Acca F7 - Cash Flow

Contents Page

1a. Background 3

1a. Objective 3

1a. Scope 4

1a. Benefits 4

1a. Limitations 6

1b. Workings for question 2b 7

1c. Assessment of Liquidity 8

1d. Question 1d 9

2a. Question 2a 10

2b. Question 2b 11

3a. References 12

3b. Bibliography 13

Background

IAS 1 makes it necessary for entities when preparing financial statements within the International Financial Reporting Standards to present cash flow statements as a fundamental part of the financial statements. Cash flow statements are governed by IAS7, which dictates the rules for preparing and reporting cash flows providing information on an entity's cash inflows and cash outflows for the financial period for which the financial statements are prepared.

IAS 7 originally required entities to prepare 'Statement Of Changes In Financial Position' more commonly known as the 'Funds Flow Statement' which reported changes in funds, as part of there financial statements. The term 'funds' was somewhat unclear though and led to some ambiguity as to the correct definition with some preferring to interpret as 'net liquid funds' and others 'working capital' and so in 1992, effective in 1994, the IAS7 standard was revised. This revision by the IASC would clearly show the cash receipts and cash payments for the period for which the financial statements were prepared. (Mirza et al, 2008).

In September 2007 The International Accounting Standards Board amended the title of IAS7 from 'Cash Flow Statements' to 'Statement Of Cash Flow' as a result of the latest revision of IAS1 (Epstein and Jermakowicz, 2010).

Objective

The objective of the IAS7 standard in short is to provide guidance on the manner for which the cash flow information should be presented.

A more concise definition of the standard:

The objective of this Standard is to require the provision 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 from operating, investing and financing activities. IASB (2008, p984).

The disclosure of the information reported on the cash flows of an entity is useful as it facilitates the assessment of an entities potential viability, in particular the solvency, liquidity and also it's financial adaptability. This information is reported in such a way as to allow it to be easily compared and interpreted by investors, shareholders and other users of financial statements who require an insight into the cash resources of the entity, the ability to generate cash resources & cash equivalents, what these cash resources are used for and also how it's performance compares with other entities or businesses of similar nature.

Statement of cash flow is also relevant for assessing:

* The ability to meet obligations and pay dividends.

* Movement in cash balances for a period.

* The ability to generate future positive cash flows.

* Timing and certainty of cash flows.

* Prediction of future cash flows (Greuning et al, 2011).

Scope

IASB (2008) tells us of the scope of IAS7:

An entity shall prepare a statement of cash flows in accordance with the requirements of this Standard and shall present it as an integral part of its financial statements for each period for which financial statements are presented.

The scope for the IAS7 standard dictates that ALL entities present a statement of cash flow as part of its financial statements, regardless of the nature of the entities activity as all entities in affect use cash for the same reasons. Fundamentally they require cash to carry out there operations and so reporting in such a way will allow a true and fair view of the financial position, profit and loss or income and expenditure of a company allowing for comparison of different financial periods or with different companies (BPP 2009).

Benefits

Statements of cash flows are an important, integral component of financial reporting. The benefits of presenting this along with the statement of financial position and the statement of comprehensive income have been by IAS 7 to be as follows:

1) It can give an insight into the financial structure of a company, comprehensive information on its liquidity, solvency and its capacity to take affect on the amounts and timing of cash flows in order to survive, it's ability to adapt to changing circumstances and opportunities. The statement of financial position is sometimes used to gain an understanding of a company's liquidity, but this does not give a full picture of liquidity as it is drawn up at a specific point in time. The statement of cash flows discloses important information regarding the cash flows from operating, investing, and financing activities. This information is not normally as easily accessible the statement of financial position or the statement of comprehensive income.

2) It provides users of financial information with additional data for evaluating changes in assets, liabilities, and equity of a business entity.

3) It allows for the comparison of performance