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The summarize of cash flow statement
1. Introduction
Financial reports aim at assuring an efficient dialogue between the entity and the external operators interested in having realistic estimations on the growing perspectives of the entity and, equally, on its sustainability. In spite of the fact that the profit and loss account, as a component of the cash-flow statement financial report, provides a dynamic image on an entity's activity, it nevertheless does not offer a clear vision on the financial flows that modify its financial structure and its cash flow. Out of the information officially issued by a certain entity, only that providing financially-significant data is selected, once it expresses \realities on the cash resources necessary for supporting an efficient investment policy and for remunerating the invested capitals, or that referring to the external contributions of capital assuring financial balance.
Within such a context, to evaluate a company's capacity of generating cash flow and cash-flow equivalents, the users of financial situations analyze the cash-flow statement – an expression of the cash and pay operations performed by an entity, and not only the \dimension of its performances, determined by the conventions of the obligation accountancy. The cash-flow statement is conceived so that to offer a most pregnant image of the inputs and outputs of the availabilities afferent to the main categories of activities developed by a company (exploitation, investment and financing activities) and to justify the treasury's balance at the end of the financial exercise. Otherwise, the cash flow statement explains the company performances in generating cash.
The IASB has developed, at the international level, the IAS 7 norm “The cash-flow statements”. This norm renders void and replaces IAS 7 “The situation of changes in the financial position” from 1977 and has been revised in time, its last variant being applied on January 1st, 1994. The other entities, considered small and intermediate, can optionally conclude such a document. The obligation imposed to some companies to develop The Cash-Flow Statement emphasizes the increasing importance of this statement in evaluating the company’s performances.
2. The Informational Application of Cash-Flow Statements
Drawing a Cash Flow statement has several reasons.
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First, the financial statements are concluded according to the commitment accounting and based on the principle of exercise independence. In these circumstances, the effects of the agreements and of other events from the company are acknowledged when they are produced and not while the cash and cash considerations are cashed or paid by the company, an aspect that does not always satisfy the necessities of the financial-accounting information users.
Second, the result of the exercise, reflected in The Profit and Loss Account, is affected by a series of accounting conventions (for example, the redemption calculation system) and does not express the real company performance. In exchange, The Cash-Flow Statement has the role to express unconventional realities because it eliminates the effect of using various accounting treatments for the same agreements and events and, also, does not take into account the operation revenues and expenses considered as calculated that do not generate profits and payments in the analyzed financial exercise (expenses for redemption and provisions, revenues from provisions, revenues from subsidies for investments, etc).
Another aspect worth mentioning is that in conditions of under-liquidity, the analysis of cash flows becomes a priority for the analysis of results.
The analysis of the company results involves, from the simplest point of view, comparing the revenues and expenses from The Profit and Loss Account, independently from the effective moment of revenues cashing and of the expenses payment. Thus, The Profit and Loss Account allows determining profitability without allowing the direct measure of liquidity by cash flows. There is a tendency to give priority to the profitability analysis to the prejudice of the analysis of liquidity.
Profitability and liquidity are two distinct approaches that characterize the company balance sheet. A significant profitability points out that the difference between revenues and expenses ensures the payment of the invested capital. But the revenues do not always correspond to the profits or to the expenses of parties. On the other hand, certain profits do not represent revenues (loans) and certain payments do not immediately determine the expenses (investments). A sufficient or insufficient liquidity does not correspond, by definition, to a significant or inexistent profitability. A chronic negative (absent) profitability means that the company revenues are insufficient to cover expenses and the difference between them cannot pay the invested capital. On a long term, this can lead to a lack of liquidity, in case that the company cannot earn other profits. On a short and medium term, profitability and liquidity can be sensitively divergent. Thus, the profitable
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companies can face cash difficulties, both as a result of the rapid increase of investments in the fixed capital, which determined the increase of the financing needs for the operation cycle, and as a result of a decrease in the rotation speed of the current assets. On the contrary, the less profitable companies can maintain a satisfying liquidity in the absence of investments or through the progressive decrease of their value. As a result, liquidity, which depends on the company’s profitability and on its financial structure, is an essential approach drawing the creditors’ attention. The difference between the revenues capable of generating profits and the expenses capable of generating payments is represented by the cash flow, an index that connects profitability and liquidity (Ooghe H., Van Wymeersch C., 2000).
Fourth, The Cash-Flow Statement, by taking the census of company profits and payments, allows knowing its historical capacity to generate cash flow and offers the elements that lie at the basis of predictions, on short term, of the future cash flows. The cash-flow information is considered by the financial-accounting information users one of the most intelligible and objective source of information that presents the facts without leaving space to subjective interpretations. As a result, the cash-flow information represents the essence of some new modern methods of business evaluation (a method based on updating/capitalization of future cash flows) (Pantea I.P., Deaconu A., 2004).
Finally (without pretending to mention all the uses of this situation), The Cash-Flow Statement offers extra information about a series of aspects that have already been analyzed statically, on the account of financial statements.
For example, the change of the company net assets can be statically analyzed starting from the balance sheet, thus being the expression of unsettled agreements. The Cash-Flow Statement presents the change of net assets, dynamically, materialized in the profits and payments of the respective agreements carried out during the financial exercise. Consequently, the financial structure is analyzed starting from the Balance sheet and The statement of changing equity capital. Such an analysis mainly reflects the amounts belonging to the financiers, due to be repaid at the end of the financial exercise, without revealing their dynamics. The Cash-Flow Statement presents the profits and payments concerning the external capital coming from the shareholders, creditors, as well as their payment by dividends and interests. The relationship between the company’s profitability and the cash flows can be emphasized by analyzing, in dynamics, the way in which the price variation influences the period turnover and profits.
IAS 7 “The Cash-Flow Statement” synthesizes the informational utility of the
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Cash-Flow Statement mentioning that the information offered to the financial statement users is the basis for: evaluating the company’s capacity to generate cash and cash equivalents; identifying the moment of cash and cash equivalents occurrence; knowing the destination of the respective cash flows (in order to re-start the operation cycle, the investments, financiers’ payment).
3. The determination and interpretation methodology of cash flow
The Cash-flow Statement describes the way in which the operation, investment and financing activities determine the positive (profits) and negative (payments) cash flows during the financial year. Thus the cash flows are divided upon the activities that generated or consumed them in: cash flows from the operation activities; cash flows from the investment activities; cash flows from the financing activities.
In IAS 7 “The Cash-Flow Statement” it is mentioned that the operation cash-flows (OCF) are essential for appreciating the company’s financial performance. It is on their dimension that the company capacity depends in order to: maintain the production capacity, achieve new investments, reward new dividends, and repay loans without referring to expensive external financing resources.
The Cash-Flow Statement turns the operation result into an effectively cashed result. Cash-flows from investment activities (CFI) are imputable to the operations of investment/disinvestment in/from invested and financial capital and reflect the deficit or surplus generated by such operations.
The cash flows from financing activities (CFF) present the profits and payments related to the external finances to which the company refers, when the cash resulted from the operation activities was insufficient to cover the investment operations and to reward the financiers (banks, shareholders).
The separation of flows in relation to their origin has the advantage of further explanations concerning the company’s financial position, by means of the partial balances resulted from comparing the profits and payments specific to each activity. Simultaneously, the separate emphasis on cash and cash equivalents resulted from the period agreements and from cash surplus investments allows the factorial analysis of their variation during the respective period and the identification of the activity that generated or consumed the highest cash flows. The total cash flow is determined according to the computing method of cash flows from exploitation activities, using the direct or indirect method. The direct method operates only with cash-ins and payments
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