Accounting – FRS 7: Statement of Cash Flow
According to the FRS 7, you should present the cash flow statement as an integral part of your business main financial statements. The FRS 7 does not contain amendments applies to financial statements that cover periods commencing on or after 1st January 2016.
The main aim of FRS 7 is to ensure that the information regarding historical changes in cash flow and cash equivalents of a business is presented using cash flow statement that categorize cash flows into operating, investing and financing activities and therefore provide insight of different “quality” of cash received or paid.
Basic Principle of FRS 7
The basic principle of FRS 7 is that every entity that prepares its accounts and financial statements in accordance with the FRS is required to present cash flow statement at the end of its accounting period. Cash flow statement analyzes variations in cash and cash equivalents within a given period. Note that cash and cash equivalents also comprise demand deposits and cash on hand and highly liquid investments (Also see Accounting for Book and Bank Overdrafts and their Cash Flow Presentation).
Note that equity investments should be excluded, unless the investments are substantial cash equivalent such as preferred shares obtained within 3 months of the redemption date. Also, note that FRS 7 requires bank overdrafts that are repayable on demand to be included in the cash and cash equivalents. This is because such overdrafts form an integral part of the business cash management.
Presentation of Cash Flow Statement
The business cash flows in a given period should be analyzed under three broad categories including operating, investing, and financing activities. The FRS 7 lists all the items that should be included in each category. It also offers instructions on how you should treat special cash flows such as tax income, dividends and interests, and more (Also see 4 Rules for Managing Business Cash flow).
It is worth noting that there are two methods of preparing cash flow statements in accordance with the FRS 7: the direct and indirect method. Each method is different from the other and therefore, you should study each keenly to be able to prepare the right cash flow statement.
There are so many cash flow items that affect the cash flow statement. Therefore, unless you have a vast knowledge regarding the FRS 7, you shouldn’t prepare the cash flow statement on your own (Also see Cash Flow Forecasting Mistakes to Avoid). Instead, use a professional accounting service in Singapore to ensure that the cash flow statement is not only prepared in accordance with the FRS 7 but also presents the exact financial position and the performance of your business.