Understanding Cash Flow Statements: Standards and Presentation

NIC / State Cash Flow: Objective

This Standard requires companies to provide information about historical movements in cash and cash equivalents through a cash flow statement classified into operating, investing, and financing activities.

Scope

Companies must prepare a cash flow statement following this Standard's requirements, including it as part of their annual financial statements.

Benefits of Cash Flow Information

The cash flow statement, used with other financial statements, helps users evaluate changes in a company's net assets, financial structure (liquidity and solvency), and ability to adapt to changing circumstances by modifying receipts and payments. It is useful in assessing the company's overall financial health.

Definitions

• Cash comprises cash on hand and demand deposits.
• Cash equivalents are short-term, highly liquid investments readily convertible to known cash amounts with insignificant risk of value changes.
• Cash flows are inflows and outflows of cash and cash equivalents.

Presentation of the Cash Flow Statement

The cash flow statement should report cash flows during the year, classified into operating, investing, and financing activities.

Cash Flows from Operating Activities

Companies must report operating cash flows using one of these methods:

• Direct Method: Present major classes of gross receipts and payments.
• Indirect Method: Start with net income or loss, adjusting for non-cash transactions, deferrals, accruals, and items related to investing or financing activities.

Cash Flows from Investing and Financing Activities

Enterprises should separately report major classes of gross cash receipts and payments from investing and financing activities. However, cash flows described in paragraphs 22 and 24 can be reported net.