Ias 7 cash flow statements lecture notes

Ias 7 cash flow statements lecture notes Ias 7 cash flow statements lecture notes Ias 7 cash flow statements lecture notes Ias 7 cash flow statements lecture notes

IAS 7: Statement of Cash Flows

ACCA F7/FR Lectures

Updated: July 2025

Introduction to IAS 7

Purpose

IAS 7 Statement of Cash Flows ensurestransparency in reporting cashinflows and outflows, critical for assessing liquidity

Complements accrual-based financial statements

Key for ACCA F7/FR syllabus; includes VAS comparisons

Focus: Operating, investing, and financing cash flows

Role in Financial Reporting

IFRS Financial Statements

Statement of Financial Position (BS)

Statement of Profit or Loss and OCI (PL)

Statement of Cash Flows

Statement of Changes in Equity

Notes

Shows cash movements, unlike BS (snapshot) or PL (period

performance)

Accrual vs Cash Basis

Accrual Accounting Limitations

Accrual basis:

Revenue/expenses recognized when earned/incurred, not when cashflows

Can mask liquidity issues (e.g., high profits, negative cash)

Cash basis: Records transactions when cash changes hands

Cash flow statement addresses this gap

Practical Scenario: Firms with high profits but cash shortages riskinsolvency

Why Cash Flow Statement?

Addressing Limitations

Cash flow statement provides clarity on:

Actual cash generated/used

Ability to meet obligations and fund operations

Impact of non-cash accounting policies (e.g., revenue recognition).Example: Revenue recorded but not collected reduces cash

Exam Tip: Emphasize liquidity focus in answers

Definition of Cash Flows

IAS 7 Para 6

Cash flows are inflows/outflows of cashand cash equivalents

Cash: Cash on hand, demand deposits.

Cash Equivalents: Short-term (3 months), highly liquid investments.

Formula:Cash at end = Cash at start + Net cash flows

Exam Tip: Define cash equivalents precisely

Cash Flow Activities Overview

Three Categories (IAS 7)

1 Operating Activities: Core revenue-generating activities

2 Investing Activities: Long-term asset transactions

3 Financing Activities: Equity/debt structure changes

Exam Tip: Correctly classify activities in scenarios

Practical Scenario: Retail cash receipts, manufacturing costs.

Exam Tip: Interest/dividends classification depends on policy

Investing Activities

Definition

Investing activities involve acquisition/disposal of long-term assets andinvestments (excluding cash equivalents)

Examples: PPE purchases, asset sales, investment transactions

Practical Scenario: Buying equipment, selling subsidiary shares

Exam Tip: Exclude cash equivalents from investing

Financing Activities

Definition

Financing activities result in changes to equity and borrowings

Examples: Share issuance, loan proceeds, lease repayments, dividends(if classified here)

Practical Scenario: Issuing bonds, repaying loans

Exam Tip: Principal (financing), interest (operating)

Direct vs Indirect Method

Direct: Useful for forecasting; indirect: Simpler, widely used

Exam Tip: Specify method and justify in answers

Indirect Method: Overview

Process

Start with profit before tax, adjust for:

Non-cash items (e.g., depreciation)

Working capital changes (e.g., receivables)

Investing/financing items in profit (e.g., asset sale gains)

Calculatenet cash from operations, then add investing/financingflows

Exam Tip: Structure adjustments systematically

Indirect Method: Non-Cash Adjustments

Non-Cash Items

Expenses: Add back (e.g., depreciation, impairments, provisions) Gains: Deduct (e.g., gain on PPE sale).

Foreign Exchange: Adjust unrealized gains/losses.

Example: Add $57,000 depreciation, deduct $7,000 gain

Exam Tip: Justify each adjustment with IAS 7

Indirect Method: Working Capital

Working Capital Changes

Inventories Increase: Deduct (cash tied up).

Receivables Increase: Deduct (less cash collected).

Payables Increase: Add (less cash paid).

Example: Inventory +$133,000 (deduct), Payables +$78,000 (add).Practical Scenario: Receivables increase delays cash inflows

Indirect Method: Additional Adjustments

Investing/Financing Items

Adjust for items in profit related to:

Investing: Gains/losses on asset sales (deduct/add).

Financing: Interest/dividend income (deduct).

Example: Deduct $7,000 gain on PPE sale (investing)

Exam Tip: Identify activity type for each adjustment

Indirect Method Example

Deduct: Inventory increase $133,000.

