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| International Accounting standard(IAS) |
What is the International Accounting Standards (IAS-7)? Describes in details:
IAS -7 (International Accounting Standard 7) is a standard issued by the International Accounting Standards Board (IASB) that focuses on the presentation of cash flow statements. The purpose of IAS 7 is to provide information about a company's cash inflows and outflows over a specific period, helping users of financial statements assess the company's liquidity, financial flexibility, and overall financial health.
Key aspects of IAS 7 include:
1. Components of Cash Flows: IAS 7 divides cash flows into three categories:
Operating Activities:
Cash flows related to the primary business activities, such as receipts from customers and payments to suppliers and employees.
Investing Activities:
Cash flows from buying and selling long-term assets like property, equipment, or investments.
Financing Activities:
Cash flows related to raising capital or repaying debts, including loans, issuing shares, or paying dividends.
2. Direct and Indirect Methods:
IAS 7 permits two methods for reporting cash flows from operating activities:
Direct Method:
Reports major categories of gross cash receipts and payments, such as cash received from customers or cash paid to suppliers.
Indirect Method:
Starts with net income and adjusts for changes in non-cash items, such as depreciation or changes in working capital, to arrive at operating cash flow.
3. Cash and Cash Equivalents:
Cash flow statements should include cash and cash equivalents, which generally consist of cash on hand, deposits, and short-term, highly liquid investments that are easily convertible into known amounts of cash with an insignificant risk of change in value.
4. Presentation of Cash Flows:
The statement should clearly separate cash flows from operating, investing, and financing activities, making it easier to understand how cash is generated and used in the business.
5. Non-Cash Transactions:
IAS 7 requires that non-cash transactions (such as acquisitions financed by issuing shares or converting debt into equity) should be disclosed separately, but they are not included in the cash flow statement.
In short, IAS 7 provides a framework for preparing and presenting cash flow statements, helping users understand how a company generates and uses cash, and giving insights into its liquidity and financial position.