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15CASH-FLOW STATEMENT AS AN INSTRUMENT TO IMPROVE INFORMATION
VALUE OF THE FINANCIAL STATEMENTS
Rodina M. S.
Department FGOBU VPO "Financial University under the Government of the Russian Federation"
Postgradauate in "Accounting"
ABSTRACT
Within the terms of market economy commercial entities activity depends mostly on economic information, its fullness, transparency and reliability. Organizations should increase information value of its financial statements through Statement of financial position, Statement of financial results and Cash Flow statement making it more transparent. That is Cash Flow statement that allows to liaise data presented in both statement of financial position and statement of financial results increasing its information value. Also by means of this report users are able to consider creditworthiness and liquidity of the entity that is of special importance in terms of high competition in capital and investment market.
Key words: Statement of cash flows (Cash-flows statement), increase of information value of financial statements, cash (and cash equivalents), cash flows.
Within the terms of market economy commercial entities activity depends mostly on economic information, its fullness, transparency and reliability. Due to this financial statements is the most important source of information that is presented by the entity to both external and internal users. And exactly based on this fact financial statements is reflection of entity's commercial activity.
In last decade world economy development indicated tendency to financial crises (2008-2009 yy crisis). During the World Congress of Accountants (2010) a lot of experts asserted responsibility of accountant for this crisis. It was told that it is necessary to return back confidence in financial statements, to stabilize situation and contribute to overcome this crisis. In opinion of most of experts the last financial crisis was the crisis of financial statements that leaded to loss of confidence of investors to information disclosed. Taking into account creative accounting and manipulation with financial statements performed by world famous companies such as Enron Corporation (2001), Parmalat SpA (2003), Olympus Corporation (2011) confidence in accountants and auditors significantly decreased. Nowadays users of financial statements tend to analyze financial information by themselves. Due to this the main goal of financial statements is regular increase of information value making it more transparent and consistent.
At the same time reformation of accounting and financial statements in Russia, its harmonization and conformation with IFRS leads to increase of requirements to information disclosed in financial statements for correct conclusion, effective and proved decision making by users.
Financial statements information significance is as follows:
Firstly it is based on the following principles of information space [8, 5]:
1. Information resources utility from the perspective of information users;
2. Equal access to information for its users;
3. Maximum of satisfaction of information requests from all participants of generation and consumption of accounting information
Secondly it is information product by its nature and its main quality feature is soundness [9, 7].
In accordance with RAS 4/99 Financial statements of organization should give reliable and full presentation on financial position, financial results of its activity and changes
in its financial position. As of now Russian financial statements consists of statement of financial position (hereinafter refer to as SFP), statement of financial results (hereinafter refer to as SFR), appendixes to them and explanation notes. Explanation notes to the SFP and SFR disclose information in the form of separate statements forms (cash flow statement, statement of changes in equity, etc.). Hence cash flow statement (hereinafter refer to as CFS) has a status of explanatory notes to the main forms of statements (SFP and SFR). Based on RAS 23/2011 Cash flow statement presents aggregation of data on cash assets and high liquid assets that could be converted into foregone amount of cash and that are not subject to risk of changes value fluctuations.
From the users perspective advances of CFS is impossible to overestimate. This statement is the nearest to the achievement of modern financial statement goal that is assessment of company's liquidity. Some experts assert that profitable company has always high liquidity and if there is systematically a positive result in SFR this company is always liquid.
However it is necessary to distinguish between profitability and liquidity. Under the liquidity we will understand the ability to cover its liabilities by its own resources. As opposed to SFP that contains information on cash resources of the entity as of reporting date, and to SPL that contains final financial result during the reporting period, CFS allows to assess availability of the company to generate cash flows and discover activity that results to cash in-flow generation.
Leading Russian economists mention importance of cash flow statement within the financial statements of any commercial entity. Generation of information about availability of company to appeal and distribute cash assets is the main function of CFS [3, 74]. And exactly preparation of CFS is aimed to increase usefulness and information value of data disclosed in financial statements. All specialists stress the importance of this type of report increases in the terms of convergence of RAS and IFRS. It is understandable also at state level - RAS 23/2011 Cash flow statement was issued in 2011.
