Global Journal of Management and Business Research, C: Finance, Volume 22 Issue 5

The profit/loss for the year is adjusted for changes in net working capital in the following circumstances (by way of example) an increase in trade receivables is subtracted from profit (loss) for the year, as this increase represents the lower amount collected from customers with respect to revenue accrued during the year and credited to profit and loss; conversely, a decrease in receivables is added to profit (loss) for the year, as this represents the higher amount of receivables collected with respect to revenue accrued during the year and credited to profit and loss; an increase (decrease) in trade payables is added to (subtracted from) profit (loss) for the year as it represents a portion of production costs not yet paid (or a part of production costs spent in excess of accrued expenses); the increase (decrease) in inventories is subtracted from (added to) the profit (loss) for the year IAO (Italian Accounting Organism (Henceforth IAO, in Italian language OIC))hile in the calculation of profit, the costs of production are considered, which include not only purchases but also the change in inventories, while for changes in cash only purchases are relevant. By way of example, in the case of an increase in inventories of goods, this increase is subtracted from the profit (loss) for the year since, during the year, the purchases made exceeded the goods sold by an amount equal to the difference between the closing (higher) and opening (lower) inventory. By subtracting the change in stocks from the profit/loss for the year, the economic effect is neutralised so that the statement only reflects the impact on the financial position of the cash used for purchases during the year; the increase in accrued expenses is added to the profit/loss for the year as this increase represents the higher amount of costs not yet paid through cash compared to expenses charged to profit and loss. The cash flow from operating activities can also be determined using the direct method by presenting the gross positive, and negative cash flows from transactions included in operating activities. *Investing activities Cash flows from investing activities include purchases and sales of tangible, intangible and financial fixed assets and financial assets not held as fixed assets. By way of example, cash flows generated or absorbed by investing activities derive from purchases or sales of buildings, plants, equipment or other tangible fixed assets (including tangible fixed assets of internal construction); purchases or sales of intangible fixed assets, such as patents, trademarks, concessions; these payments also include those relating to capitalised deferred charges; acquisitions or disposals of equity investments in subsidiaries and associates; acquisitions or disposals of other equity investments; acquisitions or disposals of other securities, including government securities and bonds; disbursements of advances and loans made to third parties and collections for their repayment. Cash flows arising from the purchase of fixed assets are distinctly presented in investing activities, for the cash outflow incurred in the year equal to the total purchase price adjusted by the change in payables to suppliers of fixed assets; this is to show the financial resources absorbed by the purchase transaction in a unified manner. Cash flows deriving from the sale of fixed assets are separately presented in investing activities, for the revenue received during the year equal to the realisation price (i.e. the net book value increased by the capital gain or reduced by the capital loss) adjusted by the change in receivables due from customers for fixed assets; this is to show the source of financial resources generated by the sale transaction as a whole. 36. Given that the gain or loss on the net book value of the fixed asset is recognised in profit and loss, the company adjusts the profit/loss for the year in operating activities by the value of the gain/loss. 19 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? The company presents the primary cash receipts or payments arising from investing activities separately for the different classes of fixed assets (intangible, tangible and financial), showing financial assets not held as fixed assets separately. Financing activities *Financing activities The cash flows of financing activities include the flows that result from obtaining or returning cash in the form of risk capital or debt capital. By way of example, the cash flows generated or absorbed by financing activities are: cash receipts from the issue of shares or units representing risk capital; payment of dividends; payments for the repayment of risk capital, including in the form of the purchase of treasury shares; receipts or payments arising from the issue or refund of bonds, fixed-income securities, taking out or repayment of mortgages and other short- or long- term loans; increase or decrease in other debts, including short- or medium-term debts, of a financial nature. 40. The company presents the main categories of cash receipts or payments from financing activities separately, distinguishing cash flows from risk capital and debt capital. a) Particular Cases of Cash Flows Interest and dividends Interest paid and received is presented separately under cash flows from operating activities, except in particular cases where it relates directly to investments (investing activities) or loans (financing activities). Dividends received and paid are presented separately in operating and financing activities.