The cash flow statement is one of the three main financial statements that a company or organisation must prepare as part of its year end accounts. The other two statements are the profit and loss account and the balance sheet.
The profit and loss account shows the profitability of the business and the balance sheet shows solvency and liquidity so the cash flow statement shows the sources of the cash and how the business uses its cash.
The cash flow statement discloses and explains changes in cash and cash equivalents of a company during the financial year. Cash is the liquid resources that the business has and generally cash equivalents are assets easy to convert to cash. Cash equivalents are short-term, highly liquid investments subject to insignificant risk of changes in value.
Under IAS 7 a cash flow statement should classify changes in cash and cash equivalents into three categories which are:
· operating cash flows
· investing cash flows
· cash flows from financial activities
Operating cash flows
The operating cash flow is the cash flow that a company generates from its operating activities. A company can elect to present the operating cash flows using the direct method or the indirect methods. The direct method is a cash book based methodology and it shows receipts from customers and payments to suppliers, employees, and taxation. The indirect method is driven from the balance sheet and profit and loss account. It begins with the accrual basis net profit or loss from the accounts and adjustments are done for major non-cash items like provisions for bad debts and depreciation.
Under IAS 7 the cash flows incurred on taxation and interest must be disclosed separately within operating activities, unless they can be specifically identified with or related with investing cash flows or cash flows from financial activities.
Investing cash flows
Investing cash flows are cash flows from outlays or acquisition of fixed assets like cash payments that arise from the acquisition of property, plant, and equipment. Cash that is received from the disposal of assets is also disclosed as cash flow from investing activities.
“Acquisition or sale of equity or debt instruments of other enterprises and advances or loans made to, or repayments from, third parties and cash used to acquire or dispose of subsidiaries” is also disclosed under IAS 7 as cash flows from investing activities.
Since a cash flow statement is cash based, any investing activities that do not give rise to cash flows, for example a “non monetary transaction such as acquisition of property by issuing debt,” must be excluded from the cash flow statement.
Cash flows from financial activities
Cash flows from financial activities are also disclosed separately as either cash receipts or cash payments arising “from an issue of share or other equity securities; payments made to redeem such securities; proceeds arising from issuing debentures, loans, notes; and repayments of such securities”.
Conclusion
The cash flow is the subject of IAS 7 and it is one of the three main financial statements that a company or organisation must prepare as part of its year end accounts. The cash flow statement discloses and explains changes in cash and cash equivalents of a company during the financial period and it classifies the cash and cash equivalents into three categories which are operating cash flows, investing cash flows, and cash flows from financial activities.
Munya Mtetwa - Munya is an ACCA and IFA qualified accountant with over ten years financial management and accounting experience acquired in a plethora of ...
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