Global Journal of Management and Business Research, C: Finance, Volume 22 Issue 5
At this point, one must ask whether the values thus determined to identify real income or expenditure flows, i.e. actual cash flows. In reality, even from a very superficial analysis, one can see that the simple rules identified above do not allow the identification of correct cash flows. As an example, it is sufficient to consider the case of an increase in assets. Suppose the land increases from 100 to 160. According to the rule identified above, it would have to be said that a cash flow requirement has occurred for this increase. Considering the business reality, however, one might find this is false. Take, for example, the case where the rise in land depends on a shareholder contribution or the point where the increase in the value of the long- term asset results from a mere revaluation. Or, again, the rise in land is connected with a purchase in which the debt has not yet been settled. In all these cases, the increase in land value is not matched by any actual cash flow. For this reason, we can state that the needs and sources illustrated above only and exclusively identify mere apparent flows, that is, values that only apparently create a need or a reference but which, on analysis of the facts, may conceal transactions that do not affect cash and which, consequently, do not create actual flows. Based on these considerations, we can identify the following automatic rule: the accounting change in values only provides evidence of apparent flows, which, however, do not always turn into actual cash flows. Therefore, the analyst's task is to move from determining simple apparent flows to identifying more complex actual cash flows. The calculation of actual cash flows requires the performance of two steps: Eliminate all apparent needs and sources that have no impact on cash. It is evident that if an obvious flow identifies a mere accounting change that did not have a corresponding cash flow, it is necessary to eliminate the amount as having no monetary significance Separation of so-called 'sum flows': two actual cash flows of opposite signs often correspond to an apparent flow. Consider, for example, the case where land increases in value. Let us also assume that the increase is connected with a movement characterised by a cash impact. The increase in the value of the land may correspond to a purchase equal to the difference in the initial final deal or to an annuity occurring at the same time as a purchase. If this second hypothesis appears, the natural flow is not one but twofold. Thus, an increase in land value would have to be matched by an authentic source equal to the value received due to the sale and a real need equivalent to the purchase of new land. The separation of the sum transactions is highly relevant because only by identifying the real market and the actual source in separate motion is it possible to identify the actual cash flows occurring in the period under consideration. Based on the above considerations, it can be understood how the determination of cash flows goes through the preparation of a worksheet in which all asset, liaoility and equity items are to be recorded. The analysis of the cash impact of the various accounting differences corresponding to the individual financial reporting items will determine the actual cash flows. However, a problem arises at this point. Within equity, there is, in fact, an item which, by definition, represents the most concise sum value of financial reporting. We intend to refer here to operating income. Profit or loss is derived from the sum of all costs and income occurring over time. It is evident that should the worksheet drawn up to determine the flows show the summary of payment and money outflows for the year, it would not be possible to identify the flows constituting the sum of the same profit/loss for the year. For this reason, in the worksheet, to determine the analytical cash flows, it is necessary to report the amounts of all payments and outflows instead of the value of the income and costs for the period considered by the flow analysis. It is evident that since the cash flow analysis considers a specific financial year, the substitution between income and the list of costs and revenues must relate exclusively to the financial year under consideration and research. Needless to point out, on the other hand, it should not break the previous year's result down as it represents, in the following year, a unitary value that identifies a real need for cash only for the amount equal to any dividends distributed a natural source if the shareholders cover the loss with liquid funds. The technique for determining flows is based on the two simple rules of conduct identified above. The great difficulty in calculating flows arises from eliminating all movements that did not create flow. The separation of the sum transactions represents accounting operations that often require highly complex reasoning. After finishing the worksheet, it is necessary to move on to interpreting the data obtained. Understanding the dynamic financial situation requires that the values of flows identified using worksheets or other accounting tools be correlated to highlight the presence of balance or imbalance between items that must interpret simultaneously. To achieve this, a summary document must be drawn up. Since, often, those analysing the data do not have specific technical skills in accounting, it is necessary to draw up a document that simultaneously achieves two objectives 1. Summary of the results obtained within the worksheet; 2. Illustration of the results through a document that can be understood even by a non-accounting expert. 13 Global Journal of Management and Business Research Volume XXII Issue V Version I Year 2022 ( ) C © 2022 Global Journals Does the Formal Structure of the Cash Flow Statement have an Impact on the Understanding of the Data Contained in the Report Explaining the Company's Financial Dynamics?
RkJQdWJsaXNoZXIy NTg4NDg=