As practice shows, today there are many companies that experience some difficulties in preparing a report reflecting cash flows. These difficulties are often caused by differences in the rules for the preparation of the report according to international and Russian standards. International standards, in addition, provide relative freedom for companies regarding the degree of disclosure of data and the choice of methods and accounting procedures.
When preparing a report reflecting cash flows, an indirect or direct method can be used. For example, for financial and investment activities, only the direct method is applicable. It is considered more informative both from the side of interpretation of the report, and from the side of its application in the analysis of the financial condition of the organization. When preparing a report using this method, a detailed assessment of cash flows is required due to the fact that the direct method is very time-consuming. The use of this technique is most effective and appropriate in the framework of automation.
The indirect method is used in the formation of consolidated financial statements. This format is necessary when placing public reporting on the exchange. It should be noted that this method less clearly reflects the cash flow. In accordance with it, it’s quite difficult to “untwist” any indicator before posting in a financial direction. And this is often enough required for budgeting and internal control.
Some companies practice compiling two cash flow statements. One is compiled using the indirect method, and the other using the direct method. Moreover, one report is used when checking indicators in the second. As a result, the summary items reflecting cash flows are identical in them. This integrated approach contributes to the provision of enterprise management and reporting users with all the necessary information for decision making. However, the use of two methods immediately requires a lot of labor.
It should be noted that regardless of the method used, the report shows the sources of financing of the enterprise, as well as the target direction of their application. Reporting is of great importance in the financial analysis of the company, as you can determine its ability to generate income from basic operations. The document shows the part of the proceeds that goes to the company in the form of cash. This is important when the receivables are to some extent covered by the offset of claims or there is a significant “isolation” of transfers to customers for the services rendered from the very period when these services are provided. The latter, for example, is often relevant for construction organizations.
The report also allows you to determine the effectiveness of management decisions in the financial sector. The adoption of each such decision affects the cash flows in the company. So, for example, there may be a reduction or increase in costs, a change in the direction of finance and so on.
The adoption of long-term management decisions also requires appropriate cash flow planning. Information on the direction of finance, but not information on costs and revenues, is the main criterion that allows you to implement certain investment projects. When calculating those, the analysis of future cash flows and their discounting is taken into account. This information is embedded in the report on the areas of finance.
In addition, information about cash flows is often used by analysts to determine the free movement of finance, which is one of the most important indicators used in the formation of company value.