However CFS capabilities are not fully utilized. As of now main aim of CFS is presentation of information that allows assess indexes of cash flow generation and its volume and also understand:
- changes in net assets of the company;
organization financial structure, its liquidity and
solvency;
ability to regulate cash flows concentration in terms of constantly changing environment and internal factors [4, 716].
At the same time to see the full picture users should be able to compare and match SFP, SFR and CFS lines of cash assets, cash inflows/outflows during the reporting period. From T. G. Vakulenko and L. F. Fomina point of view analysis, planning and control of cash flows in parallel with results of entity's activity are very important for liquidity, solvency and financial stability of the organization [5, 131]. This information could be received by financial statements users from CFS only.
Russian economy was also affected by international financial crisis that began in 2008. Many companies were insolvent due to absence of planning, accounting and analysis of cash assets. As of now it is impossible to predict when world and Russian economy come out from recession.
Traditionally profit is used as main indicator within the metrics system of efficiency assessment of entity's activity and its financial position. At the same time it is often that an entity that is profitable in terms of accounting is not able to repay its liabilities due to absence of cash when it is necessary and in the whole amount on the other hand unprofitable entity is able to stay solvent. Profit or loss for definite period and cash assets received are not the same things. Moreover there are no direct interdependency between them.
CFS is one of the main source of information for cash flow analysis. At the same time SFP and SFR has significant information load for cash flow analysis. But due to necessity to account for special features of accounting principles and preparation of reporting using of these reports for the purpose of analysis leads to some distortion of real picture of cash flows. For the purposes of this article we will consider concept of cash/cash assets and cash flows. The concept of cash assets is static. It represents amount of cash assets as of definite date (e. g. reporting date). Cash assets are represented within the statement of financial position. The concept of cash flows represents dynamic of cash movements, directions and moreover circulation of cash assets. Cash movements are represented within the CFS exactly. Consider thoroughly the concept of cash movements.
It is possible to divide economists opinions into two main approaches. From R. Kokh, J. Rishar, B. Kolas, E. L. Krylov and others perspective cash flow is an static indicator as of (reporting) date. Another group of economists (V. V. Bocharov, I. A. Blank, R. Merton, J. Perar, E. J. Dolan, J. K. Van Khorhn and others) considers cash flows as dynamic indicator, i. e. cash inflow and outflow for the reporting period.
More than once some experts endeavored to classify cash flows. There are following classifications [6, 75]:
1. Based on measure of service of economic process (for entity in overall, for SBUs, for separate commercial transactions);
2. Based on types of economic activity (based on classification for CFS purposes - operational activity, investment activity, financial activity);
3. Based on direction (positive and negative);
4. Based on its volume (gross and net);
5. Based on adequacy of volume (excess or deficit CF).
Even if the net cash flow is positive it may be classified as
deficit if this amount does not provide planning necessity in all expenditures of economic activity of the entity. Negative value of net cash flow is automatically considered as deficit flow.
Thereby overall entity cash flow is all cash inflows and outflows relating to operational, investment and financial activity. To provide effective dedicated cash flow management it is necessary to classify it by types of activity.
In accordance with RAS 23/2011 it is assumed that current/ operational activity is activity relating to entity's general income-generating activity , investment activity is activity relating to acquisition, producing and retirement of fixed assets, financial activity is activity relating to debt or share financing that lead to changes and structure of equity and debt.
Within international practice CFS was begun to apply beginning from the 1970s. It was proposed by P. Maison at 1973 and henceforth in more detailed proof by V. Thoms. As of now CFS is regulated by IAS 7.
Within Russian practice this statement was began to apply not long ago, beginning from 1996 in accordance with FZ On accounting N129-FZ dd 21/11/1996.
