Idea Transcript
THE "UNIFIED ACCOUNTING SYSTEM": HOW TO IMPLEMENT ON-LINE CASH FLOW ACCOUNTING
by Hervé Stolowy Associate-Professor of Accounting Paris Graduate School of Management (Ecole Supérieure de Commerce de Paris) 79 avenue de la République, 75543 - Paris Cedex 11, France.
Jean-Claude Dormagen Accounting Manager L'Oreal Group 41, rue Martre, 92117 - Clichy, France. and Michel Ternisien General Secretary Salustro-Reydel (C.P.A.) network RSM International 2, avenue Hoche, 75008 - Paris, France.
Paper presented at the 16th Annual Congress of the European Accounting Association Turku, Finland, April 28-30, 1993
April 1993 ___________________________________________________________________________ Simona Lardera, Associate-Professor of Information Systems at the Paris Graduate School of Management, who programmed the case material supporting this paper, as well as to Nabil Elias, Professor at the University of Manitoba, Visiting Professor at the Paris Graduate School of Management, for his helpful comments, John Kennedy, Associate-Professor of Accounting at the Paris Graduate School of Management, and Paul Gillion, International Department, Salustro-Reydel,
THE "UNIFIED ACCOUNTING SYSTEM": HOW TO IMPLEMENT ON-LINE CASH FLOW ACCOUNTING
ABSTRACT
Corporate accounting information is sometimes organized in separate processing centers, each one providing a specific kind of information. In France, for instance, as in many other European countries, there are often three separate data processing centers: financial accounting, management accounting and cash flow accounting. In the United States, it would appear that such a separation between financial accounting and cash flow accounting also exists. The FASB (1987, § 109) recognizes that many providers of financial statements do not presently collect information in a manner that will allow them to determine amounts such as cash receipts and payments directly from their accounting systems. These divisions and dispersals of information entail laborious reconciliation and analysis work, reducing considerably the efficiency of accounting as a management tool. Data processing has overcome these obstacles clearing the way for a more advanced bookkeeping technique: the Unified Accounting System (UAS), which helps to eliminate divisions and dispersals and take optimum advantage of the available resources. The purpose of this paper is to introduce the Unified Accounting System which unifies all the information needed for management needs; such a system is currently operating in several subsidiaries of an international French cosmetics group. The paper presents an application of the integration of financial accounting and cash flow accounting1. This is made possible by a major innovation: the introduction of the concept of "object", i.e. the purpose of each entry. We also show how this System which is "driven" by a software data base, can facilitate the preparation of the Statement of Cash Flows (SFAS 95 model) using the direct method, which discloses cash receipts and cash payments directly from the financial accounting entries, instead of reanalysing the accounts.
1
The integration of financial accounting and management accounting, also in practice, could be presented in an other paper. 1
THE "UNIFIED ACCOUNTING SYSTEM": HOW TO IMPLEMENT ON-LINE CASH FLOW ACCOUNTING
Corporate accounting information is sometimes organized in separate processing centers, each one providing a specific kind of information. In France, for instance, as in many other European countries, there are often three separate data processing activities: • Financial accounting providing information about assets, liabilities, the determination of net income - being the difference between revenues and expenses classified by type or nature. • Management accounting determining the cost of goods with details of the composition of net income, revenues and expenses being classified by function. • Cash flow accounting generally provided by a separate processing center. In the United States, it would appear that such a separation between financial accounting and cash flow accounting also exists. The FASB (1987, § 109) recognizes that many providers of financial statements do not presently collect information in a manner that will allow them to determine amounts such as cash receipts and payments directly from their accounting systems. Such divisions and dispersals of information entail laborious reconciliation and analysis work, reducing considerably the efficiency of accounting as a management tool. Data processing has overcome these obstacles clearing the way for a more advanced bookkeeping technique: the Unified Accounting System (UAS), which helps to eliminate divisions and dispersals and take optimum advantage of the available resources. Having noted the constraints of traditional accounting systems and the problems of calculating the net cash flows from operating activities using the direct method, this paper introduces the Unified Accounting System which unifies all the information needed for management and which is currently operating in several subsidiaries of an international French cosmetics group. The paper presents an application of the integration of financial accounting and cash flow accounting2. This is made possible by a major innovation: the introduction of the concept of
2
The integration of financial accounting and management accounting, also in practice, could be presented in an other paper. 2
"object", i.e. the purpose of each entry. In other words, the Unified Accounting System modifies the structure of accounting entries and adds a new dimension to processing financial information. At this stage, it is important to distinguish between the Unified Accounting System and the Events Accounting approach introduced by Sorter (1969). Thereafter, with the help of an example we show how this System which is "driven" by a software data base, can facilitate the preparation of the Statement of Cash Flows (SFAS 95 model) using the direct method, which discloses cash receipts and cash payments directly from the financial accounting entries, instead of reanalysing the accounts. The cash flow accounting protagonists like Lee (1987) saw a cash flow accounting as an alternative to accrual accounting. The Unified Accounting System effectively combines both approaches, since by modifying the structure of accounting entries, one can obtain real-time cash-flow information from the basic financial records. 1 - BACKGROUND 1.1
The Unified Accounting System, as we will demonstrate, eliminates some of the weaknesses of the traditional accounting system whilst retaining its strengths. 1.1.1 are fully specified in a standard Chart of Accounts.
