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Overview and Structure
[edit]International Accounting Standard 7: Statement of Cash Flows (IAS 7) establishes the requirements for reporting changes in cash and cash equivalents.[1] The statement of cash flows is an integral component of a complete set of financial statements.[2] IAS 7 requires entities to classify cash flows during the period into three distinct categories: operating, investing, and financing activities.[3]
Operating activities are the principal revenue-producing activities of the entity.[4] Investing activities involve the acquisition and disposal of long-term assets and other investments not included in cash equivalents.[5] Financing activities result in changes in the size and composition of the contributed equity and borrowings of the entity.[6]
Illustrative Example: Cash Flow Reconciliation (Indirect Method)
[edit]IAS 7 requires a reconciliation between profit and the net change in cash to arrive at the final cash balance.[7]
Scenario: Cash (Jan 1): $10,000 | Net Profit: $50,000 | Depreciation: $5,000 | Increase in Receivables: $2,000 | Purchase of PPE: $15,000 | Loan Repayment: $8,000.
Calculation: Cash from Operations: $53,000 | Cash from Investing: ($15,000) | Cash from Financing: ($8,000) | Net Cash Increase: $30,000.[8]
Cash Flow Statement Reconciliation:
| Item | Amount | Rationale |
|---|---|---|
| Net Profit | $50,000 | Starting point for indirect method.[9] |
| Adjustments (Depreciation & Working Capital) | $3,000 | Non-cash add-back ($5k) less receivable increase ($2k).[10] |
| Net Cash from Operating Activities | $53,000 | Subtotal of operations.[11] |
| Net Cash from Investing & Financing | ($23,000) | Purchase of PPE ($15k) and loan repayment ($8k).[12] |
| Net Increase in Cash for the Period | $30,000 | Total change in cash position.[13] |
| Cash and Cash Equivalents (Jan 1) | $10,000 | Opening balance from prior year.[14] |
| Cash and Cash Equivalents (Dec 31) | $40,000 | Final balance reported on the Balance Sheet.[15] |
References
[edit]- ^ IASB. IAS 7, Paragraph 1.
- ^ Deloitte. IAS 7 — Statement of Cash Flows Summary.
- ^ IASB. IAS 7, Paragraph 10.
- ^ IASB. IAS 7, Paragraph 14.
- ^ Deloitte. IAS 7 — Investing activities guidance.
- ^ IASB. IAS 7, Paragraph 17.
- ^ IASB. IAS 7, Para 20.
- ^ Deloitte. IAS 7 Reporting.
- ^ IASB. IAS 7, Para 18.
- ^ IASB. IAS 7, Para 20.
- ^ Deloitte. IAS 7 Operations.
- ^ IASB. IAS 7, Para 17.
- ^ IASB. IAS 7, Para 45.
- ^ Deloitte. IAS 7 Summary.
- ^ IASB. IAS 7, Para 45.