Question

Outline the development, purpose, thrust and application of AASB107 Statement of Cash Flows

Answer 1

AASB107 Statement of Cash Flows

This Australian Accounting Standards Board 107 requires the provision of information about the historical changes in cash and cash equivalents of an entity by means of a statement of cash flows which classifies cash flows during the period from operating, investing and financing activities.

An entity shall prepare a statement of cash flows in accordance with the requirements of this Standard and shall present it as an integral part of its financial statements for each period for which financial statements are presented.

A statement of cash flows, when used in conjunction with the rest of the financial statements, provides information that enables users to evaluate the changes in net assets of an entity, its financial structure (including its liquidity and solvency) and its ability to affect the amounts and timing of cash flows in order to adapt to changing circumstances and opportunities. Cash flow information is useful in assessing the ability of the entity to generate cash and cash equivalents and enables users to develop models to assess and compare the present value of the future cash flows of different entities. It also enhances the comparability of the reporting of operating performance by different entities because it eliminates the effects of using different accounting treatments for the same transactions and events.

The purpose of AASB107 statement of cash flow statement is intended to

1. provide information on a firm's liquidity and solvency and its ability to change cash flows in future circumstances
2. provide additional information for evaluating changes in assets, liabilities and equity
3. improve the comparability of different firms' operating performance by eliminating the effects of different accounting methods
4. indicate the amount, timing and probability of future cash flows.

Applications:

A cash flow statement summarizes the amount of cash and cash equivalents entering and leaving a company. The cash flow statement measures how well a company manages its cash position, meaning how well the company generates cash to pay its debt obligations and fund its operating expenses.

It shows the changes in the balance sheet, and helps in analysing the operating, investing and financing activities. It can be used to easily predict the timing, amounts, and uncertainty of future cash flows.

Cash flow analysis is the examination of the financial report of the cash inflows and cash outflows of the company. It helps the management in decision making. It helps them to anticipate the future deficits in cash and hence help them to make the financing decisions beforehand. It helps the management to make the decision whether to invest the cash balances if positive in the capital market in order to generate an additional source of income.