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The statement of cash flows

What is a statement of cash flows?

1.1 IAS 7 Statement of Cash Flows

Statements of cash flows are prepared in accordance with IAS 7 Statement of Cash
Flows.

 A statement of cash flows recognises the importance of liquidity to a business
by reporting the effect of the transactions of the business during the period on
the bank, cash and similar liquid assets.

 At its simplest, it is a summary of receipts and payments during the period.

1.2 Why does profit earned not equal the change in cash equivalents?

 Profit is calculated on an accruals basis, which means that revenue is
recognised when it is earned, not when it is received, and expenses are
deducted on the same basis to match with that revenue. Bank and cash
balances change when monies are received and paid out.

 The calculation of profit includes some items that do not affect cash at all or
affect it differently. For example, profit for the year is determined after deducting
depreciation, which involves no movement in cash.

 Bank and cash balances are affected by some items that do not affect profit,
such as the purchase of non-current assets (only depreciation affects profit), the
raising of additional capital or the repayment of loans.

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