IAS 7 – STATEMENT OF CASH FLOWS

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 Table of Contents
Learning Outcomes ......................................................................................................3
Section 1: Foundation and Core Concepts ...................................................................4
Section 2: Operating Activities .....................................................................................8
Section 3: Investing Activities ....................................................................................11
Section 4: Financing Activities ...................................................................................14
Section 5: Reporting Cash Flows from Operating Activities ........................................19
Section 6: Reporting Cash Flows from Investing and Financing Activities ..................21
Section 7: Reporting Cash Flows on a Net Basis ........................................................23
Section 8: Interest and Dividends ..............................................................................25
Section 9: Taxes on Income........................................................................................27
Section 10: Non-Cash Transactions ...........................................................................29
Section 11: Changes in Liabilities Arising from Financing Activities ...........................31
Section 12: Components of Cash and Cash Equivalents ............................................34
Section 13: Other Disclosures ....................................................................................37

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Learning Outcomes
After studying these notes, learners should be able to:
1. Explain the purpose and objective of IAS 7 and why the statement of cash flows
is a critical part of financial reporting.
2. Define key terms used in IAS 7, including cash, cash equivalents, cash flows,
operating activities, investing activities, and financing activities.
3. Classify transactions correctly into operating, investing, or financing activities,
including special cases (e.g., rentals, trading securities, financial institutions).
4. Prepare a statement of cash flows using both the direct method and the indirect
method, and reconcile these approaches.
5. Report cash flows from operating, investing, and financing activities in
compliance with IAS 7, including when gross reporting is required and when net
reporting is permitted.
6. Analyse the treatment of interest, dividends, and taxes in the cash flow
statement, and apply judgment on classification consistent with IAS 7 guidance.
7. Identify and disclose non-cash transactions and changes in financing liabilities,
explaining why they are excluded from the main cash flow statement but must
still be reported.
8. Reconcile the components of cash and cash equivalents between the statement
of cash flows and the statement of financial position.
9. Evaluate additional disclosures required or encouraged under IAS 7, such as
restricted cash balances, undrawn borrowing facilities, maintenance vs. growth
cash flows, and segmental cash flow information.
10. Interpret the cash flow statement to assess an entity’s liquidity, solvency, and
financial flexibility, linking theory to real-world company cases.

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Section 1: Foundation and Core Concepts

1. Objective of IAS 7
The cash flow statement gives users a clear picture of how money actually moves in
and out of a business. Unlike the Statement of Financial Position (SFP) or Statement
of Comprehensive Income (SCI), which are based on accrual accounting, this
statement shows the timing, amount, and certainty of actual cash flows.
• Purpose: To help users assess an entity’s ability to:
o Generate cash and cash equivalents.
o Understand how those cash flows are used to fund operations, settle
debts, and reward investors.
• Requirement: Entities must provide information about the historical changes
in cash and cash equivalents, classified into operating, investing, and
financing activities.
Key Insight: A company may report profits, but if it cannot generate enough cash to
meet obligations, it risks collapse. That is why IAS 7 requires all entities to present
this statement.

2. Scope
• Every entity must prepare and present a cash flow statement for each period of
financial reporting.
• Applies to all entities, regardless of the nature of operations (manufacturers,
service providers, banks, NGOs).
• Even financial institutions, where “cash” may appear as a product, must still
report how they generate and use cash.
Why universal? Because all entities need cash to:
• Run operations.
• Pay obligations (suppliers, employees, lenders).
• Provide returns to investors.

3. Benefits of Cash Flow Information

The cash flow statement, alongside other financial statements, provides unique
insights:

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 • Shows changes in net assets, financial structure (liquidity and solvency), and
capacity to adapt to new opportunities.
• Helps users build models to predict future cash flows and compare
companies, even if they use different accounting methods.
• Provides evidence on the relationship between profitability and cash flow,
revealing whether profits translate into cash.
• Useful in assessing the accuracy of past cash flow forecasts and in analyzing
the effect of inflation or changing prices.
Example:
• Carillion plc (UK, 2018): Reported profits, but historical cash flows showed
increasing pressure on liquidity, a warning sign of eventual collapse.
• Steinhoff (2017): Profit looked strong, but poor cash flow conversion exposed
financial misstatements.

4. Key Definitions
IAS 7 introduces terms that form the backbone of the statement:
• Cash: Cash on hand and demand deposits (e.g., bank balances).
• Cash equivalents: Short-term (≤3 months), highly liquid investments, easily
convertible to known amounts of cash, with insignificant risk of value
changes.
o Examples: Treasury bills, 3-month deposits, money market funds.
o Excluded: Equity investments (unless redeemable like near-maturity
preference shares).
• Cash flows: Inflows and outflows of cash and cash equivalents.
• Operating activities: Day-to-day, revenue-producing activities (e.g., sales
receipts, supplier payments).
• Investing activities: Acquisition/disposal of long-term assets and other
investments (e.g., property, equipment, financial investments).
• Financing activities: Transactions affecting equity and borrowings (e.g., share
issues, loan repayments).

