- Global Frameworks: IAS 7 (Statement of Cash Flows), US GAAP ASC 230.
1. Structural Classifications
The cash flow statement reconciles accrual net income to actual physical cash generated. It is divided into three distinct sections:
- Cash Flow from Operating Activities (CFO): Core cash flows from production and service delivery.
- Cash Flow from Investing Activities (CFI): Cash spent on or received from long-term assets, such as purchasing property, plant, equipment (PP&E) or acquiring business subsidiaries.
- Cash Flow from Financing Activities (CFF): Cash flows from capital providers, including issuing equity, repurchasing stock, drawing loans, or paying dividends.
2. Classification Flexibilities: IFRS vs. US GAAP
Analysts must adjust for classification differences when comparing cash flows across regions:
| Transaction type | US GAAP Classification | IFRS Permitted Options |
|---|---|---|
| Interest Received | Operating (CFO) | Operating (CFO) OR Investing (CFI) |
| Interest Paid | Operating (CFO) | Operating (CFO) OR Financing (CFF) |
| Dividends Received | Operating (CFO) | Operating (CFO) OR Investing (CFI) |
| Dividends Paid | Financing (CFF) | Financing (CFF) OR Operating (CFO) |
3. Direct vs. Indirect Presentation Formats
- Direct Method: Lists actual cash receipts from customers and cash payments to suppliers and employees. Both the IASB and FASB prefer this format because it is more transparent, but corporations rarely use it due to the complex data systems required.
- Indirect Method: Starts with accrual Net Income and applies adjustments to reconcile it to operating cash flow:
CFO = Net Income
- Non-Cash Expenses (Depreciation/Amortization)
- Losses on Asset Sales − Gains on Asset Sales
− Δ Operating Assets (Accounts Receivable, Inventory)
- Δ Operating Liabilities (Accounts Payable, Accrued Taxes)
Â