7.1 Objective, Benefits & Structure of IAS 7 Cash Flows

ACCA Applied Knowledge — Financial Accounting FA

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1 Chapter 1: Context & Qualitative Characteristics of Financial Reporting

1.1 Scope, Purpose & Governance of Financial Reporting 1.2 Users, Stakeholders & Types of Business Entity 1.3 The IASB Conceptual Framework & Qualitative Characteristics 1.4 Accounting Concepts, Assumptions & Principles

2 Chapter 2: Double-Entry Bookkeeping & Accounting Systems

2.1 The Accounting Equation & Double-Entry Mechanics 2.2 Books of Prime Entry & Source Documents 2.3 Ledger Accounts & Sales / Purchase Tax (VAT) 2.4 Computerized Accounting Systems & Internal Controls

3 Chapter 3: Recording Tangible & Intangible Non-Current Assets

3.1 Capital vs Revenue Expenditure & IAS 16 Acquisition 3.2 Depreciation Methods, Accounting & Changes in Estimate 3.3 Revaluation of Non-Current Assets & Disposals 3.4 Intangible Non-Current Assets & Research & Development (IAS 38)

4 Chapter 4: Accounting for Specific Transactions

4.1 Inventory Valuation, Cost Formulas & Net Realisable Value (IAS 2) 4.2 Irrecoverable Debts & Allowance for Receivables 4.3 Accruals, Prepayments & Payables 4.4 Provisions, Contingent Liabilities & Contingent Assets (IAS 37)

5 Chapter 5: Capital Structure, Trial Balance, Control Accounts & Bank Reconciliations

5.1 Capital Structure, Share Capital, Reserves & Dividends 5.2 Extracting the Trial Balance & Errors Not Affecting Trial Balance 5.3 Control Accounts, Discrepancies & Control Account Reconciliations 5.4 Bank Reconciliations & Correction of Errors via Suspense Account

6 Chapter 6: Preparing Basic Financial Statements

6.1 Statement of Financial Position (IFRS 18) Structure & Preparation 6.2 Statement of Profit or Loss and Other Comprehensive Income (IFRS 18) 6.3 Events After the Reporting Period (IAS 10) 6.4 Incomplete Records Techniques & Single Entry Conversion

7 Chapter 7: Statement of Cash Flows

7.1 Objective, Benefits & Structure of IAS 7 Cash Flows 7.2 Operating Activities: Direct vs Indirect Method Calculations 7.3 Cash Flows from Investing & Financing Activities

8 Chapter 8: Group Accounts

8.1 Group Accounting Concepts: Subsidiaries, Associates & IFRS 10 / IAS 28 8.2 Consolidated Statement of Financial Position: Goodwill & NCI Calculations 8.3 Consolidated Statement of Financial Position: Intra-Group Balances & Unrealised Profits 8.4 Consolidated Statement of Profit or Loss & Associates Equity Accounting

9 Chapter 9: Interpretation of Financial Statements

9.1 Profitability, Return & Margin Ratios 9.2 Liquidity, Working Capital & Working Capital Cycle Ratios 9.3 Solvency, Gearing & Debt Risk Ratios 9.4 Investor Ratios & Limitations of Financial Ratio Analysis

7.1 Objective, Benefits & Structure of IAS 7 Cash Flows

Key Takeaways Explain This Topic AI

The primary objective of IAS 7 is to provide information about the historical changes in cash and cash equivalents of an entity.

Cash flow information helps users evaluate an entity's ability to generate cash, its liquidity, and solvency, independent of its accounting policies.

Cash comprises cash on hand and demand deposits; cash equivalents are short-term, highly liquid investments subject to an insignificant risk of changes in value.

A statement of cash flows classifies cash flows during the period into operating, investing, and financing activities.

Bank overdrafts that are repayable on demand often form an integral part of an entity's cash management and are included as a component of cash and cash equivalents.

Last updated: July 2026

Introduction to IAS 7 Statement of Cash Flows

The Statement of Cash Flows is one of the primary financial statements required under International Financial Reporting Standards (IFRS), specifically governed by IAS 7. IFRS 18 Presentation and Disclosure in Financial Statements (which supersedes IAS 1) also impacts the statement of cash flows: ACCA confirms that the formats for the statement of cash flows under IFRS 18 are examinable for FA, although the three-way operating/investing/financing classification set by IAS 7 is retained. While the Statement of Profit or Loss measures an entity's financial performance by matching revenues and expenses (accrual accounting), the Statement of Cash Flows is prepared on a cash basis. It details the actual cash inflows and outflows during the reporting period. Understanding the difference between profit and cash flow is fundamental. A company can be highly profitable yet face acute liquidity crises if its cash is tied up in inventory or receivables. Conversely, an entity might report accounting losses while generating strong positive cash flows due to high non-cash expenses like depreciation.