5. Cash and Cash Equivalents in Practice

• Cash equivalents are held to meet short-term commitments, not for long-
term investment.

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 • Must be both:
1. Readily convertible to cash.
2. Subject to insignificant risk of value changes.
• Typical cut-off: Maturities of three months or less from acquisition.

Special cases:

• Bank borrowings → Usually financing activities.

• Bank overdrafts repayable on demand → If they form an integral part of daily
cash management (balances fluctuate between positive and overdrawn), they
are treated as part of cash and cash equivalents.
• Cash flows exclude movements within cash and cash equivalents (e.g.,
moving funds from one current account to another). This is considered cash
management, not an operating/investing/financing activity.

6. Presentation of the Cash Flow Statement

IAS 7 requires classification into three categories:
• Operating activities.
• Investing activities.
• Financing activities.
This classification helps users understand how each activity affects the entity’s
financial health.
• The format should suit the entity’s business model but must remain clear and
consistent.
• A single transaction may be split into multiple classifications:
o Example: Loan repayment → Interest portion (Operating activity), Capital
portion (Financing activity).

Student Tip: Always ask: Is this transaction about running the business,
buying/selling assets, or raising/repaying funds? That determines its classification.

Summary of Section 1
• IAS 7 ensures users can see how cash actually moves, complementing accrual-
based statements.
• Applies to all entities, no exceptions.
• Cash flow information improves analysis, prediction, and comparability.

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• Definitions (cash, cash equivalents, operating, investing, financing) are
fundamental.
• Presentation requires proper classification to make the statement meaningful.

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Section 2: Operating Activities

1. Why Operating Activities Matter

• Cash flows from operating activities are the heart of the business.
• They show whether day-to-day operations are generating enough cash to:
o Repay loans.
o Maintain the business (replace worn-out assets).
o Pay dividends.
o Make new investments.
• Strong operating cash flows mean the business can sustain itself without
relying on external borrowing or share issues.

Key Point: Investors and lenders often check this section first, because it reveals
whether profit is backed up by real cash.

2. What Are Operating Activities?

They are the principal revenue-producing activities of the entity, i.e., normal trading
activities.
Common Examples:
• Cash inflows:
o Receipts from selling goods and providing services.
o Receipts from royalties, fees, commissions, and other revenue sources.
o Refunds of income taxes (unless clearly linked to financing or investing).
o Receipts from trading or dealing in contracts (e.g., derivatives for
traders).
• Cash outflows:
o Payments to suppliers for goods and services.
o Payments to and on behalf of employees (wages, salaries, benefits).
o Payments of income taxes (unless specifically linked to financing or
investing).
o Payments for contracts held for trading purposes.

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 Memory trick for students: Think of Operating = “Everyday cash” — what comes
in from customers and what goes out to suppliers, staff, and government.

3. Special Situations in Operating Cash Flows

1. Sale of Assets (e.g., machinery, plant):
o The gain or loss appears in profit or loss, but the cash inflow from selling
the asset is treated as investing, not operating.
2. Assets Held for Rental then Sale (IAS 16 para 68A):
o If a business manufactures or acquires assets for rental (e.g., cars in a
leasing business) and later sells them, both:
▪ Cash paid to acquire/manufacture, and
▪ Cash received from rent and sale
→ are considered operating activities (because that’s the core
business).
3. Trading Securities and Loans:
o If securities and loans are held for trading (like inventory for resale), the
cash flows from buying/selling them are operating, not investing.
o For financial institutions, cash advances and loan repayments are also
operating, since lending is their core revenue-generating activity.

4. Why Operating Cash Flows Are Powerful for Forecasting

• Past operating cash flows help predict future ones.
• Analysts often adjust profit figures with operating cash flow to test how “real”
the profits are.
o If profits rise but operating cash flow falls → red flag (earnings may not
be sustainable).

Example:

• Steinhoff (2017): Reported billions in profit, but cash flow from operations
lagged, showing weak cash conversion.
• Tesla (2018): Loss-making in early years, but investors tracked operating cash
flows as proof the company was getting closer to self-sufficiency.

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5. Student Tip
When analyzing or preparing cash flow statements, always ask:
• Is this activity part of daily business operations? → If yes, it’s operating.
• If not, check whether it’s about buying/selling assets (investing) or
raising/repaying funds (financing).

