IFRS Essentials

IAS 7 STATEMENT OF CASH FLOWS

1 INTRODUCTION

A statement of cash flows is a mandatory part of the financial statements (IAS 1.10(d) and IAS 7.1). Cash flows are inflows and outflows of cash and cash equivalents. Cash comprises demand deposits and cash on hand. Cash equivalents are short-term, highly liquid investments which are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value (IAS 7.6). Thus, an investment normally qualifies as a cash equivalent only when it has a short maturity of, say, three months or less, from the date of acquisition. Equity investments are normally excluded from cash and cash equivalents (IAS 7.7). Bank overdrafts that are repayable on demand are included as cash and cash equivalents to the extent that they form an integral part of the entity's cash management (IAS 7.8).1

The statement of cash flows aims to give insights to the users of financial statements about the actual cash inflows and cash outflows during a period. By contrast, income and expenses are sometimes of a non-cash nature.

In the statement of cash flows, the cash flows arising during the period are classified according to the activities of the entity (IAS 7.6, 7.10, and 7.13–7.17):

• Operating activities: These are the principal revenue-producing activities of the entity and other activities which are not investing or financing activities. Examples are cash outflows for the purchase and cash inflows from the sale of merchandise, ...