It is possible to distinguish between: • collections and payments, thus determining cash variations • revenues and expenses, thus determining the income. 1.1.2 Weak points: the organization of accounting entries 3
Accounting entries record information in respect of transactions and provide the data needed to analyze accounts and draw up summaries. In current bookkeeping systems, the accounting entries: • combine several movements under the same entry, preventing the direct reconciliation of each "source" with the related "use". For example, the accounts receivable is debited with the total amount of an invoice, which includes the sales value plus the sales tax.
• neglect elements of information by not indicating the reason or purpose of the accounting entries, thus, preventing direct explanations of account variations. For example, "collection", i.e. the reason (or purpose or object) of the movement on the bank account, when a check has been received from a customer in settlement of an account receivable, is not entered.
Consequently, certain statements and certain analyses cannot be produced directly from accounting entries and lengthy and costly additional work needs to be done to produce meaningful analyses. 1.2 How to overcome problems encountered with the preparation of the Statement of Cash Flows under the direct method In taking the two methods of reporting cash flows from operating activities: the direct and the indirect methods, Stolowy and Walser-Prochazka (1992) carried out a comparative study on the application of both methods in countries having adopted standards or exposure drafts dealing with the Statement of Cash Flows. A summary extract of this study is shown in exhibit 1. INSERT EXHIBIT 1 HERE
These two direct methods are which is to provide information about cash receipts and cash payments, than the indirect method.
4
In contrast, many providers of financial statements contend that the indirect method is less costly. In practical terms, the information contained within a traditional accounting movement is often insufficient for cash flow purposes. The basic information on cash flow is, however, required for the preparation and analysis of the Statement of Cash Flows. The constraints in traditional accounting give rise to two consequences: • The Statement of Cash Flows becomes an imperfect representation of the underlying concepts: for example, purchases cash payments are calculated as the difference between purchases and change in accounts payable balances at the beginning and the end of the period ("semi-direct" method). • the preparation of the Statement of Cash Flows requires prior analysis of accounts balance movements and underlying transactions affecting the accounts, involving additional time and costs. The main question being raised is: "Why not analyse cash flows directly from their source the accounting entries relating to receipts and payments?" The reply to this question is straight-forward. It is difficult to analyse receipts and payments given the existing and traditional structure of accounting entries. Once this is overcome, a "true" direct method Statement of Cash Flows can be produced immediately. 2 - THE OBJECTIVES AND CONDITIONS OF CHANGE The aim is to increase the effectiveness of accounting work by making it possible to draw up the Statement of Cash Flows directly from the source accounting entries. The Unified Accounting System proposes a change in the structure of accounting entries in order to enable any one accounting entry to serve as a "data base" for further work or analysis. Two major innovation are proposed by Dormagen (1990): (1) to enter the purpose of each entry, i.e. the reason for the movement in one or more accounts; (2) the creation of "junction" accounts allowing the liaison between accounts by nature and accounts by function. We shall not be expanding on the second point as it lies outside of the scope of this paper.
