Ind AS 7: Cash Flow Statement

Ind AS 7 provides the guidelines for preparing the Cash Flow Statement (CFS). A Cash Flow Statement provides information about the cash inflows and outflows of an entity during a specific period. This standard follows the principles set by IAS 7 under IFRS.

Components of Cash Flow Statement:

The Cash Flow Statement (CFS) is divided into three main categories:

1. Operating Activities

2. Investing Activities

3. Financing Activities

Each of these activities provides insights into different aspects of the company’s operations, and they are analyzed as follows:

1. Operating Activities:

Operating activities refer to the primary revenue-producing activities of the entity. For most entities, this represents the day-to-day operations, including:

• Cash inflows from sales of goods and services.

• Cash outflows to suppliers for goods and services.

• Cash payments to employees, creditors, and other operational expenses.

Examples of Operating Activities:

• Dividend received

• Cash receipts from customers (sales revenue).

• Cash payments to suppliers and employees.

• Payments or receipts related to income taxes (unless they can be specifically attributed to investing or financing activities).

• Cash receipts or payments related to interest (if the entity classifies it under operating activities).

In the case of a banking company, interest received would be categorized under operating activities since it’s directly related to its core operations.

2. Investing Activities:

Investing activities represent the acquisition and disposal of long-term assets and investments. These are activities that affect the long-term financial position of the entity.

Examples of Investing Activities:

• Cash payments to acquire property, plant, and equipment.

• Proceeds from the sale of property, plant, and equipment.

• Cash payments to acquire financial assets (e.g., bonds, shares).

• Cash receipts from the sale of financial assets.

• Cash payments related to loans made to others.

Investing activities give insights into the long-term growth and investment strategies of an entity, such as the purchase or sale of assets or investments.

3. Financing Activities:

Financing activities deal with the changes in the size and composition of the equity and borrowings of the entity. These activities focus on the funding side of the business—how the company raises capital and repays debts.

Examples of Financing Activities:

• Cash proceeds from issuing shares or other equity instruments.

• Cash proceeds from borrowing (loans, bonds, etc.).

• Repayment of borrowings.

• Dividends paid to shareholders.

• Repurchases of shares.

Financing activities highlight how the company manages its capital structure and how it raises funds to finance its operations and investments.

✅ Methods to Prepare Cash Flows from Operating Activities

Ind AS 7 allows two approaches for preparing the Operating Activities section:

🔷 1. Direct Method

✅ Description:

The Direct Method reports major classes of gross cash receipts and payments from operating activities. This method presents a clear picture of how cash flows into and out of the business from operations.

✅ Common Cash Inflows:

• Cash received from customers

• Cash received from commission, royalties, or fees

✅ Common Cash Outflows:

• Cash paid to suppliers

• Cash paid to employees

• Cash paid for operating expenses

• Cash paid for interest and taxes

✅ Advantages:

• Provides clear and understandable information.

• Helpful for internal management and external users to assess liquidity.

• Recommended by Ind AS 7 (but not mandatory).

❌ Disadvantages:

• Data gathering is more complex.

• Requires adjustments to accounting systems to track actual cash transactions.

🔷 2. Indirect Method

✅ Description:

The Indirect Method starts with the net profit before tax (or operating profit) and then adjusts for:

• Non-cash items like depreciation and amortization

• Non-operating gains/losses (e.g., gain on asset sale)

• Changes in working capital (e.g., increase/decrease in receivables, payables, inventories)

This method converts accrual basis accounting to cash basis.

✅ Advantages:

• Easier to prepare, since most companies maintain accrual-based financial records.

• Widely used in practice.

• Allows clear reconciliation of profit and cash flow.

❌ Disadvantages:

• Less transparent than the direct method.

• Can be confusing for non-accountants.

✅ Comparison Table:

Cash and Cash Equivalents:

The term “cash and cash equivalents” is defined under Ind AS 7. It refers to:

• Cash: Currency or funds available in current accounts, etc.

• Cash Equivalents: Short-term, highly liquid investments that are readily convertible into cash, with an original maturity of three months or less. Examples include:

  • Treasury bills.

  • Short-term government bonds.

  • Marketable securities.

  • Certificates of deposit.

Note: Cash equivalents exclude any assets that are not as liquid, such as long-term investments.

Conclusion:

Ind AS 7 (Cash Flow Statement) is a vital standard that helps users of financial statements assess the cash flows of an entity during a period. It breaks down the cash inflows and outflows into operating, investing, and financing activities, providing clarity on how a company manages its cash position.

By using the Direct or Indirect method, the company must present the flow of cash in its business operations. The standard ensures that investors, creditors, and other stakeholders have enough information to evaluate the company’s liquidity and financial health.