International Journal of Applied Finance For Non-Financial Managers (ISSN: 1742-528X) Volume 2 Issue 3
Dr Philip E Dunn
The notion of cash flow and funds flow has been included in accounting standards for almost three decades. For example in the UK, SSAP 10 (1976), Source and Application of Funds Statement, was an early attempt by standard setters to provide a link between the balance sheet at the start of the accounting period, the profit and loss for the period and the balance sheet at the end of the period.
When the Accounting Standards Board in the UK, took over the work of the Accounting Standards Committee in 1991, its first significant revision was to replace SSAP 10 by FRS 1, Financial Reporting Standard 1, Cash Flow Statement. This transition from funds flow to cash flow was also reflected in the revision of the IASCís, International Accounting Standards Committee, IAS 7, Statement of Changes in Financial Position (1977) to IAS 7 Cash Flow Statement (1992) which became operative for financial statements covering periods beginning on or after 1 January 1994.
Readers will be aware that International Financial Reporting Standards (IFRSís) including the IASís are to be adopted by all listed companies in the EU from 1 January 2005.
IAS 7 requires enterprises to present a cash flow statement as part of their financial statements.
A cash flow statement is needed as a consequence of the difference between profits and cash and thus provide the user with a facility for:
The purpose of the statement is to provide information on changes in cash and cash equivalents and to classify cash flow under three standard headings:
and to determine whether the operating activities reveal a positive cash flow, whether the overall activities yield a positive cash flow and the manner in which such activities have been funded.