5
2.1 The concept of object Each transaction has its reason or object. The following example attempts to illustrate the underlying notions. During a given period, the company has bought merchandise for 100 $ and paid 88 $ to its supplier. It has sold a part of the merchandise for 110 $ and received 95 $ from its customer. At the end of the period, it takes a physical inventory of its warehouse and notes an inventory variation of 11 $ (increase). In this example the objects are as follows: Purchase
100
Payment
88
Sale
110
Collection
95
Inventory variation
11
In this context, the object corresponds to the nature of the transaction, rather than its effects in terms of debit or credit. 2.2 Structure of accounting entries For accounting systems purposes, the organization of entries respects: • First, the principle of double entry : the debited account indicates the "use" of funds; the credited account indicates the "source" of funds; Because only one account is debited and one credited per entry, the amount is mentioned only one time. The recording of a single movement under the same entry allows the direct reconciliation of each source to its respective use. When, however, an entry contain more than one debit or credit, it must be split into several simple entries.
To take the example cited above, accounts receivable will be debited twice, once with the net sales value and once with the sales tax value.
This split will normally be carried out automatically by the data input program. 6
• Secondly, the need to know the object or purpose of the transaction to be codified in order to permit automated processing. 3 - ORGANIZATION OF ENTRIES 3.1 Principle We present below the standard accounting entries. Use
Source
(debited
(credited
account)
account)
Object
Amount
In the simplified example shown above (paragraph 2.1), the accounting entries can be presented as follows:
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Use or Debit
Source or Crédit
Object
Amount
Income statement
Accounts payable
Purchase
100
Accounts payable
Cash
Payment
88
Accounts receivable
Income statement
Sale
Cash
Accounts receivable
Collections
95
Inventory
Income
Inventory variation
11
110
Remember that because only one account is debited and one credited per entry, the amount is mentioned only one time. Any income statement transactions (revenues and expenses) are detailed in the object column (purchase, sale, in our example). There is no longer a need to repeat this information in the debit and credit columns. Consequently, the debit (purchase) or credit (sale) is recorded in a single "income statement" account. 3.2 Accounting entries, a data base The Unified Accounting System entry records in one time all the information necessary for the different reporting needs. The basic input form presented above is complemented by additional information. Date & Identification
Use (debited account) and associated dimensions
Source (credited account) and associated dimensions
Object and associated dimensions
Amount
Explanations & other information
The "associated dimensions" correspond to additional information concerning the use, the source and the "object". Fox example, for purchases of raw materials: • the use will be "income statement" and the associated dimensions the raw material code and type, • the source will be "accounts payable" and the associated dimensions the supplier code and category,
8
• the "object" will be "purchases" and the associated dimensions the weight and volume... Additional information could include the type of operation, payment conditions, the project details... All this information is linked and forms a whole. All accounting data meet criteria which govern "data bases". The list of entries stores a description of the transactions. Other lists store general data: the chart of accounts, the customers file, the suppliers file... These lists include common items (accounts number, customers number, etc.) used to link the data they contain. They supply all data needed to draw up and analyse the statements peculiar to general accounting (balance sheet, income statement) and to cash (Statement of Cash Flows) from a common source. 3.3 Actual implementation Input of use, source and object at the same time does not cause any particular problem. •
The input format is designed to enter a datum needed or several entries only once. For example, the accounts payable account is entered first. The supplier code and invoice number are entered once for several entries concerning the invoice.
•
Whenever possible, the object of the movement is automatically generated from knowledge of the use and source concerned. If the source is a bank, and supplier is the use, the object is payment.
3.4 Organizational aspects in the company This organization of accounting entries facilitates the decentralization of accounting departments: • because an entry describes all aspects of a transaction (source, use and object), it is important to input the data at a site close to the underlying transactions effected.
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For example, to record an invoice properly, the payables accounting must be close to the supply and reception departments, which have information about the order, the delivery, the result of checking, etc.
• because the list of entries constitutes a common data source for different applications, data can be input by those units which are directly responsible for the transaction. For example, the payables accounting can be used to make and enter the payment, because it has the necessary information and is in direct contact with the suppliers, even if the authorization to pay is the final responsability of the treasurer.
