Definition of the Statement of Cash Flow
The Statement of Cash Flow is the grouping of cash movements executed during a period, being classified as operating, investing, and financing activities.
Importance of the Statement of Cash Flow
- It provides timely information for management decision-making.
- Provides information on the main cash disbursements made by the Company.
- Provides important information for forecasting future disbursements for the following year.
- Assists in making short-term investment decisions.
- Determines the Company’s ability to meet its obligations.
Methods for the Elaboration of the Statement of Cash Flow
According to IAS 7 paragraph 18, the Company must report cash flows from operations using one of the following two methods:
- The direct method, whereby major categories of receipts and payments are presented separately on a gross basis; or
- The indirect method, which begins by presenting the profit or loss on a net basis, which is then corrected for the effects of non-cash transactions, for all types of deferred payment items and accruals that are the cause of collections and payments in the past or the future, as well as for items of profit or loss associated with cash flows from operations classified as investing or financing.
Classification of the Statement of Cash Flow
Operating activity
Cash flows from operating activities are derived primarily from transactions that constitute the entity’s principal source of revenue from ordinary activities. The principal operating activities are as follows:
- Collections from the sale of goods and the rendering of services;
- Collections from royalties, fees, commissions, and other revenues from ordinary activities;
- Payments to suppliers for the provision of goods and services;
- Payments to and on behalf of employees;
- Collections and payments from insurance companies for premiums and benefits, annuities, and other obligations arising from policies underwritten;
- Payments or refunds of income taxes, unless these can be specifically classified within investing or financing activities; and
- Collections and payments arising from contracts held for intermediation or dealing.
Investing activity
The information to be displayed of investing activities is important because such cash flows represent the extent which disbursements have been made for resources that are expected to produce future income and cash flows. But disbursements make an asset to be recognized in the statement of financial position qualify for classification as investing activities. Examples of cash flows from investing activities are as follows:
- Payments for the property acquisition, plant and equipment, intangible assets, and other long-term assets.
- Collections from the sale of property, plant and equipment, intangible assets, and other long-term assets.
Financing activity
The separate presentation of cash flows from financing activities is important due to its use in forecasting cash requirements to cover commitments to the entity’s capital providers. Here below are displayed some examples of cash flows from financing activities are as follows:
- Collections from the issuance of shares or other equity instruments;
- Payments to owners for acquiring or redeeming the entity’s shares;
- Collections from the issuance of unsecured debentures, loans, bonds, mortgage certificate, and other loaned funds; whether long-term or short-term;
- Cash repayments of loaned funds; and
- Payments made by the lessee to reduce an unpaid debt from a lease.