Summary of Section 2
• Operating cash flows = core business survival test.
• Includes receipts from customers and payments to suppliers, employees, and
tax authorities.
• Excludes investing transactions like selling equipment.
• Special rules apply for rentals, trading securities, and financial institutions.
• Strong operating cash flows = strong fundamentals.

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Section 3: Investing Activities

1. Why Investing Activities Are Important

• Investing activities show how a business is building for the future.
• They reflect cash spent on acquiring resources that are expected to generate
future income and cash flows (e.g., buying machinery, software, subsidiaries).
• They also show proceeds from selling those resources.

Key Insight: Only expenditures that result in a recognised asset in the Statement
of Financial Position (SFP) can be classified as investing activities.

2. Examples of Investing Cash Flows

(a) Outflows (spending on future growth)
• Cash paid to acquire:
o Property, Plant and Equipment (PPE).
o Intangibles (e.g., patents, trademarks, software).
o Other long-term assets (including capitalised development costs and self-
constructed PPE).
• Cash paid to acquire:
o Equity or debt instruments of other entities (shares, bonds).
o Interests in joint ventures (unless they are trading/short-term cash
equivalents).
• Cash advances and loans made to other parties (except when the entity is a
financial institution, where this would be operating).
• Cash paid for derivatives (futures, forwards, options, swaps), except when:
o Held for trading (→ operating), or
o Classified as financing.
(b) Inflows (recovering or releasing investments)
• Cash received from sales of:
o PPE, intangibles, or other long-term assets.
• Cash received from sales of:
o Equity or debt instruments of other entities.

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 o Interests in joint ventures (again, not including trading or cash
equivalents).
• Repayment of advances and loans by other parties.
• Cash received from settlement of derivative contracts (futures, forwards,
options, swaps), unless classified as trading (operating) or financing.

3. Special Considerations
• Hedging contracts: If a derivative contract is accounted for as a hedge of a
specific item, then its cash flows follow the classification of that hedged item.
o Example: If a futures contract is hedging a PPE purchase, then the
contract’s cash flows are classified as investing.
• Trading vs investing:
o Trading in securities or derivatives → Operating activities.
o Long-term investments → Investing activities.
4. Why Users Care About Investing Cash Flows
• Heavy investment outflows often mean the company is expanding capacity or
innovating — a positive sign if well-funded.
• Consistent inflows from asset sales may signal either:
o Good asset management (disposing of unused resources), or
o Trouble (selling core assets to fund operations).
• Users assess whether investments are being made sustainably — i.e., without
endangering cash for daily operations.

Examples:

• Apple: Significant investing outflows each year on property, data centres, and
R&D intangibles — seen as investment in future growth.
• Carillion plc: Rising investment commitments without sufficient operating cash
inflows created liquidity strain, contributing to collapse.

5. Student Tip
Think of investing activities as planting seeds for future harvest:
• When cash goes out, the company is planting (buying assets, acquiring
businesses).

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 • When cash comes in, the company is harvesting (selling assets, collecting
loans).

Summary of Section 3
• Investing activities = resources for future income.
• Outflows: purchase of PPE, intangibles, securities, loans, derivatives.
• Inflows: sales of assets, securities, loan repayments, derivative receipts.
• Only recognised assets qualify.
• Hedge contracts follow the classification of the hedged item.

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Section 4: Financing Activities

1. Why Financing Activities Are Important

• Financing activities show how a business raises capital and repays it.
• They highlight the relationship between the company and its providers of
capital (shareholders and lenders).
• Users pay attention because these flows help predict future claims on the
company’s cash flows — i.e., how much cash will be demanded by those who
financed the business.

Key Insight: Financing is about who funds the business and how that funding is
repaid or rewarded.

2. Examples of Financing Cash Flows

(a) Inflows (raising funds)
• Cash proceeds from issuing shares (ordinary or preference shares).
• Cash proceeds from issuing debt instruments: debentures, loans, notes,
bonds, mortgages, and other borrowings (short- or long-term).
(b) Outflows (repaying or rewarding providers of capital)
• Cash payments to owners: acquiring or redeeming the entity’s own shares
(buybacks).
• Cash repayments of borrowings: settlement of loans, bonds, notes, or
mortgages.
• Lease payments: specifically, the portion that reduces the outstanding lease
liability (principal portion under IFRS 16).

3. Why Users Care About Financing Cash Flows

• A large inflow from financing suggests the company is raising capital —
positive if to support growth, negative if it signals reliance on debt due to weak
operating cash flows.
• Outflows indicate the company is servicing obligations — healthy if
sustainable, risky if excessive.
• Analysts compare financing flows with operating flows to assess sustainability:
o If a company must constantly borrow to cover operations → red flag.

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 o If borrowings fund expansion but operating cash flows comfortably cover
repayments → healthier.