Thus, the payables accounting can be made responsible for all aspects of operations involved in processing an invoice, from purchase to payment. 4 - THE UNIFIED ACCOUNTING SYSTEM AND EVENT ACCOUNTING
5 - PREPARING A STATEMENT OF CASH FLOWS We show below a limited example for pedagogical and demonstration purposes created specifically for this paper using the data base functions of Excel3. In practice, the Unified Accounting System, which is today in use, functions with data base software. The following example shows how a Statement of Cash Flows can be prepared directly from the source accounting entries. 5.1 Example: transactions and accounting entries Opening balance sheet Assets Fixed
assets("PPE")4
Less accumulated depreciation
3 4
Liabilities and stockholders'equity 15 Capital stock (5) Retained earnings
The choice of Excel was made simply because it is widely used and it is adequate for an illustration. Property, Plant and Equipment. 10
14 5
Inventories
9 Long-term debt
4
Accounts receivable
4 Accounts payable
8
Cash
8
Total
31 Total
31
During a given period, the following transactions are recorded (in $) :
The accounting entries are shown in Table 1, as follows. INSERT TABLE 1 HERE Remember that the income statement accounting entries, debits or credits, are not at this stage analysed or classified into expense or revenue types. The "object" of the original transaction and source accounting entry provides the detail composition of the income statement and individual expense/revenue categories within the income statement. 5.2 Preparing the income statement This step is not required for the preparation of a Statement of Cash Flows. For demonstration purposes, however, we show how the income statement is obtained by selecting entries whose use (debit) or source (credit) is "income", and sorting and grouping selected entries according to their object. Nonetheless, we are fully aware that an income statement can be obtained using a traditional accounting system. The strength of the Unified Accounting System lies not in its ability to produce an income statement, but in its efficient use of accounting data to produce a direct method Statement of Cash Flows. Table 2 gives the "selections" made by the program. INSERT TABLE 2 HERE As noted earlier, the object is expressed as expenses or revenues and corresponds to the accounts by type (nature). The income statement is shown in table 3. INSERT TABLE 3 HERE
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In table 3, the entries are annoted as follows: DEBIT (-) CREDIT (+) =
=
USE SOURCE
5.3 The cash statement The connection existing between debit, credit and object of an entry, in the Unified Accounting System, means that movements affecting accounts may be analysed according to the object of the movements but also the correlated accounts. By selecting bank account entries, debits or credits, and then grouping the selected entries according to: • the object of the movements (collections, payments, etc.), • the correlated accounts (receivables, payables, etc.), the entries can be used directly to analyse the cash variation giving the origin of the collection or purpose of the payment for each type of movement (see table 4). INSERT TABLE 4 HERE The cash statement is now obtained (see table 5). INSERT TABLE 5 HERE 5.4 Statement of movements Table 6 illustrates how all account balance movements may be summarized for analysis, i.e. • by objects, • by cash-flow impacts, • by "non" cash-flow impact (depreciation, inventory variation, book value sold items) (see table 6). INSERT TABLE 6 HERE
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5.5 Statement of cash flows (intermediary version) Movements concerning funds flows are analysed according to the use (debit) or source (credit) they represent, i.e.: • Income statement items - revenue and expenses column • Cash items - receipts and disbursements column • Other cases - other movements column (see table 7). Account balance movements which stem from both income statement and cash related transactions (cash revenues and expenses - financial costs; sale of assets), should normally be dealt with separately. However, since our objective is only to prepare a statement of cash flow, we have included both categories in the one column (receipts and payments). INSERT TABLE 7 HERE 5.6 Statement of cash flows ("semi-direct" method version) The "total" column of table 7 gives an unsatisfactory Statement of Cash Flows since the cash flow movements are reconstructed (sales cash receipts being the difference between sales and variation in accounts receivable) (see table 8). INSERT TABLE 8 HERE 5.7 Statement of cash flows ("true" direct version) However in selecting the receipts and disbursements column only (in table 7), one obtains a "true" Statement of Cash Flows because each figure is an actual cash flow (table 9).
INSERT TABLE 9 HERE
CONCLUSION The illustrated example can be applied for any cash flow model, since the data is source accounting information which can be used in different ways, configurations, etc.
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The integrated use of data processing has made it possible to develop these accounting techniques which enable management to use more meaningfully the source accounting information and, thus, develop more effective information systems. Thus, thanks to the Unified Accounting System, all statements and all analyses can now be produced directly from book entries and more rapidly and more cheaply than in the traditional accounting system.
