IAS 7 – Statement of Cash Flows

Abstract

Overview You have finally arrived at the third of the " big three " required financial statements. The statement of cash flows is the newest of the three, having only been required since 1988. Although it usually isn't given as much weight as the balance sheet or income statement, it can be a very useful statement for decision makers. Like the other two statements, items are grouped according to categories. In the case of the statement of cash flows, the categories are referred to as activities: operating, investing, and financing. There is one standard format for the investing and financing sections of the statement of cash flows. For the operating activities section, however, there are two possible methods: direct and indirect. Many people feel that the direct method is the better of the two methods. However, nearly all companies use the indirect method, so this method is the manner of the operating activities section that we will place our focus. In addition, the few companies that do use the direct method must perform a reconciliation, which essentially is the indirect method. By analyzing a statement of cash flows, you can begin to understand where a company may be headed in the future or at what point in a company's life cycle it is currently functioning. These pieces of information are sometimes easier to glean from a statement of cash flows than from a balance sheet or income statement (the latter two of which are prepared using the accrual method).