How your auditors make a statement of cash flows

Summary

In this video, Sylvia from ibx.com explains the process of preparing a statement of cash flows under IFRS in a simple and accessible way. Using a case study, she breaks down the steps involved, such as calculating changes in the balance sheet, assigning those changes to the appropriate sections of the cash flow statement, and making necessary adjustments for non-cash transactions. Sylvia emphasizes the importance of understanding asset and liability changes and provides helpful tips for ensuring accuracy in cash flow reporting. She also highlights how auditors typically approach this task and offers further resources for those seeking in-depth training.

Takeaways

• 😀 Always ensure your balance sheet and statement of comprehensive income have correct plus and minus signs to avoid errors when preparing a cash flow statement.
• 😀 Changes in assets and liabilities affect the cash flow in opposite directions—assets decrease cash, while liabilities and equity increases cash.
• 😀 The starting point for preparing a cash flow statement is to calculate the changes in the balance sheet between the reporting period and the previous period.
• 😀 For the first step, classify all changes in assets, liabilities, and equity into the operating, investing, or financing sections of the cash flow statement.
• 😀 Be cautious with the classification of property, plant, and equipment changes as these typically belong in the investing section.
• 😀 The net change in cash and cash equivalents is calculated directly from the cash flow statement, not from the balance sheet changes.
• 😀 Changes in share capital and long-term borrowings are classified under financing activities as they involve external financing.
• 😀 When preparing a cash flow statement, remember to add back non-cash items such as depreciation to adjust for their effects on profit.
• 😀 Adjust for non-cash transactions in the statement of profit or loss, such as unrealized foreign exchange gains or losses, and loss on sale of property, plant, and equipment.
• 😀 Ensure that all changes in equity, including revaluations or conversions, are properly incorporated into the statement of cash flows.
• 😀 After all adjustments and classifications, double-check the statement to ensure the net increase in cash matches the calculated balance and the check sum is zero.

Q & A

What is the main purpose of the cash flow statement?

The cash flow statement provides detailed information about the cash inflows and outflows of a company, helping to assess its liquidity, solvency, and financial flexibility.

How do auditors approach preparing a cash flow statement?

Auditors typically use a systematic approach where they calculate changes in the balance sheet and assign them to appropriate sections in the cash flow statement (operating, investing, and financing activities) before making adjustments for non-cash items.

What is the significance of balance sheet changes in preparing the cash flow statement?

Changes in the balance sheet, such as increases in assets or liabilities, directly impact the cash flow statement, and they must be properly classified to reflect their cash flow effects (opposite effect for assets, same effect for liabilities and equity).

What happens if there is a change in property, plant, and equipment?

If property, plant, and equipment increase, it reflects a cash outflow, as it typically involves purchasing assets. This change is recorded in the investing section of the cash flow statement.

Why should changes in inventories and receivables be classified under the operating section?

Changes in inventories and trade receivables are considered working capital changes, which are part of the operating activities since they represent day-to-day business operations.

How is the change in cash and cash equivalents handled in the cash flow statement?

The change in cash and cash equivalents is not directly entered in any section of the cash flow statement but is used for final reconciliation to ensure the beginning and ending balances of cash are accurate.

Why is the increase in share capital reflected in the financing section?

The increase in share capital reflects cash inflow from issuing new shares, which is classified as a financing activity since it involves raising funds for the business.

What adjustments need to be made after classifying balance sheet changes?

After classifying the changes, adjustments for non-cash items such as depreciation, unrealized foreign exchange gains/losses, and tax expenses are made to ensure the cash flow statement reflects actual cash movements.

How is depreciation handled in the cash flow statement?

Depreciation is a non-cash expense that reduces the profit figure in the income statement. In the cash flow statement, it is added back to profit because it does not involve actual cash outflow.

What role does the statement of changes in equity play in preparing the cash flow statement?

The statement of changes in equity helps identify any non-cash items, such as revaluations or conversions of debt to equity, that need to be incorporated into the cash flow statement.