REFERENCES FASB: Statement of Financial Accounting Standards (SFAS) No. 95 Statement of Cash Flows, November 1987, 76 pages. IASC: Exposure draft 36 Cash Flow Statements, 1991; IAS n° 7 Cash Flow Statements 1976, revised 1992. Augustin, G.: La comptabilité et la révolution informatique. Masson, France, 1986, 173 pages. Degos, Jean-Guy: Histoire de la comptabilité matricielle : de l'amnésie à la réécriture. Revue Française de Gestion n° 83, mars-avril-mai 1991, 18-28. Dormagen, Jean-Claude: La comptabilité intégrée. La Villeguerin Editions, France, 1990. Gensse, Pierre: Le renouvellement du modèle comptable : Evolution ou révolution ? Revue Française de Comptabilité n° 139, October 1983, 374-383. Gensse, Pierre: A propos de comptabilité multidimensionnelle... Revue Française de Comptabilité n° 152, December 1984, 500-501. Johnson O.: Toward an "Events" Theory Accounting. The Accounting Review, October 1970, 641-653. Kucic, A. Ronald and Samuel T. Battaglia: Matrix Accounting for the Statement of Changes in Financial Position. Management Accounting, April 1981, 27-32. Lee, Tom A.: The Cash Flow Accounting Alternative for Corporate Financial Reporting. in Financial Accounting Theory, edited by Stephen A. Zeff and Thomas F. Keller, Mc GrawHill, 3rd edition 1987, 275-282. Leech, Stewart A.: The Theory and Development of a Matrix-Based Accounting System. Accounting and Business Research, Vol. 16, n° 64, 1986, 327-341. Lieberman, A.Z. and A.B. Whinston: A Structuring of an Events - Accounting Information System. The Accounting Review, April 1975, 246-258.
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Mepham, M.J. : Matrix-Based Accounting: A Comment. Accounting and Business Research, Vol. 18, No. 72, 1988, 375-378. Sorter, George H.: An "Events" Approach to Basic Accounting Theory. The Accounting Review, January 1969, 12-19. Stepniewski J.: Principes de la comptabilité événementielle. Masson, France, 1987, 156 pages. Stolowy, Hervé and Sylvie Walser-Prochazka: The American Influence in Accounting: Myth or Reality? The Statement of Cash Flows Example. The International Journal of Accounting, 1992, Vol. 3, 185-221.
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TABLE 1 ACCOUNTING ENTRIES
Use (débit) Fixed assets/PPE5 Opening balance Inventories Accounts receivable Cash Opening balance Opening balance Opening balance Opening balance Income statement Accounts payable Accounts receivable Cash Fixed assets/PPE Fixed assets/PPE payable Income statement Income statement Inventories Income statement Income statement Accumulated depreciation Cash Cash Long-term debt
5
Source (crédit)
Object
Opening balance Accumulated depreciation Opening balance Opening balance Opening balance Capital stock Retained earnings Long-term debt Accounts payable Accounts payable Cash Income statement Accounts receivable Fixed assets/PPE payable Cash Cash Accumulated depreciation Income statement Inventories Fixed assets/PPE Income statement Income statement Long-term debt Cash
"PPE" = Property, Plant and Equipment 16
Opening Opening Opening Opening Opening Opening Opening Opening Opening Purchases Payments Sales Collections Purchases of fixed assets/PPE Payments Interest expenses Depreciation expense Inventory variation Inventory variation Book value sold items Book value sold items Sales of fixed assets/PPE Issuance of long-term debt Repayment of long-term debt
Amount
15 5 9 4 8 14 5 4 8 100 88 110 95 18 14 1 4 20 9 5 3 7 10 1
TABLE 2 SELECTION OF ENTRIES - INCOME STATEMENT
Income statement Accounts payable Accounts receivable Cash Fixed assets/PPE Fixed assets/PPE payable Income statement Income statement Inventories Income statement Income statement Accumulated depreciation Cash Cash Long-term debt
Accounts payable Cash Income statement Accounts receivable Fixed assets/PPE payable Cash Cash Accumulated depreciation Income statement Inventories Fixed assets/PPE Income statement Income statement Long-term debt Cash
Purchases Payments Sales Collections Purchases of fixed assets/PPE Payments Interest expenses Depreciation expense Inventory variation Inventory variation Book value sold items Book value sold items Sales of fixed assets/PPE Issuance of long-term debt Repayment of long-term debt
TABLE 3 INCOME STATEMENT
Sales Sales of fixed assets/PPE
110 7
Purchases Inventory variation Depreciation expense Interest expenses Book value sold items
-100 11 -4 -1 -2
Income statement
