Cash Flow Statement Under US GAAP and IFRS - AnalystPrep | CFA® Exam Study Notes (2024)

FAQs

What is the difference between IFRS and U.S. GAAP cash flow statement? ›

Under IFRS Accounting Standards, the primary principle is that cash flows are classified based on the nature of the activity to which they relate. Under US GAAP, the classification of an item on the balance sheet, and its related accounting, often informs the appropriate classification in the statement of cash flows.

One can conduct a basic cash flow analysis by examining the cash flow statement, determining whether there is net negative or positive cash flow, pinpointing how the outflows compare to inflows, and draw conclusions from that. However, there is no universally-accepted definition of cash flow.

The cash flow from operating activities depicts the cash-generating abilities of a company's core business activities. It typically includes net income from the income statement and adjustments to modify net income from an accrual accounting basis to a cash accounting basis.

While both are ways of calculating your net cash flow from operating activities, the main distinction is the starting point and types of calculations each uses. The indirect method begins with your net income. Alternatively, the direct method begins with the cash amounts received and paid out by your business.

IFRS stands for International Financial Reporting Standards, which are a set of internationally accepted accounting standards used by most of the world's countries. The key differences between GAAP and IFRS include: GAAP is a framework based on legal authority while IFRS is based on a principles-based approach.

Unlike Indian GAAP and IFRS, there is no exemption or relaxation in complying with US GAAP requirements except certain relaxations for non-public companies. The accounting standards may have differing date of implementation for public entities and non-public entities.

The cash flow statement is believed to be the most intuitive of all the financial statements because it follows the cash made by the business in three main ways: through operations, investment, and financing. The sum of these three segments is called net cash flow.

The difficulty and time required to list all the cash disbursem*nts and receipts—required for the direct method—makes the indirect method a preferred and more commonly used practice.

COGS is what you spend on the raw materials and direct labor for your products or services. The operations section of your business's cash flow statement shows that your business is generating enough money from sales to keep up with expenses.

What are the two approaches in preparing a cash flow statement? ›

There are two ways to prepare a cash flow statement: the direct method and the indirect method: Direct method – Operating cash flows are presented as a list of ingoing and outgoing cash flows. Essentially, the direct method subtracts the money you spend from the money you receive.

Free Cash Flow = Net income + Depreciation/Amortization – Change in Working Capital – Capital Expenditure. Net Income is the company's profit or loss after all its expenses have been deducted.

Whenever given a choice between the indirect and direct methods in similar situations, accountants choose the indirect method almost exclusively. The American Institute of Certified Public Accountants reports that approximately 98% of all companies choose the indirect method of cash flows.

As we mentioned above, the indirect method is the required/preferred method under GAAP and IFRS accounting regulations. Thus, many companies will choose to only utilize the indirect method to save their team the time of having to prepare the cash flow statement using both methods.

The direct method will actually add up all sales and costs to find out the total cash flow. The indirect method will start with net income, from the income statement, and take out any costs or assets that are included in the net income but are not actually cash in and out.

Other Potential Cash Flow Statement Differences

Others treat interest received as investing cash flow and interest paid as a financing cash flow. The method used is the choice of the company. Under U.S. GAAP, interest paid and received are always treated as operating cash flows.

The statement of cash flows provides information about the changes in cash and cash equivalents of an entity for a reporting period, showing separately changes from operating activities, investing activities and financing activities.

The statement of cash flows shall report cash flows during the period classified by operating, investing and financing activities. An entity presents its cash flows from operating, investing and financing activities in a manner which is most appropriate to its business.

Yes, the direct method of accounting for cash flow is allowed under the generally accepted accounting principles (GAAP) and under the International Financial Reporting Standards (IFRS). The indirect method is also allowed; however, the guidelines tend to promote the direct method.