**Focus Keyphrase:** IAS 7

**Meta Description:** Learn IAS 7 – Statement of Cash Flows, its scope, classifications, and examples using Akwaaba Foods Ltd. Understand operating, investing, and financing activities with exam-style questions and answers.

**Excerpt:** IAS 7 – Statement of Cash flows explains how businesses present their cash inflows and outflows. This post simplifies IAS 7 with Ghanaian examples, including Akwaaba Foods Ltd., and exam-style questions with solutions.

## Overview

IAS 7 requires companies to prepare a **Statement of Cash Flows** showing how cash and cash equivalents change during a financial period. It provides insights into a company’s ability to generate cash and use it effectively.

Using our example, **Akwaaba Foods Ltd.**, a Ghanaian manufacturing company, the cash flow statement shows how the company manages cash from operating, investing, and financing activities.

## Objective of IAS 7

The main objective of IAS 7 is to provide users of financial statements with information about the **historical changes in cash and cash equivalents** of an entity. This helps assess the ability of the entity to: – Generate cash – Meet obligations – Pay dividends – Fund future investments

## Definition and Scope

IAS 7 applies to all entities preparing financial statements under IFRS. **Cash** includes cash on hand and demand deposits. **Cash equivalents** are short-term, highly liquid investments readily convertible to known amounts of cash, with insignificant risk of changes in value.

## Classification of Cash Flows

Cash flows are classified into three main categories:

– **Operating Activities** – Principal revenue-generating activities. – **Investing Activities** – Acquisition or disposal of long-term assets. – **Financing Activities** – Changes in equity and borrowings.### 1. Operating Activities

Operating activities include all transactions that affect profit or loss. For Akwaaba Foods Ltd., these would include: – Receipts from customers for food product sales. – Payments to suppliers for raw materials. – Salaries to employees. – Income tax payments.

**Methods:** – **Direct Method:** Lists all major cash receipts and payments. – **Indirect Method:** Adjusts net profit for non-cash transactions and working capital changes.

### 2. Investing Activities

These include cash flows from acquiring and disposing of long-term assets. Examples for Akwaaba Foods Ltd.: – Purchase of new processing machines. – Sale of old delivery vehicles. – Purchase of government securities or other investments.

### 3. Financing Activities

Financing activities show how the company funds its operations. Examples for Akwaaba Foods Ltd.: – Proceeds from issuing new shares. – Loan repayments to banks. – Dividend payments to shareholders.

## Non-Cash Transactions

Non-cash transactions are excluded from the statement of cash flows but disclosed elsewhere in the financial statements. Examples: – Acquiring assets through finance leases. – Converting debt into equity. – Revaluation of assets.

## Disclosure Requirements

IAS 7 requires disclosure of: – Components of cash and cash equivalents. – Policy on classifying items as cash equivalents. – Reconciliation of cash flows with changes in liabilities arising from financing activities. – Separate disclosure for restricted cash balances.

## Example: Akwaaba Foods Ltd.

Akwaaba Foods Ltd. started the year with GH¢200,000 in cash. During the year, it earned GH¢1,000,000 from sales, paid GH¢700,000 to suppliers, and bought new machinery for GH¢150,000. The company also received a GH¢100,000 loan from a bank and paid GH¢20,000 in dividends.

Its cash flow summary would appear as follows:

| Activity Type | Description | Cash Flow (GH¢) | |—————-|————-|—————–| | Operating | Receipts from customers | +1,000,000 | | Operating | Payments to suppliers | -700,000 | | Investing | Purchase of machinery | -150,000 | | Financing | Bank loan received | +100,000 | | Financing | Dividends paid | -20,000 | | **Net Increase in Cash** | | **+230,000** |

This means Akwaaba Foods Ltd. ends the year with **GH¢430,000** (opening GH¢200,000 + net increase GH¢230,000).

## Exam-Style Questions and Solutions| **Question** | **Answer / Explanation** | |—————|—————————-| | 1. Define the main purpose of IAS 7. | To provide information on cash inflows and outflows, helping users assess an entity’s ability to generate cash. | | 2. List the three classifications of cash flow activities. | Operating, Investing, and Financing activities. | | 3. Which method of reporting operating cash flows is preferred under IAS 7? | The Direct Method is encouraged but the Indirect Method is more commonly used. | | 4. How are non-cash transactions treated? | They are excluded from the cash flow statement but disclosed in the notes. | | 5. Akwaaba Foods Ltd. purchased machinery worth GH¢150,000 by issuing shares. Is this shown in the statement of cash flows? | No. It is a non-cash transaction and must be disclosed in the notes. |## Related IFRS Standards- [IAS 1 – Presentation of Financial Statements](https://yourwebsite.com/ias-1-presentation-of-financial-statements/) – [IAS 2 – Inventories](https://yourwebsite.com/ias-2-inventories/)## Conclusion

IAS 7 plays a vital role in assessing an entity’s liquidity and financial health. Understanding cash flow categories helps investors, auditors, and students evaluate how effectively a business generates and uses cash. For Ghanaian companies like **Akwaaba Foods Ltd.**, this statement ensures transparency and informed decision-making.

By mastering IAS 7, students can easily interpret how operating, investing, and financing activities affect overall business performance.