21
17
100 88 110 95 18 14 1 4 20 9 5 3 7 10 1
TABLE 4 SELECTION OF ENTRIES - CASH STATEMENT Fixed assets/PPE Opening balance Inventories Accounts receivable Cash Opening balance Opening balance Opening balance Opening balance Income statement Accounts payable Accounts receivable Cash Fixed assets/PPE Fixed assets/PPE payable Income statement Income statement Inventories Income statement Income statement Accumulated depreciation Cash Cash Long-term debt
Opening balance Accumulated depreciation Opening balance Opening balance Opening balance Capital stock Retained earnings Long-term debt Accounts payable Accounts payable Cash Income statement Accounts receivable Fixed assets/PPE payable Cash Cash Accumulated depreciation Income statement Inventories Fixed assets/PPE Income statement Income statement Long-term debt Cash
Opening Opening Opening Opening Opening Opening Opening Opening Opening Purchases Payments Sales Collections Purchases of fixed assets/PPE Payments Interest expenses Depreciation expense Inventory variation Inventory variation Book value sold items Book value sold items Sales of fixed assets/PPE Issuance of long-term debt Repayment of long-term debt
TABLE 5 CASH STATEMENT Objects of movements
Counterparts accounts
Opening balance
-8
Collections Payments Payments
-95 88 14
Interest expenses Sales of fixed assets/PPE Issuance of long-term debt Repayment of long-term debt
1 -7 -10 1
Total of movements
-8
Closing balance
-16 18
Accounts receivable Accounts payable Fixed assets/PPE payable Income statement Income statement Long-term debt Long-term debt
15 5 9 4 8 14 5 4 8 100 88 110 95 18 14 1 4 20 9 5 3 7 10 1
TABLE 6 STATEMENT OF MOVEMENTS Accounts debit/credit
Objects
Opening balance
Movements Cash flows
INCOME STATEMENT
FIXED ASSETS/PPE
DEPRECIATION
INVENTORIES
ACCOUNTS RECEIVABLE CAPITAL STOCK RETAINED EARNINGS LONG-TERM DEBT ACCOUNTS PAYABLE FIXED ASSETS/PPE PAYABLE CASH
Sales Sales of fixed assets/PPE Purchases Inventory variation Depreciation expense Interest expenses Book value sold items Opening
Total
Closing balance
Noncash flows
110 7 -100 11 -4 -1 -2
21
21
5
-13
-28
4 -3
1
6
-20 9
-11
-20
-15 0
-19 14 5
9
13
100 -88 18
12
20
-14
4
4
-8 0
-16 0
-15
Purchases of fixed assets/PPE Book value sold items Opening Depreciation expense Book value sold items Opening Inventory variation Inventory variation Opening Sales Collections Opening Opening
-18 5
-9
-4 -110 95 14 5
Opening Issuance of long-term debt Repayment of long-term debt Opening Purchases Payments Purchases of fixed assets/PPE
0
4 10 -1 8
Payments Opening Collections Payments Payments Interest expenses Sales of fixed assets/PPE Issuance of long-term debt Repayment of long-term debt
-8
TOTAL
0
19
-95 88 14 1 -7 -10 1 0
0
TABLE 7 STATEMENT OF CASH FLOWS (INTERMEDIARY VERSION)
Revenues/ Expenses
Receipts/ Disbursements
Other movements
Total
Cash flows from operating activities Sales Purchases Interest expenses
110 -100
Changes in accounts receivable Changes accounts payable
-110 100
-1
110 -100 -1
95 -88
-15 12
Net cash flows from operating activities Cash flows from investing activities
6
Purchases of fixed assets/PPE Sales of fixed assets/PPE Changes in Fixed assets/PPE payable
-18 7 -14
18
Net cash flows from investing activities Cash flows from financing activities
-18 7 4
-7
Increase in long-term debt Decrease in long-term debt Net cash flows from financing activities Net increase in cash and cash equivalents
0
20
10 -1
10 -1
8
9 8
0
TABLE 8 STATEMENT OF CASH FLOWS ("SEMI-DIRECT" METHOD)
Total Cash flows from operating activities Sales Purchases Interest expenses
110 -100 -1
Changes in accounts receivable Changes in accounts payable
-15 12
Net cash flows from operating activities
6
Cash flows from investing activities Purchases of fixed assets/PPE Sales of fixed assets/PPE Changes in Fixed assets/PPE payable Net cash flows from investing activities
-18 7 4
-7
Cash flows from financing activities Increase in long-term debt Decrease in long-term debt
10 -1
Net cash flows from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year
21
9 8 -8 -16
TABLE 9 STATEMENT OF CASH FLOWS ("TRUE" DIRECT METHOD)
Cash flows from operating activities Cash receipts from sales
95
Cash payments for •Purchases •Interest Payments
-88 -1
Net cash flows from operating activities Cash flows from investing activities Purchase of equipment Sale of equipment
6
-14 7
