Lecture on IAS 7 Statement of Cash Flows

Dated 21-03-2024

 Introduction to IAS 7:
 International Accounting Standard 7 (IAS 7) deals with the preparation and
presentation of the Statement of Cash Flows. This statement provides vital
information about an entity's cash flows during a specific period, helping
users assess its liquidity, solvency, and financial flexibility.
 Objective of IAS 7:
 The primary objective of IAS 7 is to require entities to provide information
about historical changes in cash and cash equivalents by classifying cash flows
into operating, investing, and financing activities.
 Lecture on IAS 7
By Muhammad Yasir Afsar
Associate Professor
Key Definitions:
 Cash: Cash comprises cash on hand and demand deposits.
 Cash Equivalents: Short-term, highly liquid investments that are readily
convertible to known amounts of cash and subject to insignificant risk of
changes in value.
 Operating Activities: Principal revenue-producing activities of the entity and
other activities that are not investing or financing activities.
 Investing Activities: Acquisition and disposal of long-term assets and other
investments not included in cash equivalents.
 Financing Activities: Activities that result in changes in the size and
composition of the equity and borrowings of the entity.
Structure of the Statement of Cash Flows:

 Operating Activities: Cash flows from operating activities reflect the cash
effects of transactions that enter into the determination of net profit or loss.
It can be presented using either the direct or indirect method.
 Investing Activities: Cash flows from investing activities represent the cash
effects of acquiring and disposing of assets that are not held for trading
purposes.
 Financing Activities: Cash flows from financing activities include cash receipts
and payments related to equity and debt financing.
Direct Method vs. Indirect Method:

 Direct Method: Under the direct method, operating cash flows are presented
by showing major classes of gross cash receipts and gross cash payments. It
provides a more detailed view of cash flows from operating activities but may
require additional effort to prepare.
 Indirect Method: The indirect method starts with net profit or loss and
adjusts for non-cash items and changes in working capital to arrive at cash
flows from operating activities. It is widely used due to its simplicity but may
not provide as detailed information.
Disclosure Requirements

 Cash and Cash Equivalents: Disclose the composition of cash and cash
equivalents.
 Reconciliation: If the indirect method is used, provide a reconciliation of net
profit or loss to net cash flows from operating activities.
 Significant Non-Cash Transactions: Disclose details of any significant non-
cash transactions, such as acquisitions through the assumption of liabilities or
issuance of shares for the acquisition of assets.
 Foreign Currency Cash Flows: Disclose the effect of exchange rate changes
on cash and cash equivalents held in foreign currencies.
Conclusion:

 IAS 7 ensures that entities provide users of financial statements with

comprehensive information about their cash flows, enhancing transparency
and enabling stakeholders to make informed decisions. By understanding the
structure, methods, and disclosure requirements of the Statement of Cash
Flows, entities can effectively communicate their liquidity position and cash
flow dynamics.
 Example 1: Operating Activities:
Xerox Company provides the following information:
Net Income: $100,000
Depreciation Expense: $20,000
Increase in Accounts Receivable: $10,000
Increase in Inventory: $15,000 Xerox Limited
Cash Flows from Operations
Decrease in Accounts Payable: $5,000 For the period ended on -----

OPERATING ACTIVITIES:
Net Income $100,000
Adjustments for:
Depreciation Expense 20,000
Increase in Accounts Receivable (10,000)
Increase in Inventory (15,000)
Decrease in Accounts Payable 5,000
Net Cash Provided by Operating $100,000
Activities
 Example 2: Investing Activities:
XYZ Company provides the following information:
Purchase of Equipment: $50,000
Sale of Investments: $30,000
Purchase of Land: $20,000

XYZ Limited
Cash Flow from Investments
For the period ended on -----
INVESTING ACTIVITIES:
Purchase of Equipment $(50,000)
Sale of Investments 30,000
Purchase of Land (20,000)
Net Cash Used in Investing Activities $(40,000)
 Example 3: Financing Activities:
LMN Company provides the following information:
Issuance of Common Stock: $80,000
Repayment of Long-Term Debt: $50,000
Payment of Dividends: $20,000

Solution
XYZ Limited
Cash Flows from Financing
For the period ended on -----
FINANCING ACTIVITIES:
Issuance of Common Stock $80,000
Repayment of Long-Term Debt (50,000)
Payment of Dividends (20,000)
Net Cash Provided by Financing Activities $10,000