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Cash Flow Statement – How to

2 October 2009 2,335 views 7 Comments

Dear Experts,

As we know that cash flow from operating activities includes changes in Accounts Paybles. This seems okay for a company having accounts payables related to company’s normal operational expenses. But what if Accounts payable includes payable against normal operating expenses and payables against construction of buildings.

Company’s business is constrcution of buildings and lease on rent under IAS 17.

If payables against construction is included in cash flow from operating activities it gives a large value of cash inflow from operating activites if 2007 payables paid out in 2008.

Do you think that payables against construction can be shown under cash from from investing activites or what is an alternative.

Best Regards,

Hemant

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7 Comments »

  • admin (author) said:

    Message from Jeroen

    Dear Hemant,

    I think the operating cash flows only include an adjustment for TRADE accounts payable. Therefore, payments for construction of buildings should only affect investment activities. Also if it is a lease, it sounds more like a long term lease obligation rather than an account payable.

    The trade payable correction is a correction on the operating profit, which does not include transactions on property.

    Consequently you need to adjust your accopunts payable for trade related payables only. I suggest to include a new account in your Bookeeping system to separate trade from non trade related payables.

    Hope this helps.

    Regards

    # 2 October 2009 at 5:45 pm
  • admin (author) said:

    Message from Ally

    Hey Folks,

    refer to the following para,

    “operating activities are the main revenue-producing activities of the entity that are not investing or financing activities, so operating cash flows include cash received from customers and cash paid to suppliers and employees [IAS 7.14] ”

    The thing here is this Construction activities can be Operational or Investing depending on the revenue generating activities of the firm i.e for the firm deals with the Construction and sale of buildings, all the receivables and payables associated with the same will be under operational activities.

    Thanks and Regards

    # 2 October 2009 at 5:46 pm
  • admin (author) said:

    Message from William

    Hemant,
    If payable resulting from constructions – and construction is the normal operation of the company – is classified under operating activities of the cashflow then it’s okay regardless of the size of the payable. The substance of the business payable transactions and size is a reflection of the nature of the business.

    William

    # 2 October 2009 at 5:47 pm
  • cmanishiyer said:

    Dear Mr. Hemant,

    The payables against construction of buildings which are part of property, plant and equipment or investment property should be part of “Cash Flows for Investing Activities”. Only trade payables and payables to employees would be adjusted under Operating Activities.

    Regards,
    CA Manish Iyer
    +919825286903

    # 3 October 2009 at 6:58 am
  • admin (author) said:

    Message from Arauz

    Dear All,
    In both cases it is an operating cash flow.
    If the payment is related to a construction of a building that will be part of the properties plant and equipement, the building will generate a return, therefore it is going to be used in the normal operation of the business.

    By the way, if the building is being built to be sold by a construction company, the money is part of the operative business, therefore it is also part of the operating cash flow.

    Best Regards

    # 5 October 2009 at 9:27 am
  • admin (author) said:

    Message from Jeroen

    Dear All,

    I do not agree on the conclusion below. Property, Plant and equipment are assets and acounted for as an investment, Please see definition of operating, investment and finance cash flows below:
    operating activities are the main revenue-producing activities of the entity that are not investing or financing activities, so operating cash flows include cash received from customers and cash paid to suppliers and employees [IAS 7.14]
    investing activities are the acquisition and disposal of long-term assets and other investments that are not considered to be cash equivalents [IAS 7.6]
    financing activities are activities that alter the equity capital and borrowing structure of the entity [IAS 7.6]

    Obviously a company will always invest in assets that will generate a return at some time, otherwise it would be a stupid investment. But if everything would be recorded under operating cash flows, what would be left in the other categories?
    Operating cash flows in this case would only entail the revenue streams generated from the property (rent income) and non capitalised expenses.

    Regards

    # 5 October 2009 at 10:46 am
  • Stiaan said:

    Dear all

    The cash flow statement should reflect the cash flow through the cash book.

    If the entry made was:

    Debit Asset 100
    Credit Account payables 100

    then there was no cash flow, and none should be reflected in the cash flow statement. Therefore, the increase in assets of 100 should be netted against the increase in the account payables (pertaining to the asset) of 100 and a zero reflected in the “Cash flow from investing activities”

    If, for example, 80 was paid before year-end, i.e:

    Debit Asset 100
    Credit Account payables 100
    Debit Account payables 80
    Credit Bank 80

    then “Cash flow from investing activities” should reflect a cash outflow of 80 (100 – 20).

    Regards
    Stiaan

    # 8 October 2009 at 8:33 am

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