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Introduction to Cash Flow Statement [ IAS 7 ]

Objective of IAS 7 The objective of IAS 7 is to require the presentation 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 according to operating, investing, and financing activities. Fundamental Principle in IAS 7 All entities that prepare financial statements in conformity with IFRSs are required to present a statement of cash flows. [IAS 7.1] The statement of cash flows analyses changes in cash and cash equivalents during a period. Cash and cash equivalents comprise cash on hand and demand deposits, together with shortterm, highly liquid investments that are readily convertible to a known amount of cash, and that are subject to an insignificant risk of changes in value. Guidance notes indicate that an investment normally meets the definition of a cash equivalent when it has a maturity of three months or less from the date of acquisition. Equity investments are normally excluded, unless they are in substance a cash equivalent (e.g. preferred shares acquired within three months of their specified redemption date). Bank overdrafts which are repayable on demand and which form an integral part of an entity's cash management are also included as a component of cash and cash equivalents. [IAS 7.7-8] Presentation of the Statement of Cash Flows Cash flows must be analysed between operating, investing and financing activities. [IAS 7.10] Key principles specified by IAS 7 for the preparation of a statement of cash flows are as follows: The cash flow statement reports the cash generated and used during the time interval specified in its heading. The period of time that the statement covers is chosen by the company. For example, the heading may state "For the Three Months Ended December 31, 2010" or "The Fiscal Year Ended September 30, 2010". The cash flow statement organizes and reports the cash generated and used in the following categories:

1. Operating

converts the items reported on the income statement from the

activities

accrual basis of accounting to cash.

2. Investing activities reports the purchase and sale of long-term investments and property, plant and equipment. 3. Financing activities 4. Supplemental information reports the issuance and repurchase of the company's own bonds and stock and the payment of dividends. reports the exchange of significant items that did not involve cash and reports the amount of income taxes paid and interest paid.

What Can The Statement of Cash Flow


Because the income statement is prepared under the accrual basis of accounting, the revenues reported may not have been collected. Similarly, the expenses reported on the income statement might not have been paid. You could review the balance sheet changes to determine the facts, but the cash flow statement already has integrated all that information. As a result, savvy business people and investors utilize this important financial statement. Here are a few ways the statement of cash flows is used. 1. The cash from operating activities is compared to the company's net income. If the cash from operating activities is consistently greater than the net income, the company's net income or earnings are said to be of a "high quality". If the cash from operating activities is less than net income, a red flag is raised as to why the reported net income is not turning into cash. 2. Some investors believe that "cash is king". The cash flow statement identifies the cash that is flowing in and out of the company. If a company is consistently generating more cash than it is using, the company will be able to increase its dividend, buy back some of its stock, reduce debt, or acquire another company. All of these are perceived to be good for stockholder value. 3. Some financial models are based upon cash flow.