Question

Research cash flow statements. Describe the proper accounting and reporting for cash flow statement with U.S. GAAP and IFRS. What are the relevant U.S. GAAP and IFRS standards? Discuss how each standard is similar and different in handling the reporting of the cash flow financial statements.

Answer 1

The statement of cash flows is one of the most important financial statements for modern investors and stakeholders. Company's such as Amazon sparesly make profits. Yet, their Cash flows are huge enough to validte their enormous valuation.

The statement of cash flows in the IFRS are governed by IAS 7, while in the U.S.GAAP it is ASC 230.

Both standards primarily require reporting under a 3 tier structure including:

a. Cash flow from operations

b. Cash flow from investing

c. Cash flow from financing

The cash flow from operations can be reported in one of 2 ways:

i. Direct Method: Adding up the operating receipts and payments of cash to the opening balance

ii. Indirect Method: removing Non-Cash and Non-operating transactions from the Net Income reported in the income statement.

Cash Flow from Investing and Financing activities are generally a net of any cash inflows and outflows from the respective activites.

Some of the fundamental differences between these 2 reporting standards with respect to cash flows include:

a. Inclusion of Bank Overdrafts in Cash & Cash Equivalents in IFRS - IFRS allows the inclusion of Bank Overdrafts as Cash and Cash Equivalents provided they are sufficiently liquid. US GAAP on the other hand requires Bank Overdrafts to be treated as a cash flow from financing activities.

b. Collective reporting of complex transactions in US GAAP - Certain cash transactions are complex in nature and may require reporting under multiple sources of Cash. US GAAP allows the reporting of such transactions under the source which is likely to be the predominant source or use of cash. On the other hand, IFRS requires bifurcation of such transactions between different sources and uses.

c. Classification of interest and dividends by non-finance institutions received as operating activities in US GAAP - In IFRS, the general classification for interest and dividends paid or received is as investing or financing activities unless the Company is a Finance Company. However in US GAAP, Interest received or paid is classified as operating. Dividends received are also classified as operting. Dividends paid are however classified as Financing Activites in US GAAP as well.