IAS 7: Statement of Cash Flows
A firm's ability to generate cash is arguably its most critical metric. IAS 7 categorizes historical cash flows into operating, investing, and financing activities.
The Direct vs. Indirect Method
| Method | Description | IASB Preference |
|---|---|---|
| Direct | Shows major classes of gross cash receipts and payments (e.g., cash collected from customers). | Encouraged, but rarely used due to system constraints. |
| Indirect | Adjusts accrual net income for non-cash items and working capital changes. | Most common in practice. Allowed. |
Free Cash Flow (FCF) Calculator
Derive Unlevered FCF from IAS 7 line items.
FCF: $800,000
Classification Pitfalls
- Interest Paid: Can be operating or financing. Consistency is required.
- Dividends Received: Can be operating or investing.
- Bank Overdrafts: Generally classified as cash equivalents if they form an integral part of cash management.
FAQs
How are non-cash transactions handled?
Non-cash investing and financing transactions (e.g., acquiring assets by assuming debt) are excluded from the cash flow statement but must be disclosed elsewhere.
Related Resources
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