The statement of cash flows as the name suggests is a presentation form for cash flows and none other. All cash related movements are disclosed on this statement to show the company’s ability to generate cash and of course the consumption of cash in the process. When preparing the statement of cash flows, the number one question is ‘Did actual cash move for this transaction?’ If the answer is ‘No’, it’s not on the statement. Not directly anyway.

We have discussed the general meaning of presentation of cash flows, but what we’d like to point out as we see this happening too often in real life, is the simple fact that all non-cash related balances should be removed when using the indirect method of presenting the cash flows.

What we see as being confusing are for an example provisions which are simply measured annually. Often no cash is given up hence the change is not within direct outflows of cash. When reaching to the ‘Cash generated from operations’ result you must eliminate from operating profit the depreciation and amortization charge, but also all expenses that are non-cash in nature. Usually these are the changes in provisions for an example.

We just got asked a question concerning a liability recognized on the balance sheet and its disclosure on the statement of cash flows. I asked back, ‘Was it expensed on the income statement?’ When you think about it, you start from the operating profit and using the indirect method you are making adjustments to the profit. This means that you take into account all changes in receivables, payables and inventory as well. If for an example in the liabilities you have disclosed a balance that hasn’t been expensed, but instead let’s say is for dividends or capital reduction, it should be eliminated from the balance prior to calculating the change in payables. The actual cash flow shall happen in future periods.

So think before preparing the statement of cash flows – did cash move and was it expensed?