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Chapter 5
STATEMENT OF CASH FLOWS (IAS 7)
BACKGROUND AND INTRODUCTION
IAS 1, Presentation of Financial Statements, makes it incumbent upon entities preparing financial statements under International Financial Reporting Standards
(IFRS) to present a statement of cash flows as an integral part of the financial statements. IAS 7, Statement of Cash Flows, lays down rules regarding statement of cash
flows preparation and reporting. The statement of cash flows provides information about an entity’s cash receipts and cash payments (i.e., cash flows) for the period
for which the financial statements are presented.
The statement of cash flows replaced the “fund flow statement,” which most accounting standards around the world (including the then International Accounting
Standards) previously required to be presented as an integral part of the financial statements. The fund flow statement reported the movements or changes in funds.
Certain standards interpreted the term “funds” as “net liquid funds;” most others, however, interpreted “funds” as “working capital.” Most standard setters revised their
standards in favor of the statement of cash flows, probably due to the ambiguity in the interpretation of the concept of “funds” coupled with the growing importance of
the concept of “cash generated by operations.” With the change in requirements, whereby an entity is required to report a statement of cash flows (in lieu of a funds
flow statement) as an integral part of its financial statements, the emphasis has clearly shifted globally from reporting movements in funds (say, working capital) to cash
inflows and cash outflows (i.e., cash receipts and cash payments) for the period for which the financial statements are presented.
SCOPE
All entities, regardless of the nature of their activities, should prepare a statement of cash flows in accordance with the requirements of IAS 7. The statement of cash
flows should be presented as an integral part of the financial statements for each period for which the financial statements are presented. Recognizing that no matter
how diverse the principal revenue-generating activities of the entities are, their needs for cash to pay their obligations (liabilities) and to produce returns for the
shareholders is the same, the statement of cash flows has been made mandatory for all entities.
(in accordance with IAS 7, paragraph 6)
Cash. Comprises cash on hand and demand deposits with banks.
DEFINITIONS OF KEY TERMS
Cash equivalents. Short-term, highly liquid investments that are readily convertible into known amounts of cash and that are subject to an insignificant
amount of risk of changes in value.
Operating activities. Principal revenue-producing activities of the entity and other activities that are not investing or financing activities.
Investing activities. Activities of the entity that relate to acquisition and disposal of long-lived assets and other noncurrent assets (including investments)
other than those included in cash equivalents.
Financing activities. Activities that result in changes in the size and composition of the equity capital and borrowings of an entity.
BENEFITS OF PRESENTING A STATEMENT OF CASH FLOWS
When presented along with the other components of financial statements (namely, a statement of financial position, a statement of comprehensive income, and a
statement of changes of equity), a statement of cash flows provides this additional information to users of financial statements:
1. A better insight into the financial structure of an entity, including its liquidity and solvency, and its ability to affect the amounts and timing of cash flows in
order to adapt to changing circumstances and opportunities.
2. Enhanced information for the purposes of evaluation of changes in assets, liabilities, and equity of an entity.
Furthermore, a statement of cash flows also
3. Enhances the comparability of reporting operating performance by different entities because it eliminates the effects of using different accounting treatments for
similar transactions.
4. Serves as an indicator of the amount, timing, and certainty of future cash flows.
CASH AND CASH EQUIVALENTS
True Significance of the Term “Cash Equivalents”
Cash equivalents are held by the entity for meeting short-term commitments. The true meaning of cash equivalents can be best understood by analyzing the
definition given by the Standard. According to the definition, cash equivalents are required to possess these two attributes: