IAS 7 Statement of Cash Flows

The Statement of Cash Flows

A Historical Perspective on the Statement of Cash Flows

In 1987, the Financial Accounting Standards Board (FASB) issued an accounting standard, FASB Statement no. 95, requiring that the statement of cash flows be presented as one of the three primary financial statements. Previously, companies had been required to present a statement of changes in financial position, often called the funds statement. In 1971, APC Opinion no. 19 made the funds statement a required financial statement although many companies had begun reporting funds flow information several years earlier.

The funds statement provided useful information, but it had several limitations. First, APB Opinion no. 19 allowed considerable flexibility in how funds could be defined and how they were reported on the statement. Read more

Analysis of cash flows

See operating, financing and investing activities for a technical explanation of the components of a cash flow statement.

The cash flow statement is an addition to the balances sheets in the statement of financial position and the income statement or may be call it a ‘bridge’ statement in between those two main statements. The balance sheet is a position as at a certain date for current and non-current assets, less current and non-current liabilities, resulting a residual component of equity. The income statement shows the amounts earned in a year using the matching principle (sales match cost of sales, depreciation and amortisation match productive life) and accrual concept of accounting (expense and income allocation to the period they belong to).… Read more

What can the Statement of Cash Flows tell you?

The statement of cash flows, as its name implies, summarises a company’s cash flows for a period of time. The statement of cash flows explains how a company’s cash was generated during the period and how that cash was used. Even if the statement of cash flows seems to be a replacement for the income statement, the two statements have distinct objectives.

The income statement measures the results of operations for a period of time. Net income is the reporting entity’s best estimate representing a company’s economic performance for a period. The income statement provides details as to how the retained earnings account changed during a period and ties together, in part, the changes in the owner’s equity section of period-to-period balance sheets (the income statement started as a disclosure (sheet) of movements in shareholder’s equity). What can the Statement of Cash Flows tell you?Read More »What can the Statement of Cash Flows tell you?

Trading in securities and loans

IAS 7.14 includes a number of examples of operating cash flows, including cash receipts and payments from contracts held for dealing or trading purposes. IAS 7.15 notes that when an entity holds securities and loans for dealing or trading purposes, those items are similar to inventory acquired specifically for resale. As a result, the cash flows arising from the purchase and sale of dealing or trading securities are classified within operating activities.

Consistent with this approach, IAS 7.16(c) and (d) require cash flows which relate to the acquisition or sale of equity or debt instruments of other entities (including interests in joint ventures) to be classified as arising from investing activities, unless the instruments being acquired are considered to be … Read more

Group cash pooling and company accounts

Cash pooling arrangements arise where one group entity (which may be the ultimate group parent, or a fellow subsidiary) acts as the treasury function for the rest of the group. Under these arrangements, one entity within a group holds and maintains all cash balances with an external financial institution(s) and advances funds to group entities.

Often, a group treasury function is used in order to make the most efficient use of cash resources within a group, and to enable hedge accounting transactions to be entered into at group-level at the lowest overall cost. Typically, the group entities that act as a treasury function are not financial institutions. In some cases, subsidiaries do not have bank accounts at all, and instead … Read more

Foreign currency cash flows

IAS 7.25 requires cash flows arising from transactions in a foreign currency to be recorded at the exchange rate between an entity’s functional currency and the foreign currency at the date of the cash flow.

A similar approach is required for cash flows of a foreign subsidiary (IAS 7.26).

IAS 7.27 Foreign currency cash flows notes that cash flows denominated in a foreign currency are dealt with in a manner that is consistent with that required by IAS 21 The Effects of Changes in Foreign Exchange Rates.

Consequently, it is possible to use exchange rates that approximate the exchange rates at the dates of transactions (for example, a monthly rate or, if exchange rates are stable, a … Read more