Objective
IAS 7 requires an entity to present information about cash flows during a period — showing how cash and cash equivalents were generated and used.
It helps users understand:
-
The entity’s ability to generate cash; and
-
The timing and certainty of cash flows.
1. Key Definitions
| Term | Meaning |
|---|---|
| Cash | Cash on hand and demand deposits. |
| Cash Equivalents | Short-term (usually ≤ 3 months), highly liquid investments easily convertible to known amounts of cash. |
| Cash Flows | Inflows and outflows of cash and cash equivalents. |
2. Purpose of the Statement
The Statement of Cash Flows shows movements in cash and cash equivalents during the period, classified into three main activities:
-
Operating Activities
-
Investing Activities
-
Financing Activities
3. Classification of Cash Flows
A. Operating Activities
These are the main revenue-producing activities of the business.
Examples:
-
Receipts from sale of goods and services
-
Payments to suppliers and employees
-
Cash payments or refunds of income taxes
-
Receipts and payments related to trading securities (if part of normal business)
Example (Operating Activities):
| Item | Cash Flow |
|---|---|
| Cash received from customers | +$500,000 |
| Cash paid to suppliers | –$300,000 |
| Cash paid to employees | –$100,000 |
| Income tax paid | –$20,000 |
| Net cash from operating activities | +$80,000 |
B. Investing Activities
These are related to acquisition and disposal of long-term assets and investments.
Examples:
-
Purchase or sale of property, plant, and equipment (PPE)
-
Purchase or sale of investments (shares, bonds)
-
Loans made to other entities
-
Receipts from repayment of loans
Example (Investing Activities):
| Item | Cash Flow |
|---|---|
| Purchase of machinery | –$60,000 |
| Sale of old equipment | +$15,000 |
| Investment in shares | –$10,000 |
| Net cash used in investing activities | –$55,000 |
C. Financing Activities
These are related to changes in equity and borrowings of the entity.
Examples:
-
Issue of shares or bonds
-
Borrowings (loans received)
-
Repayment of borrowings
-
Dividends paid
-
Lease liability payments (principal portion)
Example (Financing Activities):
| Item | Cash Flow |
|---|---|
| Issue of shares | +$50,000 |
| Loan repayment | –$30,000 |
| Dividends paid | –$10,000 |
| Net cash from financing activities | +$10,000 |
4. Methods of Presenting Operating Activities
IAS 7 allows two methods:
(a) Direct Method
Shows gross cash receipts and payments.
Example:
(b) Indirect Method
Starts from net profit and adjusts for non-cash items and changes in working capital.
Example:
5. Foreign Currency Cash Flows
Cash flows in a foreign currency are:
-
Translated using the exchange rate on the date of the cash flow, and
-
The effect of exchange rate changes on cash and cash equivalents is shown separately in the statement.
Example:
A cash inflow of €10,000 is received when €1 = $1.10.
→ Report as $11,000 inflow.
If exchange rate later changes, the difference is shown as exchange gain/loss on cash.
6. Interest and Dividends
IAS 7 allows some flexibility:
| Type | May be classified as (depends on policy consistency) |
|---|---|
| Interest paid | Operating or Financing |
| Interest received | Operating or Investing |
| Dividends received | Operating or Investing |
| Dividends paid | Financing |
Example:
Company classifies:
-
Interest paid → Financing
-
Dividends paid → Financing
-
Interest received → Investing
7. Non-Cash Transactions
Transactions that do not involve cash are excluded from the statement but must be disclosed separately.
Examples:
-
Conversion of debt to equity
-
Acquisition of assets by issuing shares
-
Lease of an asset under finance lease (no immediate cash flow)
Example Disclosure:
During 2025, the company acquired machinery worth $100,000 under a finance lease. This transaction did not involve cash and is excluded from the statement of cash flows.
8. Components of Cash and Cash Equivalents
Include:
-
Cash on hand and demand deposits
-
Short-term highly liquid investments (e.g., treasury bills)
Exclude: -
Bank overdrafts (unless integral to cash management)
-
Long-term investments
Example:
| Component | Included? |
|---|---|
| Petty cash | ✅ Yes |
| Bank current account | ✅ Yes |
| 3-month term deposit | ✅ Yes |
| 6-month term deposit | ❌ No |
| Bank overdraft used for financing | ❌ No |
9. Example Summary Statement
ABC Ltd – Statement of Cash Flows (Extract)
For the year ended 31 December 2025 (USD)
| Section | Cash Inflows | Cash Outflows | Net Cash |
|---|---|---|---|
| Operating Activities | 500,000 | 420,000 | +80,000 |
| Investing Activities | 15,000 | 70,000 | –55,000 |
| Financing Activities | 50,000 | 40,000 | +10,000 |
| Net Increase in Cash | +35,000 | ||
| Opening Cash Balance | 65,000 | ||
| Closing Cash Balance | 100,000 |
10. Disclosure Requirements
Entities must disclose:
-
Components of cash and cash equivalents
-
Reconciliation of cash balances in the statement to the balance sheet
-
Non-cash transactions
-
Significant cash flows from investing or financing activities
✅ In Summary
| Activity | Meaning | Examples |
|---|---|---|
| Operating | Core business activities | Cash from customers, payments to suppliers |
| Investing | Long-term assets and investments | Buy/sell equipment or shares |
| Financing | Equity and borrowings | Loans, share issue, dividends |
IAS 7 ensures transparency by showing how cash moves through the business, highlighting liquidity and solvency.