There are 2 methods to draw CFS:
- direct, whereby all inflows are summed up and deducted by all outflows paid by the entity splitted by types of activities;
- indirect, whereby all necessary indicators of cash flows are received based on adjusting profit or loss. Retained earnings are adjusted for balance sheet items that not assume cash movements.
International practice (IAS 7) allow to use both direct and indirect method in operational activity. RAS prescribe to use only direct method. Information about cash movements arising from investment and financial activity is possible to draw using only direct method both for IAS and RAS.
Cash flow financial statements in Russia are at the stage of development and formal approach is mostly dominated that decrease its role in quality information provision of cash assets assessment.
Problems of concept of cash flows, its classification and management are considered within a lot of researches of economists. At the same time questions of CFS informativity from my point of view not enough explored. Although Russian economists investigate this question in different directions.
However, the Russian economists deal with this issue in their studies, focusing on various aspects:
1. In her PHD thesis, E.V.Ivanova has proposed a system of components of financial flows for each economic process (financial flows of the production process; financial flows of the capital accumulation process (fixes assets, intangible assets etc); financial flows of the financing process (bonds and other debt securities issued)) [10, 6];
2. In his thesis, A.A.Sugunyaev has proposed a quarterly reporting form which represents a note on cash flows on current operations and has developed a scheme of monitoring over the results of the informational and analytical support of the cash flow analysis [11, 8];
3. In his thesis, A.V.Kuchinsky has elaborated and supplemented the classification of cash flows with a number of criteria of classification (activity type, line of activity etc), proposed ways of improvement of the existing charts of
accounts in the field of accounting for cash flows [12, 5];
4. T.N.Kokina proposes to reflect in the cash flow statement the flows of cash equivalents and other means of payments broken down by activity types to which they relate. For this purpose, the following lines are proposed to be added to the cash flow statement: non-cash settlements; settlements by promissory notes of the third parties. Also, a method of correction of positive and negative cash flows based on the defined annual payment cycle of the entity is developed [13, 7];
5. In his thesis, A.Y.Filosofov reviews the impact of analysis of the cash flows on the effective management decisionmaking, and also the aspects of cash flow management, namely several methods of analysis and budgeting of the cash flows. Besides, his thesis deals with the issues of the quality of the sources of information which are necessary for realization of these methods and of availability of these sources of information to the external user [14, 9];
6. In her thesis, N.V.Nedbaylova presents forms of cash flow statement which she produced by applying both the direct and the indirect method. The thesis illustrates the necessity of accounting for the distorting inflation effects over the cash flow indicators of the entity [15,9-10];
7. E.N.Sviridova has prepared a standardization of the general and the detailed information of the sources of receipt and directions of expense of the cash flows as an information base for the analysis of the cash flows of the entity [16, 7-8];
8. In her work, T.A.Miroshnichenko proposes a draft of accounting standard «Cash flow statement», close to IAS 7, which sets a template of the cash flow statement [17, 5-7];
9. In his thesis named "Analysis and valuation of the financial statements of the consulting companies" , N.I.Vinyukov argues that during preparation of financial statements and accounting system design a company should be viewed from a prospective of the stakeholders, which implies provision of cash flow statements with a breakdown by related parties [18, 5];
10. I.V.Stashkova summarizes the main procedures of production of the cash flow statement, defines the differences between the approaches used in the Russian and international practice, analyses the contents of the reports produced by using direct and indirect methods, confirms the identity of final results and comparability of the indicators included. Her thesis illustrates the drawbacks in the contents of the Russian accounting, namely: limited information value due to accounting solely on the cash basis, lack of information of net settlements and other barter operations, problems of classification of operations by types of activities. Recommendations on ways of improvement have been provided [19, 8].
Despite that it is worth noting that real results are not implemented into practice of activity of Russian companies as they do not receive approval in normative documents controlling accounting in Russia.
At the same time there are no universal approaches how to increase information value and utility of CFS for users of stand alone and consolidated financial statements as of now at the legislative level. That is why further development of these methods is very actual. Moreover it assumes special importance in terms of high rivalry on capital and investment market, necessity of its involvement.