Objective and Importance

The primary objective of IAS 7 is to require the provision of information about the historical changes in cash and cash equivalents of an entity by means of a statement of cash flows which classifies cash flows during the period from operating, investing and financing activities. Cash flow information is useful because it provides a basis for assessing the ability of the entity to generate cash and cash equivalents and the needs of the entity to utilize those cash flows.

Benefits of cash flow information include:

Evaluating Liquidity and Solvency: It helps users assess the entity's ability to settle obligations as they fall due and pay dividends.

Assessing Future Cash Flows: Historical cash flows are often a good indicator of the amount, timing, and certainty of future cash flows.

Comparing Entity Performance: It enhances the comparability of reporting operating performance by different entities because it eliminates the effects of using different accounting treatments for the same transactions and events.

Checking Accrual Earnings Quality: A persistent difference between operating profit and net cash from operating activities may signal aggressive accounting practices or potential going concern issues.

Definitions: Cash and Cash Equivalents

Under IAS 7, the statement of cash flows explains the movement in cash and cash equivalents from the beginning to the end of the financial period. It is crucial to understand what is included in these terms.

Cash comprises cash on hand and demand deposits. Demand deposits are bank balances that can be accessed immediately without penalty.

Cash Equivalents are defined as short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. They are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes.

Key characteristics of cash equivalents:

Maturity: Generally, an investment qualifies as a cash equivalent only when it has a short maturity of, say, three months or less from the date of acquisition.

Examples: 3-month Treasury bills, commercial paper, and short-term money market funds.

Exclusions: Equity investments are excluded from cash equivalents unless they are, in substance, cash equivalents (e.g., preferred shares acquired within a short period of their maturity and with a specified redemption date). Bank borrowings are generally considered to be financing activities. However, bank overdrafts that are repayable on demand form an integral part of an entity's cash management. In these circumstances, bank overdrafts are included as a component of cash and cash equivalents, typically representing a negative balance.

Structure of the Statement of Cash Flows

IAS 7 requires an entity to present a statement of cash flows that reports cash flows during the period classified by operating, investing, and financing activities.

1. Operating Activities

Operating activities are the principal revenue-producing activities of the entity and other activities that are not investing or financing activities. Cash flows from operating activities are primarily derived from the principal revenue-producing activities of the entity. Therefore, they generally result from the transactions and other events that enter into the determination of profit or loss. Examples include:

Cash receipts from the sale of goods and the rendering of services.

Cash receipts from royalties, fees, commissions, and other revenue.

Cash payments to suppliers for goods and services.

Cash payments to and on behalf of employees.

Cash payments or refunds of income taxes unless they can be specifically identified with financing and investing activities.

2. Investing Activities

Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. The separate disclosure of cash flows arising from investing activities is important because the cash flows represent the extent to which expenditures have been made for resources intended to generate future income and cash flows. Examples include:

Cash payments to acquire property, plant and equipment, intangibles, and other long-term assets.

Cash receipts from sales of property, plant and equipment, intangibles, and other long-term assets.

Cash payments to acquire equity or debt instruments of other entities and interests in joint ventures (other than payments for those instruments considered to be cash equivalents or those held for dealing or trading purposes).

3. Financing Activities

Financing activities are activities that result in changes in the size and composition of the contributed equity and borrowings of the entity. The separate disclosure of cash flows arising from financing activities is important because it is useful in predicting claims on future cash flows by providers of capital to the entity. Examples include:

Cash proceeds from issuing shares or other equity instruments.

Cash payments to owners to acquire or redeem the entity's shares.

Cash proceeds from issuing debentures, loans, notes, bonds, mortgages, and other short-term or long-term borrowings.

Cash repayments of amounts borrowed.

Cash payments by a lessee for the reduction of the outstanding liability relating to a lease.

The net sum of cash flows from these three classifications equals the net increase or decrease in cash and cash equivalents for the period, which is then added to the opening balance to reconcile to the closing balance of cash and cash equivalents.