Category Archives: 4.5 Statement of Cash Flows

Presenting interest received on the statement of cash flows – finding the right amount

When you have given out a loan, you should normally also get interest from the loan. The loan interest is usually something that is charged monthly or quarterly and the rate itself is for a year. That’s how the loan works, however, as it’s also cash related movement, it’s disclosed on the statement of cash flows. Now whilst we have already discussed the loan disclosure itself, something that is often mistaken, is the interest.

Namely finding the right amount to be shown as the cash inflow. No, by default it’s not the interest revenue on the statement as it’s accruals based income and not the cash movement by nature. Generally speaking, finding the right amount onto the statement is really easy. Mathematically you start from the brought forward balance on your balance sheet that’s the interest receivable. You add to this the revenue you’ve recognized over the period and take off the interest receivable carried forward at the end of the period that’s recognized on the balance sheet. The general die behind this is the presumption that the brought forward balance has been in fact collected over the period, we add the amount that should also have been collected (i.e., the revenue of the period) and take off all amounts from those two that weren’t for whatever reason collected (i.e., the carried forward balance).
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Loans you have given out and their presentation on your statement of cash flows

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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Non-cash adjustments on the statement of cash flows

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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Changes in receivables and payables on the statement of cash flows

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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Property is being revalued shortly after acquisition – how to show it on the statement of cash flows?

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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Finance lease payments on your statement of cash flows

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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Payments done by investors and owners

As it happens, there may be situations where owners and investors make payments into the company. It could be that there is a need for extra capital to meet regulatory requirements, need for extra financing to close a certain deal or simply little extra is needed for either keeping the business going or expanding a bit. Either way, the owners may every now and then make the payments into the company.

Those payments are never ever part of the income statement, but as they are inflow of cash (provided the payment wasn’t done in the form of any other type of asset), they are shown on the statement of cash flows obviously.

Now another question is where they are classified under. When you think about the pure purpose of those payments – it’s either extra resources needed for expanding, keeping operations going, buying assets etc. – they key word being “financing” here.
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