ABSTRACT
FRS 1/IAS 7 requires medium and large companies (see page 8) to publish a cash flow statement as part of their annual accounts. Its aim is to show cash flows into and out of a company during the year. This is ‘in order to assist users of the financial statements in their assessment of the reporting entity’s liquidity, viability and financial adaptability’. (The requirement for a cash flow statement does not appear in the UK Companies Act.)
In preparing cash flow statements, most companies use the ‘indirect method’, which uses balance sheet differences to arrive at funds flows (representing movements in both cash and credit). Excluding the credit and accrual elements then translates these into cash flows. (The alternative ‘direct method’ of preparing cash flow statements in effect presents a classified summary of the cash book.)
As with the financial ratios we discussed in detail in sections 2 and 3, looking at cash flow figures over several years is often more useful than the results for a single year (or even two). This is partly because twelve months is a short period in the lives of most business enterprises, and partly because it becomes clearer whether particular cash flows are ‘typical’ or not.
