Question

Sun Edison’s December 31.2014 cash flow statement showed an increase in total cash of 370.2. Analyze this increase. Are you comfortable with the way the company is generating cash. Explain What is meant by the financing section of the cash flow statement? what is the major difference between GAAP and IFRS in recognition of dividends received and paid?

Answer 1

Cash flow statement showed an increase in cash of 370.2 simply means that the company has surplus cash of 370.2 during the year. It is good that the company is having more liquidity so that it can fulfill its future cash needs. It is not always comfortable just because the company have positive cash flow. It might be through selling of assets or raising fund through debt. Cash flow have 3 sections, Cash flow from operating activities, cash flow from investing activities and cash flow from financing activities. Cash flow from operating activities represents the cash flow from its normal business activities. If this portion is positive, we can say that its comfortable for the company. Investing and financing activities are not related to company’s day-to-day activities. Since it is not recurring nature, we can’t say that’s its favorable for the company.

Cash flow from financing activities:

It is the part of cash flow which shows the inflow and outflow of cash resulting from Financing and capital related activities like Financing and repayment of debt, Issuance and repurchase of stock, dividend payment etc.

IFRS and GAAP has different rules for the recognizing Dividend received in cash flow statement. US GAAP recognizes the dividend received as operating activities, but IFSR recognize the dividend based on the nature of Investment. If the company invests the fund in the normal course of business, dividend received will be classified as ‘Cash flow from operating activities’, if the shares were in the nature of investment, the dividend from it will be ‘Cash flow from Investing activities’