Cash Flow Statements - Pas 7

PAS 7 CASH FLOW STATEMENTS
IAS 7, the international standard on cash flow statements, was issued in 1992 and last amended in 2004, replacing an
earlier standard with the same number that had been issued in 1977. This standard explains the requirements and the
presentation of a statement of changes in cash.
Cash flows are inflows and outflows of cash and cash equivalents; cash comprises cash on hand and demand deposits;
and cash equivalents are short-term, highly liquid investments that are both readily convertible to known amounts of cash
and subject to an insignificant risk of changes in value.
a. Operating activities are the principal revenue-producing activities of the entity and other activities that are not
investing or financing activities.
b. Investing activities are the acquisition and disposal of long-term assets and other investments not included in
cash equivalents.
c. Financing activities are activities that result in changes in the size and composition of the contributed equity and
borrowings of the entity.
Entities are required to disclose what their policy is for determining what falls within the definition of cash and cash
equivalents. The particular issue is to decide how to distinguish what should be regarded as a cash equivalent from what
should be regarded as an investment. This is important because purchases and sales of investments for cash should
appear in the investing section of the cash flow statement, but if the investment is regarded as a cash equivalent, it
should not appear at all, being simply a rearrangement of cash resources.
Investments must not be subject to a significant risk of changes in value, IAS 7 says that an investment normally qualifies
as a cash equivalent only when it has a short maturity of, say, three months or less from the date of acquisition.
a. Equity shares are excluded unless (rarely) they are, in substance, cash equivalents, such as redeemable
preference shares acquired within a short period of their maturity.
b. In addition, any investment must be liquid so that it can be readily converted to known amounts of cash.
Although bank borrowings are generally considered to be financing activities, IAS 7 specifies that bank overdrafts
repayable on demand are included as a component of cash and cash equivalents. This is because under this kind of
banking arrangement, the bank balance often fluctuates from being positive to overdrawn.
there are two ways of presenting the operating activities section of the cash flow statement:
a. the direct and the
b. indirect methods.
IAS 7 encourages the use of the direct method, but in practice, most entities use the indirect method, which is easier to
produce.
When using the direct method, you shall disclose major classes of gross cash receipts and gross cash payments—for
example,
a. receipts from customers, or
b. payments to suppliers—which could be determined by aggregating all such cash payments as recorded in the
accounting records of the entity.
Alternatively, it could be worked out by adjusting the recorded figures for purchases by the increase or decrease in trade
creditors, or perhaps by adjusting cost of sales by more complex movements in other elements of working capital.
The indirect method adopts a similar process of adjusting profit and loss for the effects of movements in working capital
and other items that do not involve operating cash flows. However, the difference is that this reconciliation is published,
not the major classes of receipts and payments disclosed under the direct method.
a. Net profit or loss must be adjusted for non-cash entries and other elements that do not affect operating cash
flows for the period; for example, depreciation, provisions, and changes in working capital items.
b. It is important to make sure that all the adjustments relate to the correct items in the cash flow statement.
For example, when adjusting profits by the change in creditors, it is necessary to leave out any creditors that do not
relate to operating items, such as the suppliers of fixed assets. The change in such balances should instead be used in
preparing the investing activities section of the statement, to convert capital expenditure to a cash basis.
Although the term direct is not used in this context, the investing and financing activities sections are also presented on a
direct basis, meaning the information published is the gross cash payments and the gross cash receipts classified under
various headings. However, some of the figures will generally be calculated indirectly, by adjusting amounts calculated on
an accruals basis for non-cash movements to bring them back to a cash basis. some examples of investing activities?
a. Cash receipts and cash payments from the sale / purchase of property, plant and equipment, intangibles or other
non-current assets.
examples of financing activities?
a. Cash payments to owners to acquire or redeem entity’s shares and cash repayments of amounts borrowed.
1. the major classes of gross cash receipts and payments attributable to investing and financing activities must be
reported separately.
2. IAS 7 allows some netting of cash flows in limited circumstances; for example, if the cash flows relate to items whose
turnover is quick, the amounts are large, and the maturities are short.
In principle, the standard requires that any cash flows made in a foreign currency must be translated at the actual
exchange rate ruling at the date of the cash flow, in order to present on the cash flow statement. The standard applies to
cash flows conducted directly by the entity and those arising on the consolidation of foreign entities.

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PAS 7 CASH FLOW STATEMENTS

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