Examples:

• Tesla (2010s): Heavy reliance on financing inflows (share issues, bond issues) to
fund expansion before operating cash flows turned positive.
• Steinhoff (2017): Increasing debt repayments with weak operating cash inflows
raised solvency concerns.
4. Student Tip
Financing = “Who gives and takes money from the business?”
• Shareholders (equity financing).
• Lenders (debt financing).
• Lessors (lease liabilities).
Always separate financing from operations and investing to clearly see if the business
is self-sustaining or dependent on external support.

Summary of Section 4
• Financing activities = flows between the entity and providers of capital.
• Inflows: issuing shares or debt.
• Outflows: share buybacks, loan repayments, lease liability repayments.
• Crucial for predicting future claims on cash flows.

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IAS 7 – Worked Example
Case Study: ABC Ltd.
Statement of Cash Flows for the year ended 31 December 20X4
Transactions during the year
1. Sales E1,200,000 (E150,000 still receivable at year-end).
2. Cash paid to suppliers and employees E950,000 (E700,000 + E250,000).
3. Income tax paid E60,000.
4. Purchase of machinery (cash) E300,000.
5. Sale of old machine for E80,000 (carrying amount E60,000 → gain E20,000 in
SCI).
6. Purchase of shares in another company E100,000.
7. Issue of ordinary shares E500,000.
8. New bank loan E400,000; repayment of old loan E100,000.
9. Lease liability principal paid E50,000.
10. Dividend paid E40,000.

ABC Ltd. – Statement of Cash Flows

(for the year ended 31 December 20X4)

Description Amount (E)

Cash flows from operating activities

Cash receipts from customers 1,050,000

Cash payments to suppliers and employees (950,000)

Income tax paid (60,000)

Net cash from operating activities 40,000

Cash flows from investing activities

Purchase of machinery (300,000)

Proceeds from sale of machinery 80,000

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Description Amount (E)

Purchase of shares in another company (100,000)

Net cash used in investing activities (320,000)

Cash flows from financing activities

Proceeds from issue of shares 500,000

Proceeds from bank loan 400,000

Loan repayment (100,000)

Lease liability repayment (principal) (50,000)

Dividend paid (40,000)

Net cash from financing activities 710,000

Net increase in cash and cash equivalents 430,000

Quick checks (for learners):

• Operating = 1,050,000 − 950,000 − 60,000 = 40,000
• Investing = −300,000 + 80,000 − 100,000 = (320,000)
• Financing = 500,000 + 400,000 − 100,000 − 50,000 − 40,000 = 710,000
• Net increase = 40,000 − 320,000 + 710,000 = 430,000

Brief analysis of the cash flow statement above and what it could mean?
1. Operating Activities (E40,000 net inflow)
• Cash generated from day-to-day operations is very low compared to sales
receipts (only E40,000 net from E1,050,000 receipts).
• After paying suppliers, employees, and taxes, the company is left with a thin
cash buffer.
• This suggests weak operating cash flow generation, meaning the core business
is not producing enough cash to comfortably fund growth or distributions.

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2. Investing Activities (E320,000 net outflow)
• Significant investment in machinery (E300,000) and shares in another company
(E100,000).
• Only E80,000 recovered from selling old machinery.
• This shows the company is expanding capacity and investing for future
returns, but these activities drain cash in the short term.

3. Financing Activities (E710,000 net inflow)

• Major inflows: issue of shares (E500,000) and new bank loan (E400,000).
• Outflows: loan repayment, lease liability repayment, and dividend.
• Financing activities provided the bulk of liquidity, keeping the company afloat.
• Heavy reliance on external financing suggests the company is in a growth phase
or may be struggling to self-finance its investments.

4. Net Cash Movement (E430,000 increase)

• Overall, the company ended with a positive increase in cash.
• However, this increase is almost entirely due to financing inflows, not
sustainable operating performance.

Overall Interpretation
• The company is expansionary, investing in machinery and other assets, but its
core operations are not generating strong cash flows.
• Short-term liquidity is healthy (cash increased), but this is heavily dependent
on external financing (new shares and loans).
• If financing sources dry up, the company may face pressure, unless operating
cash flow improves.
• Dividends being paid despite weak operating cash flow could raise concerns
about financial discipline.

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Section 5: Reporting Cash Flows from Operating Activities

1. Two Methods Allowed by IAS 7

IAS 7 permits two ways to present cash flows from operating activities:
(a) Direct Method
• Shows major classes of gross cash receipts and payments.
• Examples:
o Cash receipts from customers.
o Cash payments to suppliers and employees.
o Cash paid for income taxes.
• Information can be obtained either:
1. Directly from accounting records, or
2. By adjusting revenue and expense items in the Statement of Comprehensive
Income (SCI) for changes in working capital, non-cash items, and investing/financing
effects.
Advantages:
• Provides more transparent and detailed information, useful for forecasting
future cash flows.
• Easy for learners and users to “see the cash trail.”

