Fundamentals of IAS 7 Cashflow Statements
In today's complex business environment, it is essential for companies to maintain transparency and provide accurate financial information. One crucial aspect of financial reporting is the statement of cash flows. The International Accounting Standard (IAS) 7 sets out specific guidelines for preparing the statement of cash flows, ensuring that companies accurately report their cash and cash equivalents.
What is the purpose of IAS 7 statement of cash flows?
The main objective of the IAS 7 statement of cash flows is to provide users of financial statements with information about a company's cash flows during a specific period. This information is valuable for assessing the company's ability to generate future cash flows and its ability to meet its financial obligations. The statement of cash flows complements the income statement and balance sheet by providing a more complete view of a company's financial performance.
How does IAS 7 define cash and cash equivalents?
IAS 7 defines cash as cash on hand and demand deposits, while cash equivalents are short-term, highly liquid investments that are readily convertible into known amounts of cash and have an insignificant risk of changes in value. Examples of cash equivalents include treasury bills, commercial paper, and short-term government bonds.
What are the main requirements of IAS 7 in preparing the statement of cash flows?
IAS 7 requires companies to present a statement of cash flows as an integral part of their financial statements. The statement should demonstrate the changes in cash and cash equivalents during a specified period and should classify cash flows into operating, investing, and financing activities.
What are the different sections of a cash flow statement according to IAS 7?
According to IAS 7, the statement of cash flows consists of three main sections: operating activities, investing activities, and financing activities. The operating activities section reports cash flows arising from the company's primary operations, such as sales and purchases. The investing activities section shows cash flows related to the acquisition and disposal of long-term assets, while the financing activities section presents cash flows associated with raising funds and repayments of borrowings.
What are the key differences between IAS 7 and other accounting standards?
IAS 7 is part of the International Financial Reporting Standards (IFRS), which is a widely accepted set of accounting standards used by companies around the world. While the IFRS framework provides general guidelines for the preparation of financial statements, IAS 7 specifically focuses on the statement of cash flows and sets out detailed requirements for its presentation and disclosure.
How does IAS 7 differ from IFRS in terms of cash and cash equivalents?
One key difference between IAS 7 and other accounting standards, including IFRS, is the definition of cash and cash equivalents. IAS 7 provides a specific definition, which includes cash on hand, demand deposits, and highly liquid investments with minimal risk of value changes. Other accounting standards may have a broader or narrower definition, so it is crucial for companies to adhere to the specific requirements of IAS 7 when preparing their cash flow statements.
What are the disclosure requirements under IAS 7?
IAS 7 requires companies to provide specific disclosures in their cash flow statements. These disclosures include information about the significant non-cash investing and financing activities, the composition of cash and cash equivalents, and the reconciliation of the net cash provided by operating activities to the net income reported in the income statement.
What are the investing and financing activities included in the statement of cash flows?
The investing activities section of the statement of cash flows includes cash flows related to the acquisition and disposal of long-term assets, such as property, plant, and equipment. It also includes cash flows related to investments in other entities and the collection of loans made by the company. The financing activities section reports cash flows associated with raising funds, such as issuing shares or borrowing money, and the repayments of borrowings Some examples of cash flows reported in the financing activities section include:
1. Issuing shares: Cash inflows from issuing new shares to investors or shareholders. This could include initial public offerings (IPOs) or secondary offerings of additional shares.
2. Repayment of borrowings: Cash outflows from repaying loans or other forms of borrowings. This includes principal repayments made on long-term debt obligations.
3. Proceeds from borrowings: Cash inflows from obtaining new loans or credit facilities. This could include the issuance of bonds or borrowing from financial institutions.
4. Dividend payments: Cash outflows from distributing dividends to shareholders. This represents the portion of profits paid out to the owners of the company.
5. Repurchase of shares: Cash outflows from buying back shares from shareholders. This could be done as part of a share buyback program or to reduce the number of outstanding shares.
6. Payment of lease liabilities: Cash outflows from lease payments made for the use of assets. This includes both operating and finance leases.
7. Treasury stock transactions: Cash outflows from purchasing shares of the company's own stock. This is different from repurchasing shares from shareholders as it involves retiring the purchased shares.
It is important to note that while the financing activities section reports cash flows associated with raising funds and repayments of borrowings, it does not include interest payments related to borrowings. Interest payments are reported as cash flows from operating activities.
How is the statement of cash flows prepared under IAS 7?
What is the indirect method used to calculate operating cash flows?
Under IAS 7, companies can choose to present the statement of cash flows using either the direct method or the indirect method. The indirect method is the most commonly used approach. It starts with the net income reported in the income statement and adjusts it for non-cash expenses and changes in working capital. The indirect method reconciles the net income to the net cash provided by operating activities.
How are cash receipts and cash payments classified in the statement of cash flows?
Cash receipts and cash payments are classified based on their nature and purpose in the statement of cash flows. For example, cash receipts from sales would be classified as operating cash inflows, while cash payments to suppliers would be classified as operating cash outflows. Similarly, cash received from the sale of equipment would be classified as investing cash inflows, while cash paid to repay a loan would be classified as financing cash outflows.
What are the historical changes in cash and cash equivalents?
One important aspect of the statement of cash flows is that it provides historical information about changes in a company's cash and cash equivalents. By comparing the opening and closing balances of cash and cash equivalents, stakeholders can analyze the company's cash flow trends over a specific period.
What are the major challenges in preparing the statement of cash flows according to IAS 7?
What are the specific requirements for disclosing cash flows from operating activities?
IAS 7 requires companies to provide detailed disclosures about cash flows from operating activities. These disclosures include the reconciliation of the operating profit to the net cash provided by operating activities, as well as explanations of the significant non-cash items included in the operating profit and the working capital changes.
How are investments not included in cash and cash equivalents treated in the statement of cash flows?
If a company has investments that are not included in cash and cash equivalents, they should be reported separately in the statement of cash flows. These investments should be classified as either investing or financing activities, depending on their nature and purpose.
How are cash flows classified and presented in the statement of cash flows?
According to IAS 7, cash flows are classified into three main categories: operating activities, investing activities, and financing activities. Each category should be presented separately, and the cash flows should be reported gross, meaning that inflows and outflows should be shown separately without netting them off.