Use by a company or enterprise of financial resources reflects a statement of cash flows. It is intended for direct or indirect display of the use of funds during the reporting or other selected period. It shows receipts with their classification by major items. This technique allows you to compile a generalized picture of economic activity, to analyze the sources, structure and magnitude of liquidity and creditworthiness.
This document today acts as a standard in the financial reporting system , which is recognized by international rules for the accounting for cash flows.
Unlike traditional accounting, this type of reporting began to be widely used only from the second half of the year before last, when information on the movement of financial resources of enterprises and organizations began to be unified on an international scale. For the first time, this approach was taken by Dowlais Ironworks to reflect the reserves of funds for updating the fixed assets of the enterprise.
Today, the cash flow statement has become a universally binding document for use by US companies, and since 1994 it has become an international standard under the name of IFRS 7. According to it, the preparation and presentation of such a report has become mandatory in the list of financial statements of any enterprise or organization.
Today, almost all developers of reporting standards claim the high importance of this document. It takes into account the movement of cash flows as a result of core activities, and also keeps a record of net flow. That is why the cash flow statement has become a necessary tool of modern management, allowing you to show both external and internal income and expenses.
In the standard version, the cash flow statement allows you to determine:
- sources and amounts of funds received;
- articles and directions for their use;
- the ability of the company to guarantee the excess of the amount of income over the volume of payments;
- ability to fulfill obligations;
- the critical amount of funds at which the organization or enterprise can continue to conduct business;
- the level and amount of equity for investing in the development of the enterprise;
- sources and causes of differences between profit and expense indicators.
Such a report is compiled by any organization or company, regardless of its industry, ownership, size and structural structure.
The methodology for generating a report in accordance with IFRS has some features that may not take into account the national rules for the preparation of this document. In particular, IFRS itself is based on accounting principles, and not on legally defined strict accounting standards. Therefore, the philosophy of the document itself is not to look for violations or loopholes in it to circumvent the rules, but to try to make the document “working”.
As adopted, the documentation of the movement of fixed assets shares the inflow and outflow of funds for the main activities of the enterprise - operating, production, financial. This approach is necessary, first of all, so that interested parties can adequately assess the impact of these areas of work on the overall financial stability of the company.
When compiling a report under IAS rules, firms are required to show information about the structure of funds. Moreover, a wide variety of classifications can be used for identification. For example, in the Russian Federation a cash flow statement (Form 4), although it is one of the main accounting reports, nevertheless has some differences from the rules adopted by IAS. In the Russian Federation, a report is generated solely by direct method, because this form does not provide for the reflection of data on cash equivalents.