1 IAS 7 – Statement of Cash flows
As discussed earlier, for the users of financial statements, beside profit it is important to know the capability of an entity to generate cash and cash equivalents and how such cash and cash equivalents are applied by the entity.
Assessing this need of the users, IAS 7 is issued with an objective that a statement (Statement of Cash Flows) shall be prepared as part of a complete set of financial statements that summarizes the changes occurred in cash and cash equivalents in a financial period. As this statement pertains to events already occurred in past therefore information provided by it is historical in nature.
1.1 Scope of IAS 7
IAS 7 requires every entity, no matter what business it is in, shall prepare Statement of Cash Flows as part of a complete set of financial statements. It is important to understand that omitting Statement of Cash Flows will render Financial Statements incomplete as per IAS 1 and IAS 7 and other applicable International Accounting Standards.
In case of financial institutions for where Cash and Cash equivalents is an inventory and as it might appear that underlying subject of both Income Statement and Statement of Cash Flows is same therefore preparing statement of cash flows might not be necessary.
IAS 7 has clearly stated that whatever activities entity might undertake to generate revenues and however the cash is considered in terms of business operations, every entity requires cash to pay its liabilities, to carry out day to day business operations and to pay out their shareholders. Therefore, presentation how the cash has flown during the period is essential. Thus preparation of Statement of Cash Flows is mandatory and it cannot be substituted with other financial statements (like income statement as in case of banks).
1.2 Benefits of cash flow information
As pointed out in the start that statement of cash flows combined with other financial statements of an entity can help provide insight about:
- the changes in net assets of the entity over a period of time
- financial structure
- its ability to generate cash flows, timings of such cash flows and capacity to coup up with varying business environment
With this much information users can predict where present day value of cash flows that are expected to flow in future.
One of the biggest advantages of preparing statement of cash flows is cash receipts and payments do not get affected by the changes in accounting policies due to differences in national accounting framework or nature of the business. And such policies have deep effects on other financial statements like income statement and statement of financial position. Therefore, comparing statement of cash flows of different entities over a period of time becomes fairly easy and simple.
Although statement of cash flows is based on past data but even historical information can be useful for example in assessing weather last year’s expectations were met. Also how changes in cash flows and changes in overall profitability are related to each other.