Link to our worked example:

In ABC Ltd.’s statement, we listed:
• Cash receipts from customers.
• Cash payments to suppliers and employees.
• Income tax paid.
This is the direct method in action.

(b) Indirect Method

• Starts with profit or loss (from SCI).
• Adjusts for:
o Non-cash items (depreciation, provisions, deferred tax, FX gains/losses).
o Changes in working capital (inventories, receivables, payables).

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 o Items in profit or loss that belong to investing or financing cash flows
(e.g., gains on asset disposals, finance costs).
Advantages:
• Links net profit to net operating cash flow, helping users reconcile the two.
• Commonly used in practice because companies already calculate net profit.

Example (using ABC Ltd.):

Start with profit (say E120,000).
• Adjust for non-cash: Depreciation +E60,000, Gain on sale of machinery –
E20,000.
• Adjust for working capital: Increase in receivables –E150,000, Increase in
payables +E30,000.
• Adjust for financing/investing: Interest expense +E10,000.
= Net cash from operating activities: E40,000.

2. IAS 7 Encourages the Direct Method

• The IASB recommends the direct method because it shows actual inflows and
outflows that can’t be derived from the indirect method.
• However, in practice, the indirect method is more common (companies often
prefer reconciling from profit).

3. Student Tip
• Direct method = show me the cash.
• Indirect method = reconcile profit to cash.
• Both must arrive at the same net cash from operating activities.

Summary of Section 5
• Operating cash flows can be reported by Direct (gross receipts/payments) or
Indirect (adjusted profit) methods.
• IASB encourages the Direct Method, but many companies use the Indirect
Method.
• In our ABC Ltd. example, we applied the Direct Method.

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Section 6: Reporting Cash Flows from Investing and
Financing Activities

1. General Rule
IAS 7 requires entities to report major classes of gross cash receipts and gross cash
payments from investing and financing activities separately.
• This means each major source or use of cash must be shown distinctly, rather
than netting inflows and outflows together.
• The only exceptions are specific cases in IAS 7 (paras. 22 and 24), which allow
net presentation (we will cover these later).

2. Application to Investing Activities

• Report cash outflows (e.g., purchase of property, plant, equipment, intangibles,
shares).
• Report cash inflows (e.g., sale of assets, collection of loan repayments, proceeds
from disposal of investments).
• Each major category should appear as a separate line in the cash flow
statement.

Example (from ABC Ltd.):

• “Purchase of machinery” – E300,000 (outflow).

• “Proceeds from sale of machinery” – E80,000 (inflow).
• “Purchase of shares in another company” – E100,000 (outflow).
Each line is shown separately, not as a single net figure of (E320,000).

3. Application to Financing Activities

• Report cash inflows (e.g., issue of shares, raising of loans).
• Report cash outflows (e.g., loan repayments, dividends, lease liability
repayments).
• Again, each category must be shown separately.

Example (from ABC Ltd.):

• “Proceeds from issue of shares” – E500,000 (inflow).

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 • “Proceeds from bank loan” – E400,000 (inflow).
• “Loan repayment” – E100,000 (outflow).
• “Lease liability repayment (principal)” – E50,000 (outflow).
• “Dividend paid” – E40,000 (outflow).
These are not netted but reported line by line.

4. Why IAS 7 Insists on Separate Disclosure

• Users need to see where cash is coming from and where it is going.
• Netting inflows and outflows would hide important details (e.g., a company
raising big loans while simultaneously repaying others).
• Transparency helps users assess whether investing is focused on growth, and
whether financing is sustainable.

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Section 7: Reporting Cash Flows on a Net Basis

1. General Principle
Normally, IAS 7 requires gross reporting: showing major classes of cash inflows and
outflows separately.
Exception: In certain cases, cash flows may be reported on a net basis (i.e., inflows
and outflows offset against each other) where separate disclosure adds little value or
where gross figures would overwhelm the statement.

2. Cases Where Net Basis Reporting is Allowed

(a) When Acting on Behalf of Customers (para 22a)
Cash flows may be shown net when they reflect customer activity, not the entity’s
own activity.
• Examples:
o Bank: acceptance and repayment of demand deposits.
o Investment entity: funds held for customers.
o Property agent: rents collected on behalf of landlords and then passed
on.

In these cases, gross reporting would be misleading, since the entity is merely a
conduit.

