You are positive that you included everything possible and needed, did the check to make sure all one off deals are disclosed, made sure that actual cash moved in the amounts stated and still end up with a difference.
In case the difference is small, the easiest way and less stressful then trying to find where it arises, is simply adding it to some line, which cannot be easily matched with something from the main statements and notes. The differences, in case you are sure about all other numbers, can easily be a part of something vague, like fixed assets acquisition – there may easily be invoices still unpaid so the result doesn’t have to match with the acquisitions disclosed in relevant notes anyway.
Also a good thought here is to make sure you add it into a group from which it makes say less than 10%. You wouldn’t want the difference added to affect the line value considerably.
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When preparing statement of cash flows there are things that you always come across – change in inventories, payables and receivables, payment and receiving of loans and fixed assets depreciation, acquisitions etc. These are the first things that are usually entered into the statement and rarely forgotten. You simply have most dealings with those balances daily and as such, you are more used to noticing when they are missing.
After you have entered into the statement all the possible cash flows you know and regardless of its adding up with the actual change in the cash balances or not, think at least once and thoroughly – did you get everything? Are all the transactions and cash flows reflected on the statement?
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Interest received, Repayments of loans granted, Repayments of loans received etc. – how are they reached? Considering that the period for which the statement is prepared is long and the company has various transactions going through its bank account, manually picking interest received may not be an option. But how should you do it then?
The logic is fairly simple and is similar to the one we already explained in the post How to reach those “paid” amounts on the statement of cash flows? Your beginning or brought forward balance is something you would expect to have received during the current period. In addition, you have current period income, which you’d again expect that part is already received during the period. So you simply add them up. To bring you an example:
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On the statement of cash flows there are line items including “paid” within them. Considering that the period for which the statement is prepared for is long and your company does various transactions over the year, picking out for an example all interest payments from the bank account abstract isn’t really efficient. But then how do you reach to for an example “paid interest” amount?
The logic is fairly simple when you think about it. Your beginning or brought forward balance is something you would expect to pay during the current period. In addition, you have current period expense as well, from which you’d again expect that part is already paid during the period. So you simply add them up. To bring you an example:
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The statement of cash flows could always be just a list of various cash flow items all randomly one after each other. However, it wouldn’t be of much use that way. Hence, as a business in involved in 3 types of activities – operating its business, investing into assets and financing its activities –, those are the groups also the cash flows are presented for.
Now to give a little bit more insight to those 3 groups let’s start with operating cash flows. Those are the cash flows generated through normal course of business – selling, buying and producing. What sometimes is also included within this group, are the interest paid. It’s simply because financing is usually received for keeping or supporting main operations so it’s more suitable to have them as a part of operating activities. However, note that the financing itself, i.e. loans, are never part of operating.
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The statement of cash flows is something that simply put reflects company’s net flows of cash. If negative, the company is spending more than it earns from operations or gets through financing and if positive, company has generated more cash than it has managed to spend on its activities and investing.
The statement itself is all about actual cash movement – the number one and key question at all times when preparing cash flows is did the cash actually move? It’s often forgotten and the amounts shown don’t always reflect the real cash movement. Always follow the money!
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Another interesting bunch of people reading the annual report are the competitors. They are generally looking to see how you’re doing, what are the financial ratios, market share etc. Something they also always look at is how much are you earning and what is your gross margin.
As you may have guessed, it is a fine balance this sharing information part in your annual report. On one hand the legislation, accounting and reporting framework ask you to disclose as much as possible to enable readers make just decisions. The regulation usually asks to also disclose information that is more or less confidential or something you certainly don’t want competitors to know. Either it is rental agreement terms, loan information, acquisitions pricings etc.
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There are so many things you need to watch out when preparing an annual report – complete table of content, numbered pages, proper headers, footers, appropriately ordered notes etc. And it’s only the structure of the report – the content itself needs to be neat and tidy as well – same terminology, no typos, cross-references where applicable etc. All that fuss and for what?
Having an organized annual report does have its benefits. First off it is readable to any outside party – they can follow the information from accurate table of content, trace what they are looking for by using the cross-references and if the report starts off with financial statements and they are followed by the notes, it will all also be in logical sequence. A number one goal for the annual report is to be readable, understandable and clear.
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Another ratio to implicate the period company takes or needs depending on the situation to pay off its debt is the days payable outstanding. It is often shown in financial statements when the management comments on the overall performance for the year, but also in various materials and reports used by investors obviously.
As the formula shows ((accounts payable / cost of sales) x number of days) it clearly displays the number of days a company needs to settle its debt. Now it should be obvious that the longer the period, the longer the suppliers need to manage with their previous debt collections, any bank overdraft or other means of financing. Anything that takes longer than industry average may cause financial difficulties. Hence as a general rule, if the period is getting longer than expected, it is an indication of imminent problems to both sides really. On one hand the supplier has problems with its receivables being collected and the company owning to the supplier is having either problems with financing its debt or may lose its supplier because it may go bankruptcy due to poor accounts receivable management.
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The ratio widely used in financial statements as a part of management report (also comments on main ratios applying for the year’s performance) and in addition to this, the ratio used in impairment tests to measure the cash outflows.
Simply put the ratio shows at which rate the company is paying off its debt. In a way it can be called as a short-term liquidity ratio obviously, but it also shows management commitment, taking responsibility and attitude towards its suppliers. The smaller the number, the longer is the period. The longer the period is, the more time is used to pay off the debt and hence the company is keeping its suppliers at the short end with the money really. It all depends on the relationships and industry standards and practices; however, the longer you wait to pay for your suppliers, the more it’s probable that they will face financial difficulties. Obviously no costumer appreciates this.
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