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IAS 7 Statement of Cash Flows

IAS 7 Statement of Cash Flows requires an entity to present a statement of cash flow in its financial statements, cash flows classified into different categories;

a) Cash flow from operating activities
b) Cash flow from investing activities or financing activities.

IAS 7 Statement of Cash Flows applied on the statements after 1 January 1994.

Objective of IAS 7 Statement of Cash Flows

IAS 7 requires an entity to present the information about changes in the cash and cash equivalents by a
statement of cash flows, these cash flows will be classified under operating, investing and financing activities.

Fundamental principle of IAS 7 Statement of Cash Flows

All entities, which are preparing their financial statements according to IFRS (International Financial
Reporting Standards), are required to present the Statement of Cash flows. This statement analyses the
changes in the cash and cash equivalents during a period. There are different items in cash equivalents
like; demand deposits highly liquids investments that can readily convertible to cash. There should be
an insignificant risk of changes in value. Investments that have the maturity of three months or less meets the
definition of cash equivalents. Equity investments are not included in the cash equivalents unless they are
in substance cash equivalent. Bank overdrafts, which are integral, part of an entity cash management, are
also included in cash and cash equivalent.

Presentation of the Statement of Cash Flows

Cash flows divided into three parts

Operating Activities,

Cash generated from operating activities (the main activities through which an entity earning its cash
flow) that are not investing or financing activities. So operating cash flow is the cash, is received from the
customer and paid to suppliers.

Investing Activities,

Investing activities are acquisition of long-term assets and other investments, which are not under the cash
equivalents.

Financing Activities,

These activities include equity capital and borrowing structure of the entity.

Interest and dividends received and paid can be classified in investing, operating and financing activities
depending on that these consistently classified into this category from the previous years. Income
received from taxes classified under operating activities unless these specifically identified with investing
or financing activities.

There are two methods for the preparation of statement of cash flow,

1. Direct Method
2. Indirect Method

In Direct Method shows all the receipts and payments for each class, operating cash flow section in direct method will be like this,

Direct Method Cash Flow Statement

Cash receipts from customers
Cash paid to supplier’s
Cash paid to employee’s
Cash paid for other operating expenses
Interest paid
Income taxes paid
Net cash from operating activities

In Indirect Method statement of cash flow accrual, basis net profit or loss adjusted with non-cash
transaction. Operating cash flow section of indirect method cash flow statement will be like this.

Indirect Method Cash Flow Statement

Profit before interest and income taxes
Add back depreciation
Add back impairment of assets
Increase in receivables
Decrease in inventories
Increase in trade payables
Interest expense
Less Interest accrued but not yet paid
Interest paid
Income taxes paid
Net cash from operating activities

The translation rate used for transaction denominated in a foreign currency should be the rate in effect at
the cash flows prepared. The translation of foreign subsidies cash flows should be translated at the exchange
rate when the cash flows took place. Investing and financing activities which do not require cash should
not include in the statement of cash flow, but these will be disclosed somewhere in the financial
statements. Entities should provide disclosures, which enable the users of the financial statements about
the change in the liabilities raised from financing activities. The cash and cash equivalents held but are
not available for the use by group, should be disclosed with management commentary

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