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Statement of cash flows is a financial statement that reports the changes in the company's cash balance. This statement is divided into three sections, namely: operating activities, investing activities, and financing activities.
Latest edition: Our comprehensive guide to the statement of cash flows, with Q&As and examples to explain key concepts. We explain cash flow classification issues and noncash disclosure requirements in detail, with special attention to recent SEC statements.
- Cash and Cash Equivalents
- Restricted Cash
- Operating Activities
- Investing Activities
- Financing Activities
- Practical Application Issues: Operating, Investing, and Financing Activities
- Reporting Cash Flows on A Gross vs. Net Basis
- Foreign Currency Cash Flows
- Non-Cash Transactions
- Changes in Liabilities Arising from Financing Activities
Cash
Cash, as defined in IAS 7.6, comprises both cash on hand and demand deposits. However, IAS 7 does not provide explicit definitions for either of these terms. Typically, cash on hand is interpreted as physical currency, including notes and coins, issued by a central bank. Demand deposits, on the other hand, should possess liquidity comparable to cash, allowing for the withdrawal of funds at any time without incurring substantial penalties, such as the loss of a significant portion of accrued i...
Cash equivalents
Cash equivalents are investments that are (IAS 7.6-9): 1. Held for meeting short-term cash commitments rather than for investment or other purposes, 2. Highly liquid, 3. Readily convertible to known amounts of cash, and 4. Subject to an insignificant risk of changes in value. Generally, as stipulated by IAS 7.7, an investment should have a maturity of no more than three months from the acquisition date to be considered short-term. Although IAS 7 does not strictly enforce this three-month peri...
Debt instruments and money market funds
Certain debt instruments, including government and high-quality corporate bonds, can potentially meet the criteria for cash equivalents. However, investments in debt securities carrying significant credit risk are not classified as cash equivalents, due to the risk of default by the issuer. Money market funds, also known as liquidity funds, are often utilised by companies in their cash management processes. Despite being equity instruments, they may be treated as cash equivalents if they fulf...
Restricted cash refers to cash and cash equivalent balances that have usage constraints. IAS 7 provides an example of balances held by a subsidiary, which are not accessible by the group due to exchange controls or other legal restrictions. Such instances should be disclosed under IAS 7.48-49, as shown in this extract from Vodafone’s annual report:...
Operating activities constitute the principal revenue-producing activities of an entity and serve as the default category for cash flows that do not align with the definitions of either investing or financing cash flows. Typically, cash flows resulting from transactions or events directly impacting profit or loss are presented under operating activ...
Investing activities involve acquiring and disposing of long-term assets and other investments not classified as cash equivalents. Such cash flows must lead to a recognised asset in the statement of financial position (IAS 7.6,16) – a crucial point to note. Items intrinsically related to investing activities that don’t result in a recognised asset ...
Financing activities result in changes in the size and composition of the entity’s contributed equity and borrowings (IAS 7.6,17). Examples of such activities encompass: 1. Cash proceeds from issuing shares or other equity instruments. 2. Cash payments to owners for acquiring or redeeming the entity’s own shares. 3. Cash payments for acquiring non-...
Interest and dividends
A dedicated section of IAS 7 (IAS 7.31-34) addresses interest and dividends, given the lack of consensus on their classification as operating, investing, or financing activities. The following table provides a summary of the categories they may be included in: The inclusion of interest paid or received and dividends received within operating activities aligns with the rationale that these items impact the profit or loss of the entity. Including dividends paid in operating activities can depic...
Factoring of trade receivables
IAS 7 does not specifically address the factoring of trade receivables. The presentation in the statement of cash flows depends on whether the receivables subjected to factoring are derecognised. If so, this implies that they have, in substance, been paid, warranting a cash inflow from operating activities. If not derecognised, factoring is essentially a borrowing, with the receivables treated as collateral, hence recognised as a financial liability and cash receipt in financing activities. T...
Supplier finance arrangements
Supplier finance arrangements present similar challenges in presentation as factoring of trade receivables. The pivotal question, once again, is whether the derecognitioncriteria set out in IFRS 9 have been satisfied. The discussion on the presentation in the cash flow statement is analogous to the one about trade receivables presented above.
Generally, cash flows are reported on a gross basis, meaning cash receipts and cash payments are presented separately (IAS 7.21). This, of course, does not apply to the presentation of cash flows from operating activities using the indirect method. However, in specific scenarios, cash flows can be reported on a net basis (IAS 7.22-24). When an enti...
Typically, cash flows in foreign currency should be translated using the exchange rate applicable on the date of the cash flow. This translation rule extends to the cash flows of a foreign subsidiary in consolidated financial statements. As a practical expedient, IAS 7, like IAS 21, permits the use of the average exchange rate for the period when t...
Investing and financing transactions that don’t directly impact current cash flows are not included in the statement of cash flows. Nevertheless, such transactions must be disclosed elsewhere in the financial statements (IAS 7.43-44). Examples include acquiring assets by assuming liabilities, through leases, or simply by exchanging one asset for an...
IAS 7.44A-E stipulate a requirement for reconciliation between the opening and closing balances in the statement of financial position for liabilities arising from financing activities. This requirement is also applicable to changes in financial assets, such as hedging derivatives, if the cash flows from these assets were, or will be, included in c...
Mar 24, 2010 · The objective of this Standard is to require the provision of information about the historical changes in cash and cash equivalents of an entity by means of a statement of cash flow which classifies cash flows during the period from operating, investing and financing activities.
Mar 6, 2014 · Cash flow from investing activities reflects the amount of expenditure made by the entity for the purchase of long term assets to generate economic benefits for a long time period. The following are the examples of cash flows from investing activities:
IAS 7 prescribes how to present information in a statement of cash flows about how an entity’s cash and cash equivalents changed during the period. Cash comprises cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and that are subject to an ...
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A statement of cash flows, when used in conjunction with the rest of the financial statements, provides information that enables users to evaluate the changes in net assets of an entity, its financial structure (including its liquidity and solvency) and its ability to affect the amounts and timing of cash flows in order to adapt to changing ...
