1. Statement of Cash Flows (IAS 7)

Question 1

According to IAS 7, what is the objective of the statement of cash flows?

Answer 1

The objective of IAS 7, Statement of Cash Flows is to provide historical information about changes in cash and cash equivalent, classifying cash flows as operating.

This will provide information to users of financial statements about the entity’s ability to generate cash and cash equivalents, as well as indicating the cash needs of the entity.

Question 2

How does the UK GAAP compare to the requirements of IAS 7?

Answer 2

The format of the statement of cash flows under FRS 102 is the same as the IAS 7 format.

Entities eligible for disclosure exemptions under FRS 102 are also exempt from the preparation of a statement of cash flows.

Question 3

What is the purpose of IAS 7, the statement of cash flows?

Answer 3

Information about the cash flows of an entity is useful in providing users of financial statements with a basis to assess the ability of the entity to generate cash and cash equivalents and the needs of the entity to utilise those cash flows.

Question 4

Give three examples of where profit may be misleading to the users of financial statements?

Answer 4

1. Shareholders might believe that if a company makes a profit for the year of, say, £100,000 then this is the amount which it could afford to pay as a dividend. Unless the company has sufficient cash available to stay in business and also pay a dividend, the shareholders expectations could be wrong.
2. Employees might believe that if a company makes profits, it can afford to pay higher wages next year. This opinion may not be correct: the ability to pay wages, depends on the availability of cash.
3. Cash is the lifeblood of the business. Survival of a business entity depends not so much on profits as on its ability to pay its debts hen they fall due. Such payments might include ‘profit and loss’ items such as material purchases, wages, interest and taxation etc, but also capital payments for new non-current assets and the repayment of loan capital when this falls due (for example, on the redemption of debentures).

Question 5

What does the use of the statement of cash flows alongside the other financial statements give users an appreciation of? (3)

Answer 5

1. The change in net assets
2. The entity’s financial position (liquidity and solvency)
3. The entity’s ability to adapt to changing circumstances and opportunities by affecting the amount and timing of cash flows.

Question 6

Why do statements of cash flow enhance comparability?

Answer 6

Statements of cash flow enhance comparability as they are not affected by differing accounting policies used for the same type of transactions or events.

Question 7

How is historical cash flow information useful?

Answer 7

Cash flow information of a historical nature can be used as an indicator of the amount, timing and certainty of future cash flows.

Past forecast cash flow information can be checked for accuracy as actual figures emerge. The relationship between profit and net cash flow and the impact of changing prices can be analysed over time.

Question 8

What is the scope of IAS 7?

Answer 8

IAS 7 requires all entities to include a statement of cash flows as an integral part of their financial statements.

All types of entity can provide useful information about cash flows as the need for cash is universal, whatever the nature of their revenue-producing activities.

Question 9

Define:
Cash flows
Cash
Cash equivalents

Answer 9

Cash flows: These are inflows and outflows of cash and cash equivalents
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 which are subject to an insignificant risk of changes in value (maturity of three months or less from the date of acquisition).