IAS 7 Statement of Cash Flows: Summary - applies in 2025

Summary

This video explains IAS 7, the International Financial Reporting Standard for the statement of cash flows. It outlines how cash flows are categorized into operating, investing, and financing activities, focusing on the generation and use of cash by a business. The statement also highlights the importance of cash and cash equivalents and discusses the direct and indirect methods of reporting cash flows. Key concepts such as reconciliation of cash balances and exceptions for certain transactions are also covered, providing a comprehensive understanding of the cash flow statement under IFRS.

Takeaways

• 😀 The statement of cash flows is the only financial statement that ignores the accrual principle, focusing solely on real cash in and out.
• 😀 IFRS requires the statement of cash flows to include cash flows from operating, investing, and financing activities.
• 😀 The main benefit of preparing a statement of cash flows is that it shows the entity's ability to generate cash and the sources of its cash inflows and outflows.
• 😀 The statement of cash flows must be presented for a specific period (e.g., from January 1 to December 31) and should include key identification marks such as the reporting entity's name, reporting period, and currency.
• 😀 Cash and cash equivalents include cash on hand, demand deposits, and short-term investments with a maturity of three months or less.
• 😀 Cash flows are reported in three main categories: operating, investing, and financing activities, with each category having specific cash transactions associated with it.
• 😀 Operating activities represent the principal revenue-generating activities of the entity, such as cash receipts from sales or payments to suppliers and employees.
• 😀 Investing activities include the acquisition and disposal of long-term assets, such as property, plant, and equipment, and equity or debt investments.
• 😀 Financing activities reflect changes in the size and composition of the entity's contributed equity and borrowings, such as issuing shares or taking loans.
• 😀 The statement of cash flows can be presented using either the direct or indirect method, with the indirect method often preferred for its simplicity.
• 😀 Financial institutions (e.g., banks) may report certain cash flows on a net basis, and there are some exceptions for other entities, such as cash flows made on behalf of customers or short-term transactions.

Q & A

What is the main purpose of the Statement of Cash Flows according to IAS 7?

The main purpose of the Statement of Cash Flows is to show the movement of cash and cash equivalents during a specific period, helping stakeholders understand how a company generates and uses cash from operating, investing, and financing activities.

What are cash and cash equivalents as defined by IAS 7?

Cash and cash equivalents include cash on hand, demand deposits, and highly liquid short-term investments that are easily convertible to known amounts of cash. These investments must have a maturity of three months or less from the acquisition date.

Why are movements in cash and cash equivalents excluded from cash flow statements?

Movements between items that constitute cash or cash equivalents are excluded because they are considered part of cash management, not activities related to the entity’s operations, investing, or financing.

What are the three main sections of the Statement of Cash Flows?

The three main sections of the Statement of Cash Flows are: 1) Cash flows from operating activities, 2) Cash flows from investing activities, and 3) Cash flows from financing activities.

What activities are included under operating activities in the cash flow statement?

Operating activities include cash receipts from the sale of goods or services, cash payments to suppliers and employees, and cash payments or refunds related to income taxes.

What is the difference between operating activities and investing activities?

Operating activities involve the core business operations like sales and expenses, whereas investing activities include the acquisition or disposal of long-term assets such as property, plant, equipment, and investments in other entities.

What types of cash flows are reported under financing activities?

Financing activities report cash flows related to changes in the entity’s capital structure, such as issuing or redeeming shares, taking loans, repaying debt, and payments related to leases.

How should cash flows from operating activities be presented?

Cash flows from operating activities can be reported using either the direct method, where gross cash receipts and payments are disclosed, or the indirect method, where adjustments are made to profit or loss for non-cash items and changes in working capital.

What are the exceptions to the gross presentation of cash flows in the cash flow statement?

Exceptions to the gross presentation include cash flows made on behalf of customers or transactions with quick turnover, such as credit card transactions. In these cases, cash flows can be reported on a net basis.

What is required in the reconciliation of cash and cash equivalents at the end of the period?

The reconciliation must show the net increase or decrease in cash and cash equivalents, the effect of exchange rate changes on cash balances, and the balance of cash and cash equivalents at both the beginning and the end of the period.