Net cash flows from investing activities Cash flows from financing activities
-7
Increase in long-term debt Decrease in long-term debt
10 -1
Net cash flows from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year
22
9 8 -8 -16
EXHIBIT 1 CALCULATING CASH FLOWS FROM OPERATING ACTIVITIES: DIRECT AND INDIRECT METHODS6 One method of reporting cash flows from operating activities is the direct method, which discloses major classes of gross cash receipts and gross cash payments. Another method of reporting cash flows from operating activities is the indirect method, which discloses the net cash flow from operating activities by adding back and in some cases substracting, to the net income, non-cash items included in the determination of this net income . All the countries included in the study 7 refer to at least one of the two methods. Moreover, France has some specific characteristics which are noted below. 1 - The choice of direct or indirect method The countries examined have made different choices concerning the method to be used, as shown in the following schedule: USA/IASC UK/IRELAND
NEW ZEALAND AUSTRALIA
SOUTH AFRICA
CANADA
FRANCE
Direct method recommended
Direct method recommended
Combination of direct and indirect methods
Both methods authorised
2 indirect methods
Indirect method authorised
Reconciliation with net income possible in notes
The USA, the UK and Ireland, and the IASC strongly encourage enterprises to calculate the net cash flow from operating activities by the direct method. However, as stated in ED 36 8 of the IASC, many enterprises may not be able to report gross operating cash flows without incurring substantial costs that may outweigh the benefits of the information to external users. This is why SFAS 95, FRS 1 and IAS 7 (revised 1992) allow the indirect method to be used 9.
6
Extract updated from the article by Hervé Stolowy and Sylvie Walser-Prochazka: The American Influence in Accounting: Myth or Reality? The Statement of Cash Flows Example. The International Journal of Accounting, 1992, Vol. 3, 185-221. 7 Australia, Canada, the USA, France, New Zealand, South Africa, the United Kingdom and Ireland, plus the International Accounting Standards Committee (IASC). 8 This comment was not included in the IAS 7 (revised 1992). 9 It has also been suggested tha the real reason in these three cases is that a large enough minority wanted retention of the indirect method. 23
In New Zealand and Australia, cash flows from operating activities may only be presented using the direct method. Exposure draft 39 (New Zealand) had proposed the indirect method as an alternative, but this proposal was not adopted in the final standard despite considerable criticism. To increase flexibility, SSAP-10 does not prohibit the disclosure of cash flows calculated by the indirect method in a separate reconciliation accompanying the statement. The South African position is unusual: the standard recommends presentation by the indirect method for cash flows from operations as defined in the strictest sense, that is to say excluding interest paid and received and taxes. Cash inflows and outflows related to interest income and expenses and taxes are then presented separately as in the direct method, to obtain the net cash flow from operations. This is, therefore, a kind of combination of both methods. Canada has opted for very open solutions, leaving enterprises the free choice between the two methods. In France, two indirect methods are recommended (see below). 2 - The French recommendation: specificities There is an important difference of terminology and methodology between France and the other countries. The French cash flow statement is based on the principle that the net cash flow from operations is calculated using one of two indirect methods, either based on the net income or on the Gross Operating Cash Surplus (Excédent Brut d'Exploitation) excluding changes in inventory. The table below summarizes these differences. USA - CANADA - NEW ZEALAND -SOUTH AFRICA - UK/IRELAND IASC - AUSTRALIA Direct method: cash receipts less cash payments Indirect method: based on the net income ("addition" method)
FRANCE
Indirect method, option 1: based on the net income ("addition" method) Indirect method, option 2: based on the Gross Cash Surplus from Operations ("subtraction" method, sometimes called the direct method in French practice)
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