(b) When Turnover is Quick, Amounts are Large, and Maturities are Short (para
22b)
Some cash flows are so fast-moving and short-term that gross reporting is
unnecessary.
• Examples:
o Advances and repayments of credit card principal amounts.
o Purchase and sale of investments with short maturities.
o Other short-term borrowings with maturities of three months or less.

Net reporting avoids clutter in the statement while still fairly presenting cash
movements.

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(c) Financial Institutions (para 24)
IAS 7 gives special treatment to banks and financial institutions — they may present
some cash flows net:
• Acceptance and repayment of deposits with fixed maturity dates.
• Placement and withdrawal of deposits with other financial institutions.
• Advances and loans made to customers and repayments received.

Reason: These are the core daily activities of financial institutions, often involving
large volumes of similar transactions.

3. Why Net Basis Reporting Matters

• Helps keep the cash flow statement clear and readable.
• Prevents distortion by showing massive gross inflows/outflows that don’t truly
represent the entity’s cash use.
• However, it is limited to specific cases; otherwise, transparency demands
gross reporting.

4. Student Tip
• Gross reporting = default rule.
• Net reporting = exceptions only.
• Ask: Is the cash flow really the entity’s activity, or is it the customers?
• Ask: Is it short-term, fast turnover, and high volume?
• If yes → netting is allowed.
Summary of Section 7
• IAS 7 generally requires gross reporting of cash flows.
• Net reporting is allowed in three main scenarios:
1. When the entity is acting as an agent on behalf of customers.
2. When cash flows involve quick turnover, large amounts, and short
maturities.
3. For specific financial institution activities (deposits and loans).
• These exceptions ensure the statement remains useful, not cluttered.

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Section 8: Interest and Dividends

1. Disclosure Requirement
• IAS 7 requires separate disclosure of:
o Interest received.
o Interest paid.
o Dividends received.
o Dividends paid.
• Each must be classified consistently from one period to the next.
• The total interest paid must be shown, whether expensed in profit or loss or
capitalised under IAS 23 Borrowing Costs.

2. Typical Classifications
(a) Financial Institutions
• For banks and similar entities:
o Interest paid, interest received, and dividends received → Operating
activities (since these are core revenue and expense flows).
(b) Non-Financial Entities
There is flexibility in classification, but it must be applied consistently.
• Interest paid:
o May be shown as Operating (since it affects profit or loss), or
o Financing (since it is a cost of obtaining financial resources).
• Interest and dividends received:
o May be shown as Operating (since they affect profit or loss), or
o Investing (since they are returns on investments).
• Dividends paid:
o May be shown as Financing (cost of equity financing), or
o Operating (to show dividend-paying ability from operating cash).

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3. Practical Recommendation
To keep the operating section clean and focused on core trading cash flows, it is
often clearer to classify:
• Interest paid → Financing
• Interest received → Investing
• Dividends received → Investing
• Dividends paid → Financing
This avoids “noise” in the operating activities section, making operating cash flows
more reflective of day-to-day operations.

Many examiners and practitioners prefer this approach, as it highlights operating

self-sufficiency without the distortion of financing/investing cash items.

4. Student Tip
• Always disclose separately.
• Apply the same classification consistently across periods.
• Remember: if classification choice exists, lean towards Investing/Financing
unless you’re a financial institution.

Summary of Section 8
• Interest and dividends must be separately disclosed.
• Financial institutions classify them as Operating.
• Other entities may choose between Operating or Investing/Financing, but
consistency is key.
• Preferred practice (recommended): classify under Investing/Financing to
keep Operating activities free of financing/investing noise.

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Section 9: Taxes on Income

1. Disclosure Requirement
• Cash flows from income taxes must be separately disclosed in the statement
of cash flows.
• By default, they are classified as Operating activities, unless they can be
clearly tied to an Investing or Financing activity.
2. General Rule
• Most of the time, income taxes are shown under Operating activities, because:
o They arise on profits, which are generally linked to operating cash flows.
o Timing differences (taxes paid in different periods from when income is
earned) make it hard to match them precisely with investing or financing
cash flows.
3. Exceptions – When Reclassification is Appropriate
If it is practicable to identify tax cash flows directly with a transaction, then classify
accordingly:
• Example (Investing): Tax on gain from sale of property → classify under
Investing with the sale proceeds.
• Example (Financing): Tax relief on borrowing costs (interest deductions) →
classify under Financing with the related loan cash flows.

IAS 7 requires that if taxes are split across categories, the total amount of
income taxes paid must still be disclosed.
4. Practical Approach (Recommended for Students & Practitioners)
• Default to Operating unless a clear and direct link to an investing/financing
cash flow exists.
• This keeps classification simple, consistent, and avoids confusion from small
reclassifications.

