Lending money to another company or a person is something every now and then a business does. Be the reasons as always what they are, but the accounting treatment is something that does not change or differ. A money lent is money given away and a receivable recognized in return on the balance sheet.

Something that is often enough neglected, is how to treat those loans on the statement of cash flows. The biggest pitfall here is the fact that those loans are often treated as receivables from operating activities, where in fact in most cases they’re not. In those rare occasions they would be treated as operating activities receivables, is if the field of business the company is operating in is in fact financing. However, for companies that are not finance institutions, loans given out are investments. On the statement of cash flows the investment activities on their own are disclosed separately. As such, when you disclose changes in operating receivables, both the beginning and end balance should exclude any loan related balances (both the principal and interest receivable).
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As you know, in the case where you prepare your statement of cash flows using the indirect method, the operating profit you start from does include non-cash related expenses. We do mean non-cash in a way that they aren’t accrued expenses or payables on your balance sheet. The most clear example of those expenses is the depreciation. You have paid once for the assets (the outflow of which was presented as a part of investing activities for the year they were acquired) and all the rest is just a non-cash depreciation. As we are preparing the statement of cash flows though, those expenses should be removed or added back (depends on how you look at this) to the profit.
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When using the indirect method for presenting your company’s cash flows for operating activities, one part of the statement also includes lines like “Changes in receivables and prepayments” and “Changes in payables and prepayments”. The keyword here is “Changes”. It’s not a direct outflow or inflow, but a change in balance.

First off those changes reflect part of the cash flows only in combination with the profit. As you know, the indirect method of presenting the operating cash flows starts either from net or operating profit. The profit then needs to be adjusted with those changes to reach the out- and inflows.
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Be it what it may – a building, machinery or other equipment – there are times when they are revalued just after the acquisition. Either valued higher or lower of the cost, the approach for the statement of cash flows stays still the same.

Effectively, as we have said, the statement of cash flows shows only movement of cash and nothing else. So if the cash didn’t move, the value is not shown. Now when we talk about revalued assets and their acquisitions on the statement – they are obviously never shown in the revalued value, but in the original cost actually paid. If the revaluation is also shown on the income statement, the non-cash adjustment (in the case it’s part of the operating profit) is done under operating activities’ cash flows and is shown as other adjustment. It’s never cash paid for property, plant and equipment under investing activities, as it wasn’t an actual cash movement.
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What a finance lease in essence is, is you buying an asset with a support of another party, that’s initially financing the purchase. Usually it’s done in the form that the financing party is purchasing the asset and is leasing it forward to you. This transaction is really common these days, however the disclosure on the statement of cash flows is something that can go messy. Hence with the following we hope to set out the basics.

First off, on the balance sheet you recognize the asset and the liability. An asset is obviously the asset you just leased, but with this you also need to recognize the liability against the financing party, who initially bought the asset. So with debit you increase your assets and with credit the liabilities. Now when you think about it, did you actually pay anything at this stage? No, you didn’t.
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