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

PART F: PREPARING BASIC FINANCIAL STATEMENTS 

 

396

 

NOTES TO THE STATEMENT OF CASH FLOWS 

Note. Analysis of the balances of cash and cash equivalents as shown in the statement of financial 

position 

 

 

 

Change 

 

20X2 

20X1 

in year 

 

 

$'000 

 

$'000 

 

$'000 

 

Cash in hand 

 

2 

 

1 

 

1 

 

Short-term investments 

 

50 

 –

 

 

50 

 

Bank overdraft 

 

(85) 

 

(98) 

 

13 

 

 

(33) 

 

(97) 

 

64 

 

2.2 The advantages of cash flow accounting 

The advantages of cash flow accounting are as follows. 

(a) 

Survival in business depends on the ability to generate cash. Cash flow accounting directs 

attention towards this critical issue. 

(b) 

Cash flow is more comprehensive than 'profit' which is dependent on accounting conventions and 

concepts. 

(c) 

Creditors of the business (both long and short term) are more interested in an enterprise's ability 

to repay them than in its profitability. While 'profits' might indicate that cash is likely to be 

available, cash flow accounting gives clearer information. 

(d) 

Cash flow reporting provides a better means of comparing the results of different companies than 

traditional profit reporting. 

(e) 

Cash flow reporting satisfies the needs of all users better. 

(i) For 

management, it provides the sort of information on which decisions should be taken 

(in management accounting, 'relevant costs' to a decision are future cash flows). Traditional 

profit accounting does not help with decision making. 

(ii) For 

shareholders and auditors, cash flow accounting can provide a satisfactory basis for 

stewardship accounting. 

(iii) 

As described previously, the information needs of creditors and employees will be better 

served by cash flow accounting. 

(f) 

Cash flow forecasts are easier to prepare, as well as more useful, than profit forecasts. 

(g) 

They can in some respects be audited more easily than accounts based on the accruals concept. 

(h) 

The accruals concept is confusing, and cash flows are more easily understood. 

(i) 

Cash flow information can be retrospective and can also include a forecast for the future. This is of 

great information value to all users of accounting information. 

(j) 

Forecasts can subsequently be monitored by the publication of variance statements which 

 

compare actual cash flows against the forecast. 

QUESTION 

Cash flow accounting

 

Can you think of some possible disadvantages of cash flow accounting? 

ANSWER 

The main disadvantages of cash accounting are essentially the advantages of accruals accounting (proper 

matching of related items). There is also the practical problem that few businesses keep historical cash 

flow information in the form needed to prepare a historical statement of cash flows and so extra 

recordkeeping is likely to be necessary.  

 

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CHAPTER 22  

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  STATEMENTS OF CASH FLOWS 

 

397 

2.3 Criticisms of IAS 7 

The inclusion of cash equivalents has been criticised because it does not reflect the way in which 

businesses are managed. In particular, the requirement that to be a cash equivalent an investment's 

maturity date has to be within three months of its acquisition date is considered unrealistic.  

The management of assets similar to cash (ie 'cash equivalents') is not distinguished from other 

investment decisions. 

 

 

Performance Objective PO8 of the PER is 'Analyse and interpret financial reports'. You can apply the 

knowledge you obtain from this chapter to help to achieve this objective. 

 EXAM FOCUS POINT 

In the exam, you could be asked to consider the usefulness of a statement of cash flows as well as 

having to calculate extracts from one.

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