CPA FAR | Financial Accounting and Reporting | Cash Flow Statement
Channel: LetsLearn Global
Date: 2024-03-06

Cash Flow  Statement ( International Accounting Standard 7)
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IAS 7, Statement of Cash Flows requires an entity to present a statement of cash flows as an integral part of its primary financial statements. 

Importance of Cash Flow Statements:
A cash flow statement is a vital financial report that provides insights into how a business manages its cash. Here are eight reasons why understanding and preparing cash flow statements are crucial for any successful business:
1. Liquidity Assessment: Cash flow statements reveal the availability of cash, which is essential for a company’s solvency and day-to-day operations.
2. Investor and Lender Confidence: External stakeholders, such as investors and lenders, rely on cash flow statements to evaluate a company’s financial health and stability.
3. Operational Efficiency: By tracking cash inflows and outflows, businesses can identify inefficiencies and optimize their operations.
4. Budgeting and Planning: Cash flow projections help businesses plan for future expenses, investments, and growth.
5. Risk Management: Understanding cash flow patterns allows companies to mitigate financial risks effectively.
6. Investment Decisions: Investors use cash flow statements to assess the profitability and sustainability of a business.
7. Tax Compliance: Accurate cash flow reporting aids in tax planning and compliance.
8. Strategic Decision-Making: Business leaders can make informed decisions based on cash flow trends.
2. Cash Flow Statement Basics:

A cash flow statement captures three main areas of cash movement:
1. Operating Activities:
o Includes operating costs, profit items (similar to those on an income statement), and activities related to selling or buying goods and services.
o Examples: Accounts receivable/payable, inventory, wages payable, and income taxes payable.
2. Investing Activities:
o Focuses on long-term investments (e.g., property, buildings, vehicles, equipment).
o Provides insights into a company’s asset transactions.
3. Financing Activities:
o Covers cash transactions related to long-term liabilities and stockholder equity.
o Includes notes payable, retained earnings, and dividend payments.
o Reflects net cash flow, considering stock purchases and debt financing.
3. Direct vs. Indirect Method:
• IAS 7 (International Accounting Standard 7) permits two methods for presenting operating activities in cash flow statements:
o Direct Method: Starts with the source of operating cash flows (e.g., cash received from customers).
o Indirect Method: Begins with net income and adjusts for non-cash transactions and balance sheet changes.

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