Cash assets balance sheet items do not include information on structure of its receipt and retirement that lead to problematic assessment of factual financial position. CFS is a disclosure to balance sheet item 1250 Cash and cash equivalents. In accordance with para 4 of RAS 23/11 the entity discloses structure of cash and cash equivalents and presents matching of amounts from CFS and SFP. In accordance with RAS 23/2011 CFS include not only data on cash but also information on cash equivalents (high liquid financial assets that could be converted into foregone amount and are not subject to risk of changes value fluctuations). The same requirement is for SFP line Cash and cash equivalents.
Thus line 1250 of SFP Cash and cash equivalents as of reporting date and as of December 31 of previous year should be equal to CFS lines Cash and cash equivalents end of the year (4500) and Cash and cash equivalents beginning of the year (4450) respectively. Thereby CFS may be considered as effective resource of verification of soundness of cash in SFP, disclosure of information on cash contained in SFP in case of equality of data or explanation is given otherwise. At the same time in accordance with order 66N p. 3 entities should define specification of reporting lines included within the financial statements (specification should be approved in accounting policy) by themselves (including CFS).
However exploring financial statements of different Russian companies allows to conclude that account balance for cash account balances from SFP do not match with account balance of CF as of the end of the period from CFS.
These discrepancies and absence of explanations from the entities make comparison of financial statements of different companies more difficult, decreasing financial statements information value and confidence from users side.
It is no longer a common practice that the companies only reconcile opening and closing balances of cash and cash equivalents in CFS versus these balances in the statement of financial position to check correctness of CFS, as it was before. However, the equality of the same items in different reports is still not always kept.
Therefore we can conclude that CFS is an integral and essential part of financial statements of the entity. It is impossible to assess liquidity and solvency of the company, that is exactly why it is necessary to consider and examine SFP and SPL in correlation with CFS. Unless requirements for consistency between both three forms financial statements are not fulfilled informativity and transparency decrease. This fact leads to increase of difficulty in correct and effective decision making by interested users. Until the requirements for comparability and consistency in cash assets line by line are not carried out CFS information capacities will not be fully utilized.
Nowadays in terms of high rivalry on the capital and investment market, necessity of its attraction and raising clearness and transparency of financial statements is one of the key factors for survival, success and growth of any entity.
References:
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2. Order of Ministry of finance of RF @02/02/2011 #11N
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ОЦЕНКА ЭФФЕКТИВНОСТИ ИСПОЛЬЗОВАНИЯ БЮДЖЕТНЫХ СРЕДСТВ:
ПРОБЛЕМЫ И ПУТИ ИХ РЕШЕНИЯ
Анастасия Татаринцева,
Кубанский государственный аграрный университет Магистрант, факультет Финансы и кредит
Бочарова Ольга, Кубанский государственный аграрный университет Кандидат Экономических Наук, факультет Финансы и кредит ASSESSMENT OF EFFICIENCY OF USE OF BUDGETARY FUNDS: PROBLEMS AND WAYS OF THEIR DECISION Anastasiya Tatarinceva, Kuban state agrarian University, Master student, faculty Finance and credit Bocharova Olga, Kuban state agrarian University, Candidate of Economic Sciences, faculty Finance and credit
АННОТАЦИЯ
Важным и неотъемлемым инструментом бюджетной политики является оценка эффективности расходования государственных средств. В данной статье рассмотрены различные определения эффективности и дана характеристика Программы повышения эффективности бюджетных расходов.
ABSTRACT
The important and integral tool of the budgetary policy is the assessment of efficiency of an expenditure of public funds. In this article various determination of efficiency is considered and the characteristic of the Program of increase of efficiency of the budgetary expenses is given.
Ключевые слова: Эффективность использования бюджетных средств, результативность, продуктивность. Key words: Efficiency of use of budgetary funds, performance, productivity.
