Sunday, April 28, 2013

Review of cash flow statement: operating activities, investing activities, financing activities

In cash flow statement prepared on an indirect method, the preparer is required to assess the cash flow activities belongs to which categories: operating, investing or financing activities. It is important to have a clear mind and exercise cautious in reviewing the "classification" of cash flow activities.

To illustrate, during the year, a Company ABC received non-current funding from its holding company. It is the intention of the Company to borrow the fund from its holding company to run the opeartions. As such, the fund received from the holding company need to be disclosed as "financing activities" instead of "opearting activities". This will assist the financial statement user to understand the nature of fund received from holding company.

We also want to highlight the following items where the financial statement preparer may mess up:
Dividend received: this is part of investing activities, as it represents the return on investment the Company made
Dividend paid: this is part of financing activities, as it represents the return given to the shareholder - who had invested in the Company's shares
Acquisition of property, plant and equipment: investing activities- as this represent the company's investment in asset to generate return

In short, we propose the auditor to review the classification of cash flow activities cautiously to assess the reasonableness of the disclosure.

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