5. Student Tip
• Remember: tax = operating (most of the time).
• Only reclassify when the tax clearly belongs with a specific investing or
financing activity.
• Always disclose the total income taxes paid for the period.

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Summary of Section 9
• Income tax cash flows must be disclosed separately.
• Usually classified as Operating activities.
• Can be allocated to Investing or Financing if directly linked and practicable.
• The total amount paid must always be disclosed, even if allocated across
categories.

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Section 10: Non-Cash Transactions

1. General Rule
• Investing and financing transactions that do not involve cash or cash
equivalents are excluded from the statement of cash flows.
• Instead, they must be disclosed elsewhere in the financial statements, in a
way that provides users with relevant information about their effect on the
entity’s capital and asset structure.

Reason: The purpose of the cash flow statement is to show actual movements of
cash, not accounting entries or financing arrangements that don’t generate immediate
cash flows.

2. Why They Are Excluded

• Many investing and financing transactions significantly affect an entity’s
resources and obligations but don’t involve cash at the time.
• Including them in the cash flow statement would distort the true picture of
liquidity.
• Disclosure outside the cash flow statement ensures transparency while
preserving the integrity of the statement’s purpose.

3. Common Examples of Non-Cash Transactions

• Acquisition of assets by assuming liabilities
o Example: Buying equipment on credit or via a lease arrangement (IFRS
16).
• Acquisition of an entity by issuing equity
o Example: Acquiring another company and paying with shares rather
than cash.
• Conversion of debt to equity
o Example: Lenders agree to swap bonds or loans for shares in the
company.
4. Student Tip
• Ask: Did cash or cash equivalents move?
o If yes → include in the cash flow statement.

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 o If no → exclude, but disclose elsewhere.
• Remember: Non-cash transactions still affect the balance sheet and capital
structure, so disclosure is essential even though no cash appears in the
statement.
Summary of Section 10
• Non-cash investing and financing activities are not shown in the statement of
cash flows.
• They must be disclosed elsewhere for transparency.
• Examples include asset acquisitions via leases, acquisitions settled with equity,
and conversion of debt into equity.
• This treatment ensures the cash flow statement remains focused on actual
cash movements.

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Section 11: Changes in Liabilities Arising from Financing
Activities

1. General Requirement
IAS 7 requires entities to provide disclosures that help users evaluate changes in
financing liabilities.
• This includes both cash flows (actual payments/receipts) and non-cash
changes (such as FX differences or fair value movements).
• Purpose: to help users reconcile movements in debt and financing obligations,
and to understand how financing decisions affect liquidity.

2. What Must Be Disclosed (para 44B)

Entities must explain changes in financing liabilities that arise from:
• (a) Financing cash flows → e.g., loan proceeds, repayments, lease payments.
• (b) Business combinations → obtaining or losing control of
subsidiaries/businesses.
• (c) Foreign exchange effects → retranslation of foreign-currency loans.
• (d) Fair value changes → e.g., fair value through profit or loss adjustments for
derivative liabilities.
• (e) Other changes → e.g., reclassifications, covenant-driven modifications,
conversions of debt to equity.

3. Which Liabilities Are Covered

• Financing liabilities are those whose cash flows are, or will be, classified as
financing activities in the statement of cash flows.
o Examples: bank loans, bonds, debentures, lease liabilities.
• The rule also applies to certain financial assets if their cash flows are included
in financing (e.g., derivatives hedging borrowings).

4. How to Disclose (para 44D–44E)

• One practical way: provide a reconciliation of opening to closing balances for
financing liabilities.

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 • This reconciliation must link:
o The statement of financial position (balance sheet).
o The statement of cash flows (showing which changes are from cash vs.
non-cash).
• If disclosed alongside other assets/liabilities, financing liabilities must be
shown separately.

5. Example of Disclosure (Reconciliation Table)

Changes in Liabilities Arising from Financing Activities – 20X4

Description Bank Loan Lease Liabilities Total

Opening balance (1 Jan) 1,000,000 200,000 1,200,000

Cash flows

– Loan proceeds 400,000 – 400,000

– Loan repayments (100,000) – (100,000)

– Lease payments – (50,000) (50,000)

Non-cash changes

– New leases recognised – 80,000 80,000

– FX translation effect 20,000 – 20,000

– Fair value adjustment (10,000) – (10,000)

Closing balance (31 Dec) 1,310,000 230,000 1,540,000

6. Student Tip
• Always distinguish cash flows vs. non-cash movements.
• Think of the reconciliation as a bridge: start with opening balances, add cash
movements, adjust for non-cash changes, and arrive at closing balances.
• Helps examiners see you can link balance sheet debt movements back to the
cash flow statement.
Summary of Section 11

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• IAS 7 requires disclosure of all changes in financing liabilities, not just cash
movements.
• Includes cash flows, FX effects, fair value changes, business combinations, and
other adjustments.
• Best practice: provide a reconciliation table from opening to closing balances.
• This ensures users can track how financing obligations evolve and link them
across financial statements.

