Updated · Originally published
This is the first of 2 blogs. First we'll examining Cash Flow Statements; in the next post we’ll look at IFRS Accounting with Microsoft Dynamics® GP: Cash Flow Statements – Indirect Methods…and the Benefit of Direct over Indirect.
IFRS statements place more weight on the Statement of Cash Flow and require it to be presented using the Direct Method; therefore, this blog warrants a discussion on how to more easily produce a Statement of Cash Flow based on the Direct Method then contrasts it with the technical preparation using the Indirect Method.
I make the following statements supported not by a reference to anyone else or other material, but by over a career exceeding 30 years.
Many SMB’s (Small and Medium-sized Businesses) rarely, if ever, generate a Statement of Cash Flow; however, most financial professionals regard this statement as the most important of the three standard financial statements, the other two statements being the Balance Sheet and Profit and Loss Statement.
The Statement of Cash Flow is exceedingly important because it provides the background of how a company is obtaining and using its liquid assets. The statement can demonstrate why a profitable company lacks the cash to cover routine operations. Interpreted correctly over time, it demonstrates the pooling of liquid assets into Receivables, Inventory, Prepaid Expenses, and a variety of Current Liabilities—a common problem for growing SMB’s who lack a source of cash during times of rapid growth.
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Direct Method
Worksheets are generally prepared to determine cash flow under the Direct Method, essentially seeking to explain the difference between accrual statements and cash flow. The following calculations can be prepared with FRx Report and Management Reporter Designers using calculations and hidden rows and columns:
Cash Receipts from customers:
- Net sales from the profit and loss statement
- Plus the beginning balance of Accounts Receivable
- Less the ending balance of Accounts Receivable
- Equals cash receipts from customers
Cash Payments to Employees:
- Salaries and wages per the profit and statement
- Plus the beginning balance of Compensation Payable
- Less the ending balance of Compensation Payable
- Equals cash payments to employees
The worksheet contains similar calculations for
- Customer and other cash receipts
- Changes to inventory
- Payments for operating expenses, taxes, and interest
- Payments and acquisition of liabilities, contracts, and notes
- Changes to equity through sale or purchase of stock and contribution of capital
In the next blog we’ll examine IFRS Accounting with Microsoft Dynamics® GP: Cash Flow Statements – InDirect Methods…and the Benefit of Direct over Indirect.
©2011, Computeration®, Inc.
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By Gloria Braunschweig, The IFRS Implementation Expert for Dynamics GP, with Computeration, a Pacific Northwest Microsoft Dynamics GP Partner.
Computeration specializes in ways to enhance your company’s solutions with Microsoft Dynamics GP in Idaho, Oregon, and Southwest Washington, with clients around the world, Computeration makes your implementation successful by offering experienced project management, data integration, training, and consulting services.
by Computeration,and the Pacific Northwest
Direct methods are nice .
Companies using the Direct Method don’t typically also prepare the reconciliation of net income to cash flow from operating activities. Companies using the Indirect Method frequently do compile a brief cash conversion at the end of their statement.
Does the standard (IFRSs) require the Company, which using Direct Method, to prepare a reconciliation from "net income" to "cash flow from operating activities"?
Thanks a million!