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1.8.4 Indirect versus direct 

The direct method is encouraged where the necessary information is not too costly to obtain, but IAS 7 

does not demand it. In practice, therefore, the direct method is rarely used. It could be argued that 

companies ought to monitor their cash flows carefully enough to be able to use the direct method at 

minimal extra cost. 

1.9 Interest and dividends 

Cash flows from interest and dividends received and paid should each be disclosed separately. Each 

should be classified in a consistent manner from period to period (IAS 7, para. 31). A financial institution 

shows interest paid and interest and dividends received as operating cash flows, because its business 

model is based around generating receipts of interest and dividends. 

For entities that are not financial institutions: 

(a) 

Interest paid should be classified as an operating cash flow or a financing cash flow.  

(b) 

Interest received and dividends received should be classified as investing cash flows.  

(c) 

Dividends paid by the entity may be classified as a financing cash flow, showing the cost of 

obtaining financial resources or alternatively as an operating cash flow, so that users can assess 

the entity’s ability to pay dividends out of operating cash flows. 

(IAS 7, paras. 33–34) 

1.10 Taxes on income 

Cash flows arising from taxes on income should be separately disclosed and should be classified as cash 

flows from operating activities unless they can be specifically identified with financing and investing 

activities. 

Taxation cash flows are often difficult to match to the originating underlying transaction, so most of the 

time all tax cash flows are classified as arising from operating activities. 

(IAS 7, paras. 35–36) 

1.11 Components of cash and cash equivalents 

The components of cash and cash equivalents should be disclosed and a reconciliation should be 

presented, showing the amounts in the statement of cash flows reconciled with the equivalent items 

reported in the statement of financial position. 

It is also necessary to disclose the accounting policy used in deciding the items included in cash and 

cash equivalents, in accordance with IAS 1 Presentation of financial statements, but also because of the 

wide range of cash management practices worldwide. 

1.12 Other disclosures 

All entities should disclose, together with a commentary by management, the amount of significant cash 

and cash equivalent balances held by the entity that are not available for use by the group and additional 

information as follows 

(a) 

The amount of undrawn borrowing facilities which are available 

(b) 

Restrictions on the use of those facilities 

(c) 

Cash flows which increased operating capacity compared with cash flows which merely 

maintained operating capacity 

(IAS 7, para. 50) 

1.13 Example of a statement of cash flows 

In the next section we will look at the procedures for preparing a statement of cash flows. First, look at 

this example, adapted from the example given in IAS 7. 

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