Based on the Financial Reporting Standard 7, you need to provide the cash flow statement as an essential part of your company main financial statements (Also see FRS 1 Presentation of the Financial Statements and FRS 10 Events after the Reporting Period). The FRS 7 does not include modifications applied to the financial statements that cover durations beginning on or after 2016 January 1st.
The main goal of FRS 7 is to guarantee that the information about historical changes in cash equivalents and cash flow of the business are shown in the cash flow statement. Cash flow statement could be categorised based on operating, investing and financing activities.
Fundamental Principle of FRS 7
The fundamental concept of FRS 7 is that every business that prepares its financial statements following the FRS has to show the cash flow statement at the end of the accounting duration. Cash flow statement evaluates variations in cash and cash equivalents within a certain period (Also see How to Manage Your Business Cash Flow). Keep in mind that cash and cash equivalents consist of demand deposits and cash on hand and greatly liquid financial investments.
The equity financial investments need to be excluded, except that the investments are substantial cash equivalent, like preferred shares attained within three months of the redemption date. Bank overdrafts that are repayable are required to be contained in the cash and cash equivalents. Overdrafts have formed an essential part of the company’s cash management.
The Cash Flow Statement
The business cash flows need to be evaluated under three broad classifications which are investing, operating and financing activities. The FRS 7 lists all the objects that need to be listed in every category. It also gives guidelines on how you ought to deal with special cash flows such as dividends, tax income (Also see FRS 12 Income Taxes), and interests.
There are two techniques to prepare the cash flow statements following the FRS 7: the indirect and direct method. Every method is different, and for that reason, you need to study each acutely to prepare the ideal cash flow statement. The more widely used one is the indirect method that has it’s starting point from the bottom line of the Profit and Loss.
There are numerous cash flow items that might influence the cash flow statement. Hence, if you do not have a great understanding of FRS 7, you should not prepare the cash flow statement yourself. Instead, employ any accounting service in Johor Bahru to guarantee that the cash flow statement of your company is made according to the FRS 7. Besides, you could understand your business’s financial position and the performance of your company through the cash flow statement.