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Analysis of IAS 7

IAS 7 outlines the principles for presenting cash flow information, focusing on operating, investing, and financing activities to assess an entity's liquidity and financial health. It mandates that all entities following IFRS include a statement of cash flows in their financial statements, detailing cash inflows and outflows. Key definitions include cash, cash equivalents, and classifications of cash flows to enhance comparability and understanding of financial obligations and future cash generation.

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Muhammad Zaurez Afshar
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28 views2 pages

Analysis of IAS 7

IAS 7 outlines the principles for presenting cash flow information, focusing on operating, investing, and financing activities to assess an entity's liquidity and financial health. It mandates that all entities following IFRS include a statement of cash flows in their financial statements, detailing cash inflows and outflows. Key definitions include cash, cash equivalents, and classifications of cash flows to enhance comparability and understanding of financial obligations and future cash generation.

Uploaded by

Muhammad Zaurez Afshar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Analysis of IAS 7 – Statement of Cash Flows

Introduction

IAS 7 sets out the principles for presenting information about historical
changes in an entity’s cash and cash equivalents. The statement of cash
flows enhances comparability by eliminating the effects of different
accounting treatments for the same transactions, providing insight into an
entity’s liquidity, solvency, and financial adaptability.

Objective

To require the presentation of information about an entity’s cash flows,


classified into operating, investing, and financing activities, so that users can
evaluate the ability of the entity to:

 Generate future cash flows,

 Meet financial obligations,

 Distribute dividends,

 Understand changes in net assets.

Scope

IAS 7 is applicable to all entities preparing financial statements in


accordance with IFRS. It must be presented as an integral part of the
financial statements for each period in which financial statements are
presented.

Key Definitions

 Cash: Cash on hand and demand deposits.

 Cash Equivalents: Short-term, highly liquid investments readily


convertible to known amounts of cash and subject to insignificant risk
of changes in value.

 Cash Flows: Inflows and outflows of cash and cash equivalents.


 Operating Activities: Principal revenue-producing activities of the
entity.

 Investing Activities: Acquisition and disposal of long-term assets and


other investments.

 Financing Activities: Activities that result in changes in the size and


composition of equity capital and borrowings.

Classification of Cash Flows

1. Operating Activities

 Cash inflows: Receipts from sales of goods/services, royalties, fees.

 Cash outflows: Payments to suppliers, employees, taxes.

 Reported using either:

o Direct method (preferred): Shows major categories of gross


cash receipts/payments.

o Indirect method: Adjusts net profit/loss for non-cash


transactions and changes in working capital.

2. Investing Activities

 Purchases/sales of property, plant, and equipment (PPE).

 Loans made to other entities or received back.

 Acquisition/disposal of subsidiaries or business units (net of cash


acquired/disposed).

3. Financing Activities

 Proceeds from issuing shares or borrowings.

 Repayment of borrowings.

 Payments of dividends or interest (interest may be shown under


operating or financing based on policy choice).

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