Chapter 9 - Cash flow statements

Abstract

This chapter focuses on the IAS 7 accounting standard, which is designed to aid users for finding out overall solvency and liquidity of the enterprise. This standard requires a cash flow statement to be drawn up by summarizing the cash flows during a period into three separate sections, which include operating activities, investing, and financing. The IAS 7 permits two methods of calculating operating cash flows, which are known as direct and indirect methods. The indirect method requires the profit to be reconciled to the cash flow being generated by operations. The direct method, in contrast, identifies the actual cash receipts from customers and the actual cash payments to suppliers and employees. The investing heading includes purchases and sales of long-term assets and the purchase and sales of investments not qualifying as cash equivalents. Interest and dividends received may be classified under this heading but they may also be included under operating activities or financing. The financing heading represent various claims on future cash flows or sources of future cash flows which may include cash proceeds from the issue of shares, cash payments to redeem/acquire the enterprise's shares, cash proceeds from the issue of debentures, loans, cash repayments of loans, and cash payments by a lessee to repay principal of finance lease liabilities. An unusual feature required by IAS 7 is the need to provide a separate note to the financial statements detailing out the individual components of cash and cash equivalents, and requiring a reconciliation to the amounts reported in the balance sheet.