University Accounting 2: Cash Flow Statement Analysis and IAS 7

This report delves into the International Accounting Standard (IAS 7) concerning the statement of cash flows. It outlines the standard's objectives and categorizes cash flows into operating, investing, and financing activities. The report explains how net cash flow from operations is calculated and emphasizes the statement's importance in assessing an organization's solvency and liquidity. It also highlights the advantages the cash flow statement offers to Girling Limited, particularly in providing insights into cash positions that are not always evident in income statements or fund flow statements. The report concludes by reiterating the significance of the cash flow statement for financial reporting and management, underscoring its role in evaluating changes in cash and cash equivalents over a specific period.

Running head: ACCOUNTING 2
Accounting 2
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

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Executive Summary:
The current report aims to explain the goals and purpose of International Accounting
Standard (IAS 7) associated with the statement of cash flows. In addition, the various segments
associated with the cash flows like operating activities, financing activities and investing
activities laid out in IAS 7 are described. The basic purpose of the cash flow statement is to
provide valuable insights regarding the solvency and liquidity of an organisation, which are
crucial for business survival and growth. The major advantage that Girling Limited could obtain
with the help of the cash flow statement is that it would enable in obtaining an insight about the
cash position or liquidity, which income statement and fund flow statement could not specify.

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Table of Contents
Cash flow statement:........................................................................................................................3
Introduction:....................................................................................................................................3
Objective and purpose of International Accounting Standard (IAS 7):..........................................4
Explanation of the key terms operating activities, investing activities and financing activities
defined by IAS 7:.............................................................................................................................4
Explanation of the calculation of net cash flow from operating activities:.....................................6
Purpose of the statement of cash flows and its benefits to Girling Limited:...................................6
Conclusion:......................................................................................................................................7
References:......................................................................................................................................8

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Cash flow statement:
Introduction:
The current report aims to explain the goals and purpose of International Accounting
Standard (IAS 7) associated with the cash flow statement. In addition, the various segments
associated with the cash flows like financing activities, operating activities and investing
activities laid out in IAS 7 are described. Along with this, the net cash flow generated from
operations is explained regarding the way it is calculated. The final segment of the report sheds
light on evaluating the purpose of the cash flow statement and its merits to Girling Limited.

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Objective and purpose of International Accounting Standard (IAS 7):
IAS 7 intends to present the information regarding the historical variations in cash and
cash equivalents of an organisation with the help of the statement of cash flows (Baik et al.
2016). This statement would categorise cash flows in the year based on operating, financing and
investing activities.
All organisations developing financial statements in line with IFRS need to present this
particular statement. This statement evaluates the variations in cash and cash equivalents in a
particular year. Such cash and cash equivalents take into account cash in hand and deposits of
demand along with liquid investments, which could be transferred to a known cash amount and
they are subject to greater amount of trivial change risk in value. According to the guidance
notes, an investment fulfils the cash equivalent definition at the time the maturity is of three
months or less from the acquired date (Charitou, Karamanou and Kopita 2017). There is
exclusion of equity investments unless they have any element of cash equivalent. The bank
overdrafts repayable on demand and forming a crucial part of the cash management of an
organisation are taken into account in the form of element of cash and cash equivalents.
Explanation of the key terms operating activities, investing activities and financing
activities defined by IAS 7:
According to IAS 7, the major items in the cash flow statement are explained as follows:
Operating activities:
These activities generate the main revenues of an organisation and it is most significant,
since it represents the ability of an organisation in generating cash by its own activities, instead

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of making investments or external funding. Some of the examples of cash flows from operating
activities comprise of the following:
 Cash received by selling products and rendering services
 Cash received from fees, royalties, commissions and other income (Golestani, Hosseini
and Mehrjoo 2017)
 Cash paid to the suppliers for products and services
 Cash received and paid from held contracts for trading or dealing purposes
Investing activities:
Investing activities are termed as the disposal and acquisition of non-current assets along
with other investments, which are not taken into account in the form of cash equivalents. Some
of the instances of cash flows categorised in investing activities constitute of the following:
 Cash paid for acquiring plant, property and equipment, capitalised development costs and
intangibles
 Cash received from selling intangibles and other fixed assets
 Cash paid for acquisition or cash received from selling equity or debt instruments of other
organisations and interests in joint ventures
Financing activities:
Financing activities could be defined as those activities leading to changes in composition
and size of the contributed borrowings and equity of the organisation. Some of the examples of
cash flows from financing activities include proceeds of cash from issuance of shares, cash paid

