IAS 7 Statement of Cashflows

The objective of IAS 7 is to require entities to provide information about changes in cash and cash equivalents through a statement of cash flows, helping users evaluate an entity’s liquidity and cash management.

Cash: Cash on hand and demand deposits

Cash equivalents: Short-term, highly liquid investments that are readily convertible to cash and subject to insignificant risk of changes in value (e.g., treasury bills, money market funds).

Operating activities – Cash flows from the entity’s main revenue-generating activities.

Investing activities – Cash flows related to the acquisition and disposal of long-term assets and investments.

Financing activities – Cash flows from transactions affecting equity and borrowings.

Cash received from customers
Cash paid to suppliers and employees
Interest paid and received
Tax payments

Purchase or sale of property, plant, and equipment (PPE)
Buying or selling investments in other companies
Loans made to or received from other entities

Issuing or repurchasing shares
Borrowing or repaying loans
Paying dividends

Direct method – Shows cash receipts and payments directly
Indirect method – Starts with net profit and adjusts for non-cash items and changes in working capital

: Non-cash transactions (e.g., asset purchases via leases or equity settlements) are not included in the cash flow statement but must be disclosed in the notes.

Net cash flow from operating activities =
Net profit + Non-cash expenses (e.g., depreciation) +/- Changes in working capital - Non-operating gains

Cash flows should be converted to the entity’s functional currency at the exchange rate on the transaction date. Any exchange differences are reported separately in the cash flow statement.

Shows liquidity and solvency
Helps assess cash flow generation ability
Provides insights into financial health and sustainability

Cash and cash equivalents policy

Reconciliation of cash and cash equivalents in the statement of cash flows and the statement of financial position

Non-cash investing and financing transactions (e.g., acquiring assets through leasing)

1. Shows Liquidity & Cash Availability
Unlike the income statement, which includes non-cash items (like depreciation), the cash flow statement shows actual cash inflows and outflows.
Helps assess whether a company can meet short-term obligations (e.g., paying suppliers, employees, and loans).

2. Helps Identify Cash Flow Sources
The statement is divided into three sections:

Operating Activities – Shows cash generated from core business operations. A strong cash flow here indicates a healthy business.
Investing Activities – Covers cash spent on long-term assets (e.g., buying equipment) and cash received from asset sales.
Financing Activities – Includes cash movements related to borrowing, repaying debt, and issuing or repurchasing shares.

3. Assesses Solvency & Financial Stability
Investors and creditors use the statement to determine if a company can generate enough cash to sustain operations and repay debts.

A company with positive cash flow from operations is in a stronger financial position than one relying on external financing.

4. Detects Financial Issues & Manipulations
Companies can manipulate profits using accounting estimates, but cash flow is harder to manipulate.
Negative operating cash flow despite reported profits can be a red flag of financial instability.

5. Aids in Decision-Making
Businesses use it to plan investments, manage working capital, and ensure they have enough liquidity.
Investors analyze it to determine if a company is generating sufficient cash to reinvest or distribute as dividends.

6. Shows adaptability - how we can change with unexected changes

7. Adequate cashflows are essential to ensure asset replacement, fund future growth