Statement of Cash Flow
The day-to-day activities of enterprises are characterized by cash inflows and cash outflows. Receipt of payment from debtors, loan advances, proceeds of sales of assets and dividend income from investments form part of cash inflows. On the other hand, the firm is required by means of payment to settle obligation they owe to suppliers, financiers and employees, constituting to cash outflow. For this reason, business entities require to keep on evaluating their cash position to enable them to settle conveniently their cash obligations when they fall due, therefore, business enterprises prepare statement of cash flow to provide them with information pertaining to cash receipts and cash payment in that particular reporting period. According to Deloitte (2013) statement of cash flow is a financial reporting statement prepared for the primary objective of reflecting the liquidity position of a business entity. Kieso, Weygandt and Warfield (2011) observe that a cash flow statement plays a secondary role of reporting on a cash basis about operating activities, investing activities and financing activities of an enterprise in a particular financial period. This essay seeks to explain the purpose and preparation methods of a statement of cash flows.
Purpose and Presentation of a Statement of Cash Flows
Deloitte (2013) states that standards for the preparation and presentation of statement of cash flow are contained in IAS 7. The first draft that formed the basis of the current IAS 7 requirement came into effect in June 1976. Since then numerous changes have been made to the standard to enhance its reporting structure. The IAS 7 statement of cash flows requires reporting entities to present a statement of cash flows as a part of primary financial statement. Therefore, a statement of cash flows should be presented alongside the statement of financial position, income statement and statement of changes in equity. According to Kieso, Weygandt and Warfield (2011), a cash flow statement is a useful reporting tool that is used by investors, creditors, managers and tax authority to measure different performance metrics of a business entity.
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The Australian Securities & Investments Commission in their review of 2011 financial reports unearth that listed entities in their reporting did not follow or meet expectations of the Australian Accounting Standard Board (AASB) requirement. According to ASIC (2012), the most affected accounting policies that did not meet full disclosure were standards concerned with performance and uncertain economic conditions and useful information for investors. Standards that deal with performance and uncertain economic condition and were not fully disclosed by reporting entities include revenue recognition, expense deferral and other comprehensive income, asset values, off- balance sheet arrangement and going concern. The standards that help disclose useful information to investors and did not meet disclosure requirement include non-IFRS financial information disclosures, operating and financial review, current versus non-current classifications, estimates and accounting policy judgements and financial instruments.