Advanced Financial Accounting

AQ054-3-2

IAS 7 Statement of Cash Flows

 Learning outcomes

Upon completion of this chapter, you should

be able to:
• prepare a statement of cash flows for a
single entity using the direct and indirect
method in accordance with IAS 7.

AQ054-3-2-AFA IA7 Statement of cash flows

 Objectives of IAS 7

1. Ensure that all entities provide information about 
the historical  changes in cash.
2. To classify cash flows (i.e. inflows and outflows
of cash and cash  equivalents) during the period 
between those arising from operating,  investing 
and financing activities.

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 Cash and cash equivalents

Comprise of:
1. Cash on hand
2. Demand deposits: from banks & other financial
institutions
3. Short term highly liquidated investment that are
readily convertible to a known amount of cash and
that are subject to an insignificant risk of changes
in value. (guidance note indicates that an
investment normally meets the definition of a cash
equivalents when it has a maturity of 3 months or
less from the date of acquisition)
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 Cash and cash equivalents

Comprise of:
4. Equity investment are normally excluded,
unless they are, in substance , cash
equivalents.
5. Bank Overdrafts: which are repayable on
demand and which form an integral part of an
enterprise’s cash management are also
included as a component of cash and cash
equivalents.

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 Cash inflows

Include:
• Money received from the sale of shares or
capital put into the biz by the owners
• Money received from the sale of surplus Non-
current assets.
• Payments from its customers for goods received
• Interest received on deposits with banks and
other companies.
• Dividend received

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 Cash outflows

Include:
• Payment of creditors and the running costs of carrying on
business
• Renewal of, and addition to Non-current assets.
• Interest on loans and debentures
• Payment of tax on profits
• Costs involved in the growth of the business (expansion
and development)
• Dividends payable to shareholders, or drawings of sole
traders and partners
• Repayment of loans or redemption of shares by the
company
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 Cash Flows from operating
activities

• Operating activities are the main

revenue-producing activities of the
enterprises that are not investing or
financial activities.

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 Cash Flows from operating
activities
• Some example of operating activities:
 Cash received from customers from sale of goods or service
provided
 Cash paid to suppliers towards purchase of goods or
services
 Cash paid to employees towards salary wages and for others
claims
 Interest/ Dividend paid (in case non-financial institututions
IAS-7 provide an option to consider the same as operating or
financing, but it should be consistently followed during the
entire period)
 Taxes paid (unless they can be specifically identified with
Financing or investing activities)
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 Cash Flows from investing
activities
• Investing activities are the acquisition and
disposal of long term assets and other
investments that are not considered to be
cash & cash equivalents.

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 Cash Flows from investing
activities
• Some example of investing activities:-
 Sale /Purchase of fixed assets
 Investing in long term investments
 Investment /acquisition/disposal of
subsidiaries/JVs/ Associates
 Interest /dividends received on
deposits/investments. (IAS-7 provide an
option to consider the same under
operating activities also.)
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 Cash Flows from financing
activities
• Financing activities are the activities
that alter the equity capital and
borrowing structure of the enterprise.

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 Cash Flows from financing
activities
• Some example of Financing activities:-
 Issue of shares/debentures
 Buy back of equity shares
 Redemption of preference
shares/debenture
 Long term loans which are not Cash &
cash Equivalent and payment thereof
 Interest/dividends paid on Loans/ to
shareholders.
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 Methods of calculating cash
flow from operating activities

1. Direct method
2. Indirect method

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 Direct method

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 Indirect method

• The Indirect method adjust accrual

basis net profits or loss for the effects
of non cash transactions.

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 Indirect method

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 Indirect method

Non-cash Expenses
• Non-cash expenses, such as depreciation
expense, are added back.
• Not truly sources of cash, even though
they are associated with cash inflows;
rather, a reversal of the accrual process
that required the expenses to be
recognized without regard for the cash
flow.
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 Indirect method

Adjustments to working capital

• Adjustments are also made to working capital
to remove the impact of  credit sales/purchases.
• When adjusting for these items, consider 
whether 
the movements are good or bad for cash. 
• For example, an increase in 
receivables is bad for cash, as it means this cas
h has not yet beencollected 
from the customers. 
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 References

• Kaplan Publishing, 2016. Statement of

cash flows. In: ACCA Approved Paper F7
Financial Reporting. London: Kaplan
Publishing, p.635 to 694.
• The Board, 2017. IAS 7 Statement of cash
flows. London: IFRS Foundation.

AQ054-3-2-AFA IA7 Statement of cash flows