IAS 7 Statement of cash flows Advantages examples

The standard requires presenting information about the historical changes in an entity’s cash and cash equivalents using a statement of cash flows. Information about the cash flows of an entity is useful in enabling users of financial statements to assess the ability of the entity to generate cash and cash equivalents and the needs of the entity to use those cash flows. The statement, required to be produced as part of the entity’s financial statements, classifies cash flows during the period according to operating, investing, and financing activities.

Statement of Cash Flows: IAS 7

• operating activities – the main revenue-generating activities of the business, together with cash outflows relating to interest and tax
• investing activities – the acquisition and disposal of long-term assets and other investments that are not considered to be cash equivalents, together with interest and dividends received
• financing activities – receipts from the issue of new shares, changes in long-term borrowings, and payment of dividends.

At the end of the statement, the net increase in cash and cash equivalents is shown, both at the start and end of the period under review. For this purpose:

• Cash is cash on hand and demand deposits.
• Cash equivalents are short-term, highly liquid investments that can easily be converted into cash. This is usually taken to mean money held in a term deposit account that can be withdrawn within three months from the date of deposit.
• Bank overdrafts – usually repayable on demand – are included as part of cash and cash equivalents.

Format of the statement

Operating activities

The cash flow from operating activities is:

• profit from operations (profit before deduction of tax and interest)
• add: depreciation charge for the year
• add: loss on sale of non-current assets (or deduct gain on sale of non-current assets)
• less: investment income
• add: decrease in inventories, decrease in trade and other receivables, and increase in trade payables; or

deduct: increase in inventories, increase in trade and other receivables, and decrease in trade payables

• less: interest paid
• less: taxes paid on income (usually corporation tax).

Investing activities

Calculate by addition of:

• inflows from sale proceeds of property, plant, and equipment both tangible and intangible, together with other non-current assets
• outflows from cash used to purchase property, plant, and equipment, both tangible and intangible, together with other non-current assets
• interest received
• dividends received.

Financing activities

Calculate by addition of:

• inflows from:
• cash received from the issue of share capital (including share premium)
• raising or increasing loans

2)outflows from:

• repayment of share capital
• repayment of loans and finance lease liabilities
• equity dividends paid.

Allowable variations:

The standard allows some flexibility in the way in which cash flow statements can be presented:

• Cash flows from interest and dividends received and paid, can be shown as operating investing, or financing activities. Whichever is chosen must be applied consistently from period to period.
• Cash flows arising from taxes on income are always classified as operating activities unless they can be specifically identified with financing and investing activities.

Frequently Asked Questions