Cash from operations (partial): $319,000

Direct Method: Overview

Process

List actual cash flows for operating activities:

Inflows: Cash from customers

Outflows: Payments to suppliers, employees, interest, taxes, dividends.Investing/financing cash flows same as indirect method

Exam Tip: Derive flows from BS/PL changes

Direct Method: Calculations

Direct Method Example

Scenario (A Co, 20X8)

Revenue: $1,476,000 Receivables: $274,000 (20X8) vs $324,000 (20X7).Cost of sales: $962,000 Payables: $274,000 (20X8) vs $352,000 (20X7)

Cash from customers: $1,526,000

Cash to suppliers: $884,000

Net operating cash (partial):+$642,000

Exam Tip: Show detailed calculations

Investing Activities Example

Scenario (A Co, 20X8)

PPE purchased: $56,000 (leased) PPE sold: $110,000 (book value

$103,000) Investments (cash equivalents): $143,000 (20X8) vs $46,000(20X7)

Cash outflows: Investments increase $97,000

Cash inflows: PPE sale $110,000

Net investing cash flow: +$13,000

Exam Tip: Exclude non-cash transactions (e.g., leased PPE)

Financing Activities Example

Scenario (A Co, 20X8)

Share issuance: $500,000 (20X8) vs $400,000 (20X7) Share premium:

$350,000 vs $100,000 Loan notes: $150,000 vs $100,000

Cash inflows: Shares $350,000, Loans $50,000

Net financing cash flow:+$400,000

Practical Scenario: Bonus issue (non-cash) excluded

Exam Tip: Include only cash transactions

Consolidated Cash Flow Statement

IAS 7 Requirement

Reflects cash flows between the group andexternal parties, eliminating

intragroup transactions

Based on consolidated BS and PL

VAS: Only indirect method; IFRS: Direct or indirect

Exam Tip: Highlight external focus in answers

Exam Tip: Identify and exclude intragroup flows.

Non-Cash Transactions in Consolidation

Adjustments

Adjust for non-cash items in consolidated PL:

Depreciation (exclude intragroup asset transfers)

Goodwill impairment

Share of associates profit/loss

Example: Add $10M goodwill impairment

Exam Tip: Use consolidated PL figures

Non-Cash Example: Pension

Scenario (Moyes, 20X8)

Service cost: $24M (operating) Contributions: $15M Remeasurementgain: $3M (OCI) Benefits paid: $31M (fund)

Adjustments:

Add: Service cost $24M (non-cash).

Deduct: Contributions $15M (cash outflow).

Ignore: Remeasurement, Benefits (fund-paid).

Exam Tip: Adjust only groups cash flows

Non-Cash Example: Impairment

Scenario (Moyes, 20X8)

Goodwill impairment: $10M PPE impairment: $43M (revaluation surplus

$20M, PL $23M)

Adjustments:

Add: Goodwill $10M, PPE in PL $23M.

Ignore: Revaluation surplus $20M.

Exam Tip: Adjust PL impairments only

Non-Cash Example: Inventory

Dividends in Consolidation

Treatment

Include dividends paid to:

Parents shareholders (external)

Non-controlling interest (NCI, external)

Eliminate parent-subsidiary dividends (intragroup)

Example: Subsidiary pays $10M to NCI (include), $20M to parent(eliminate)

Journal: DR Income, CR Equity (intragroup elimination)

Subsidiary Disposal Example

Scenario (C Co, 20X8)

C Co sells B Co for $100M B Cos cash: $20M, Inventories: $46M,

Receivables: $42M, Payables: $38M

Investing cash flow:$80M

Adjustments: Deduct gain $20M, adjust working capital (Inventories-$46M, Receivables -$42M, Payables -$38M)

Exam Tip: Adjust operating cash for disposal effects

Associate Dividends

Treatment

Dividends from associates are investing cash inflows

Example: Dividends $16M, calculated from investment account.Journal: DR Cash $16M, CR Investment in Associate $16M

Exam Tip: Adjust associates profit (non-cash) in operating section

Disclosures: IAS 7 requires detailed notes; VAS simpler.

Exam Tip: Highlight IAS 7s flexibility

Exam Scenario Analysis

Approach

1 Identify cash flows(operating, investing, financing)

2 Choose direct/indirect methodfor operating cash flows

3 Adjust fornon-cash items andworking capital

4 Eliminate intragroup transactionsin consolidation

5 Show journal entriesfor key transactions

Exam Tip: Structure answers with clear steps

Common Exam Pitfalls

Avoid These Mistakes

Misclassifying activities (e.g., interest as financing)

Including non-cash transactions (e.g., leased assets)

Failing to eliminate intragroup transactions

Omitting adjustments for impairments or associate profits

Incorrect working capital calculations

Exam Tip: Double-check classifications and show workings

Key Takeaways

IAS 7 ensures transparency incash flows across operating,investing, and

financing activities, using direct orindirect methods

Addresses accrual accounting limitations

Consolidated statements eliminate intragroup flows

Key adjustments: Non-cash items, working capital,

subsidiary/associate transactions

Exam Focus: Classify accurately, show detailed workings, apply IFRSprinciples