changes in value.
Do we know the different cash flows?
In economic entities, the generation of cash is given by shares representing positive flows, while the use of cash may be given by shares representing negative flows. Thus, in general they can be listed as:
- Customer collections.
- Shareholder capital contributions.
- Bank loans.
- Sales of assets.
- Payments to suppliers.
- Bank loan payments.
- Operating, administrative and other expenses.
- Payment of social benefits, wages and salaries.
- Payment of dividends.
- New investments.
What is the Standard that addresses cash and cash flow?
The objective of International Accounting Standard No. 7 (IAS 7) is to require the provision of information about historical changes in an entity’s cash and cash equivalents through a cash flow statement in which the cash flows for the period are classified as coming from operating, investing and financing activities.
What is the significance of cash flow?
The information that presents the cash flows of an entity is paramount to the continuity of operations. Knowing the cash flow allows users of financial statements to know:
- The capacity of the entity to generate cash and cash equivalents.
- The entity’s needs to use those cash flows.
- Financing or investment needs.
Each entity must adequately manage and control its liquidity, in order to face not only the continuity of its operations but also any situation that may arise that is not covered by their budgets. The intention is to obtain profitability and solvency in the short, medium and long term.
In this sense, the best scenario when managing cash is to increase the inflows mainly generated by the sale of goods and / or services and make the collection quickly (cash, advances), also reduce cash outflows through discounts on purchases of materials and / or reduction of unnecessary expenses, and delaying payments through increased deadlines.
Classification of cash flows in accordance with IAS 7
The cash flow statement will report cash flows during the period, classifying them by activity:
- Operating activities are those activities that constitute the principal source of income of the entity, as well as other activities that cannot be classified as investing or financing activities.
- Investing activities are those of acquisition and disposal of long-term assets, as well as other investments not included in cash equivalents.
- Financing activities are those activities that produce changes in the size and composition of the equity and loans taken by the entity.
Islava Zulema Ruiz Quiroz Degree in Public Accounting