|
|
|
|
Cashflow Statements Most readers are familiar with the cashflow statements which comes after the balance sheet and profit and loss statement, but what is its purpose and are there any special accounting requirements? The profit and loss statement will show the profit for the year but not the how the cash moved in and out of the company. The balance sheet in general, and the cash balances in particular, will show where the company’s cash is today with comparative numbers for the previous year. What the cashflow statements shows is how the profit or loss for the year is converted into cash after adjusting for:
The statement is good way of presenting to the reader how the company is managing its cashflow. One can see if it receives enough credit from suppliers or gives too much credit to its customers. One can quickly identify if it is investing enough in fixed assets to sustain the business. The requirements of the cashflow statement are defined in IAS 7 which first of all defines what cash is – it’s not so simple. Cash and cash equivalents are cash on hand and short term demand deposits, together with short-term, highly liquid investments that are readily convertible to a known amount of cash and that are subject to an insignificant risk of changes in value. An investment will be defined as a cash equivalent when it has a maturity of three months or less from the date of acquisition. Equity investments are normally excluded, unless they are in substance a cash equivalent (e.g. preferred shares acquired within three months of their specified redemption date). Bank overdrafts which are repayable on demand and which form an integral part of an enterprise's cash management are also included as cash and cash equivalents. US GAAP Under US GAAP, interest received or paid must only be classified as an operating cashflow. Bank overdrafts must not be included in the cash or cash equivalents. Presentation of the Cash Flow Statement Cash flows must be analysed between operating, investing and financing activities as follows:
Relevance for Diamond Companies As diamonds are a high volume and capital intensive industry, the cashflow statement is a powerful tool for highlighting your cash management, in particular, the credit to customers. For DTC sightholders, the DTC used the investing activities section to record how much sightholders are investing in their businesses and in SoC 1 this was deemed more important. For SoC 2, the financing activities section will indicate to the DTC whether you are committing sufficient resources to finance your development plans. Presentation There are two methods for preparing the cash flows. IAS prefers the direct method of presentation, however the more commonly used indirect method is acceptable. When selecting which presentation format to use, the key criterion should not be what your accountant likes to use, but what information you as the business manager will require useful. You can ask him to present both formats. The direct method shows each major class of gross cash receipts and gross cash payments. The operating cash flows section of the cash flow statement under the direct method would appear something like this:
The indirect method adjusts accrual basis net profit or loss for the effects of non-cash transactions. The operating cash flows section of the cash flow statement under the indirect method would appear something like this:
Points to remember - Cash flows relating to extraordinary items should be disclosed and classified as operating, investing or financing as appropriate. - The exchange rate used for translation of transactions denominated in a foreign currency and the cash flows of a foreign subsidiary should be the rate in effect at the date of the cash flows. - Cash flows of foreign subsidiaries should be translated at the exchange rates prevailing when the cash flows took place. Subsidiaries and Joint Ventures Cash flows of associates and joint ventures, where the equity method is used, the cash flow statement should report only cash flows between the investor and the investee; where proportionate consolidation is used, the cash flow statement should include the venturer's share of the cash flows of the investee. Total cash flows from acquisitions and disposals of subsidiaries and other business units should be presented separately and classified as investing activities. Total cash paid or received as consideration should be reported net of cash and cash equivalents acquired or disposed of. Cash flows from investing and financing activities should be reported gross by major classes of receipts and payments, except for some specific cases which may be reported on a net basis. Basel II Banks will be paying more attention to the cashflow statement under Basel II. In particular, they will be looking at the year on year progress to see how the business is advancing. And the financing section will gain more prominence as adverse fluctuations in the equity will have to be explained to bankers, while beneficial fluctuations can give borrowers an opportunity to improve their banking conditions. |
|
To receive Diamond Finance regularly, send an email to
info@diamondfinance.info or go to
subscribe
|
