I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

 

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   IAS 7 Statement of cash flows 

Statements of cash flows are a useful addition to the financial statements of a company because 

accounting profit is not the only indicator of performance. They concentrate on the sources and uses of 

cash and are a useful indicator of a company's liquidity and solvency.  

It has been argued that 'profit' does not always give a useful or meaningful picture of a company's operations. 

Readers of a company's financial statements might even be misled by a reported profit figure. 

(a) 

Shareholders might believe that if a company makes a profit after tax of, say, $100,000 then this is the 

amount that it could afford to pay as a dividend. Unless the company has sufficient cash available to 

stay in business and also to pay a dividend, the shareholders' expectations would be wrong. 

(b) 

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. 

(c) 

Survival of a business entity depends not so much on profits as on its ability to pay its debts when 

they fall due. Such payments might include 'profit and loss' items, such as material purchases, wages, 

interest and taxation, 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 loan stock). 

From these examples, it seems that a company's performance and prospects depend not so much on the 

'profits' earned in a period, but more realistically on liquidity or cash flows. 

1.1 Funds flow and cash flow 

Some countries have required the disclosure of additional statements based on funds flow rather than 

cash flow. However, the definition of 'funds' can be very vague. Such statements often simply require a 

rearrangement of figures already provided in the statement of financial position and statement of profit or 

loss. By contrast, a statement of cash flows is unambiguous and provides information which is additional 

to that provided in the rest of the accounts. It also lends itself to organisation by activity and not by 

statement of financial position classification. 

Statements of cash flows are frequently given as an additional statement, supplementing the statement of 

financial position, statement of profit or loss and related notes. The group aspects of statements of cash flows 

(and certain complex matters) have been excluded, as they are beyond the scope of your syllabus. 

1.2 Objective of IAS 7 

The aim of IAS 7 is to provide information for users of financial statements about an entity's ability to