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. Read the rest of this entry
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. Read the rest of this entry
Receiving the balance you had written down
You had thought you wouldn’t receive the balance in full so you recognized an allowance on the balance sheet. What you had there, was the receivable balance in full and an allowance for the very same receivable. With recognizing the allowance, you also had to bear some expenses in the same amount.
So, in this situation, with those accounting entries made, you now receive the payment from your client. Be it that they found some additional investment and are now to meet all their obligations etc., what you should do now, is the following:
1) Recognize the cash received
Db Cash and cash equivalents
Cr Accounts receivable
2) Get rid off the allowance made because the receivable it was made for has been collected (so in essence it’s not an expense on your income statement) Read the rest of this entry
Db Allowance for doubtful accounts
Cr Expense from increasing the allowance for doubtful receivables
Accounts receivable balances are subject to valuation risks and what’s more, subject to the question whether they are collectible or not. At every balance sheet date, you should ask yourself if there are any indications that the balances are not recoverable in the amount they’re recognized on your balance sheet.
If the answer to the question is “no” as in you have no reason to believe your client will not pay up its debt in full, you don’t have to do anything. However, if the answer is “yes”, there are two further considerations to be made. In the case where there’s doubt whether the client is capable of paying at all as in it’s in bankruptcy or some such serious financial difficulties, the receivable may be better to be written off the balance sheet. However, with this post we are focusing on the second case, where the client is just facing some financial difficulties, which result them just not meeting the payment terms every now and then and possibly only paying partially more often than normal. Read the rest of this entry
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. Read the rest of this entry
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. Read the rest of this entry
Specifics are always tied to events and occasions, the donations received as such are hence dependable of the business type, industry the company is in etc., however, if there is an occasion your company does receive a donation, the treatment and disclosure requirements are still more or less the same. There are some special disclosure requirements for government grants and donations, but please consult your local reporting and disclosure framework guidance for it. With the following we are focusing on the accounting treatment.
If the grant is just given out without any further conditions, the amount given is your income (note here that if it’s for a specific investment or type of expense, it’s always shown as a part of that investment (decrease) or expense (decreasing the expense in essence)). When you receive the money or it’s more than probable you will obtain the donations and there are no conditions tied to it, you make the following entry:
1. You get to know of the donation to be received
Debit Other receivables 500 Read the rest of this entry
Credit Investment purchase / Operating expense / Other operating income (depending on the type of the donation – see above) 500
There may be a time and place in your business that you feel like you want to make a donation to someone. Be it whatever it is, the treatment is still the same.
If the grant is just given out without any further conditions, the amount given is your expense. At the time of the decision made you recognize an expense and a liability and when the payment is actually done, you just debit the liability and credit your cash account.
1. Making the decision
Debit Operating expenses 500
Credit Provisions / Other liabilities 500
2. Making the payment
Debit Provisions / Other liabilities 500 Read the rest of this entry
Credit Cash and cash equivalents 500
In essence operating lease is something that has minimal risks – you just use the asset, pay for it and only if deemed so, have to also take care of the regular maintenance. The ownership and risks related to this however are never yours (if they were, it’d be a finance lease).
All that you essentially have to worry about is the cash flow needed to pay your monthly dues and that’s about it really. An operating lease does not affect your balance sheet in no other way but the initial payment in the form of prepaid expenses, the cash and profit. No other balance sheet item is affected. Read the rest of this entry
You stepped into an operating lease agreement and as you do that, you also have to pay a considerable amount as the first initial payment (something like 10 to 30% even). This payment is obviously deducted from the total of your payments hence making the monthly payment smaller. As the monthly payment is smaller, there’s one thing to remember with the initial payment though.
The initial payment is never charged as an expense straight away, but recognized as an asset first and the charged into expense over the rental period. It is meant so to spread out the expenses made for an agreement that goes through a longer period.
The accounting entry for recognizing the initial payment is as follows: Read the rest of this entry