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to owners to acquire or redeem the shares of the organisation and cash repayments of the
borrowed amount (Gordon et al. 2017).
Explanation of the calculation of net cash flow from operating activities:
In this case, the indirect method is used for computing the net cash flow generated from
operations. Firstly, the net income figure is used for arriving at the overall cash flows generated
by operating activities (Jones 2017). After that, the interim dividend paid during the year is
added along with the non-operating expense. The non-operating expenses of the organisation
comprise of depreciation and loss on sale of machinery. As a result, the operating profit before
working capital changes is arrived at and it is added with decrease in current assets and increase
in current liabilities. After that, increase in current assets and decrease in current liabilities is
deducted from the result to obtain cash generated from operations. Finally, income tax is
deducted from the operating cash flows to obtain the cash flow generated from operations (Kent
2018).
Purpose of the statement of cash flows and its benefits to Girling Limited:
The basic purpose of the cash flow statement is to provide valuable insights regarding the
solvency and liquidity of an organisation, which are crucial for business survival and growth. In
addition, with the help of this statement, the analysts would be able to utilise information
regarding past cash flows in order to estimate future cash flows of an organisations for making
economic decisions (Khansalar and Namazi 2017). Hence, the major advantage that Girling
Limited could obtain with the help of the cash flow statement is that it would enable in obtaining
an insight about the cash position or liquidity, which income statement and fund flow statement
could not specify. Along with this, it would help in internal financial management, since it is

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crucial to formulate financial plans. Finally, the organisation could locate any discrepancy with
the help of this statement by contrasting the cash positions (Li, Sougiannis and Wang 2017).
Conclusion:
From the above discussion, it could be stated that all organisations developing financial
statements in line with IFRS need to present the cash flow statement. The cash flow statement
evaluates changes in cash and cash equivalents in a particular year. In this case, the indirect
method is used for computing the net cash flow from operating activities. The basic purpose of
the cash flow statement is to provide valuable insights regarding the solvency and liquidity of an
organisation, which are crucial for business survival and growth. The major advantage that
Girling Limited could obtain with the help of the cash flow statement is that it would enable in
obtaining an insight about the cash position or liquidity, which income statement and fund flow
statement could not specify.

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References:
Baik, B., Cho, H., Choi, W. and Lee, K., 2016. Who classifies interest payments as financing
activities? An analysis of classification shifting in the statement of cash flows at the adoption of
IFRS. Journal of Accounting and Public Policy, 35(4), pp.331-351.
Charitou, A., Karamanou, I. and Kopita, A., 2017. The determinants and valuation effects of
classification choice on the statement of cash flows. Accounting and Business Research, pp.1-38.
Golestani, H.A., Hosseini, S.M. and Mehrjoo, E., 2017. Separating and Merging Cash Flows:
Investigating Five-element Cash Flows Statement. International Journal of Economics and
Financial Issues, 7(4).
Gordon, E.A., Henry, E., Jorgensen, B.N. and Linthicum, C.L., 2017. Flexibility in cash-flow
classification under IFRS: determinants and consequences. Review of Accounting Studies, 22(2),
pp.839-872.
Jones, A., 2017. Chairman’s Statement.
Kent, R., 2018. Predicting Operating Cash Flows and Earnings Using the Direct Method
Compared to the Indirect Method Statement of Cash Flows.
Khansalar, E. and Namazi, M., 2017. Cash flow disaggregation and prediction of cash
flow. Journal of Applied Accounting Research, 18(4), pp.464-479.
Li, S., Sougiannis, T. and Wang, I., 2017. Mandatory IFRS Adoption and the Usefulness of
Accounting Information in Predicting Future Earnings and Cash Flows.