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Section 12: Components of Cash and Cash Equivalents

1. Disclosure Requirement
IAS 7 requires entities to:
• Disclose the components of cash and cash equivalents (C&CE).
• Provide a reconciliation between the amounts shown in the statement of cash
flows and the equivalent items in the statement of financial position (SFP).

This ensures users can clearly see what is included in C&CE and how it ties back
to the balance sheet.

2. Importance of Disclosure
• Different entities use different cash management practices and banking
arrangements.
• To comply with IAS 1 – Presentation of Financial Statements, entities must
also disclose their policy for determining what qualifies as C&CE.
• This helps users understand whether certain deposits, overdrafts, or short-term
investments have been included.

3. Policy Changes
• If the policy for determining C&CE changes (e.g., reclassifying certain short-
term investments as cash equivalents instead of investments), this must be
reported in line with IAS 8 – Accounting Policies, Changes in Accounting
Estimates and Errors.
• That means:
o Disclosing the nature of the change.
o Explaining the reason for the change.
o Restating comparatives where required.

4. Practical Example of Components

• Cash:
o Cash on hand.
o Demand deposits (current bank balances).

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 • Cash equivalents:
o Short-term investments with maturity ≤ 3 months.
o Treasury bills.
o Money market funds.
• Special cases:
o Bank overdrafts repayable on demand may be included as part of C&CE
if integral to cash management.
o Restricted cash (not freely available) must be disclosed separately.

5. Example Disclosure (Reconciliation)

Components of Cash and Cash Equivalents – 31 Dec 20X4

Description Amount (E)

Cash on hand 20,000

Bank current accounts 150,000

Short-term deposits (< 3 months) 80,000

Money market fund 50,000

Bank overdraft (repayable on demand) (30,000)

Total cash and cash equivalents 270,000

Reconciles directly to the figure shown in the Statement of Cash Flows and the
Statement of Financial Position.

6. Student Tip
• Always check what the company defines as C&CE.
• Look for differences between companies: one might include overdrafts, another
might not.
• If policy changes → disclosure under IAS 8 is required.

Summary of Section 12
• Entities must disclose the components of C&CE.

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• A reconciliation between cash flow statement and balance sheet figures is
mandatory.
• The entity’s policy on determining C&CE must be disclosed.
• Any policy changes are treated under IAS 8.

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Section 13: Other Disclosures

1. Restricted Cash Balances

• Entities must disclose the amount of significant cash and cash equivalent
balances that are not available for use by the group, with a commentary by
management.
• Restrictions may arise when:
o A subsidiary operates in a country with exchange controls or legal
restrictions.
o Cash balances cannot be transferred freely to the parent or other
subsidiaries.

This ensures users understand that not all reported cash is truly available for
general use.

2. Additional Useful Disclosures (Encouraged)

(a) Undrawn Borrowing Facilities
• Disclose the amount of borrowing facilities available for:
o Future operations.
o Settling capital commitments.
• Must indicate any restrictions on using these facilities (e.g., covenant
conditions).
(b) Cash Flows for Operating Capacity
• Entities are encouraged to distinguish:
o Cash flows that increase operating capacity (growth expenditure).
o Cash flows that maintain operating capacity (replacement of worn-out
assets).
• This helps users see whether the company is maintaining its productive base or
prioritising liquidity/distributions at the expense of future profitability.
(c) Segmental Cash Flows (IFRS 8)
• Disclosure of cash flows by reportable segment (Operating, Investing,
Financing) provides insight into:
o How different business units generate and use cash.

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 o The availability and variability of cash flows across the group.

3. Why These Disclosures Matter

• Users can assess:
o Whether the group has true access to reported cash balances.
o Whether management is striking the right balance between maintaining
operations and expanding capacity.
o How different business segments contribute to group cash flows.
• Helps identify risks such as:
o Overstated liquidity (when restricted cash is included).
o Short-term focus (when maintenance capex is neglected).

4. Student Tip
• Always ask: Is all the reported cash really available for use?
• Distinguish between growth capex vs. maintenance capex.
• Check segmental cash flows for hidden vulnerabilities in group liquidity.

Summary of Section 13
• Disclose restricted cash balances with commentary.
• Encouraged disclosures include:
o Undrawn borrowing facilities (with restrictions).
o Split of cash flows between maintaining and increasing operating
capacity.
o Segmental cash flows (by reportable segment under IFRS 8).
• These disclosures improve transparency on liquidity, investment strategy, and
business sustainability.

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