When is interest considered a financing activity?

6. Cash flow statement

The cash flow statement (Art. 961b OR, cash flow statement, also cash flow statement, cash flow statement) contains information on the inflow and outflow of liquid funds in the reporting period. Your goal is to create transparency about a company's cash flow. The changes in the liquidity potential over time are to be quantified and the causes of the changes presented.

This means that only changes in cash (cash items) are taken into account in the cash flow statement. So-called non cash items (e.g. contributions in kind, gifts, finance leasing) have no effect on the cash flow statement. Reference is made to these transactions in the appendix.

The terms “cash flow statement”, “cash flow statement”, “cash flow statement” and “cash flow statement” have the same meaning. A correct term and also a better translation of the English term “cash flow statement” is “cash flow statement” or “cash flow statement”, whereby the German / English term “cash flow statement” is the most common in Switzerland.

According to the new law, a cash flow statement is required for companies that are legally obliged to carry out an ordinary audit (Art. 961, No. 2 OR). According to the accounting standards Swiss GAAP FER and IFRS, the cash flow statement is mandatory (Swiss GAAP FER 21 item 13; Swiss GAAP FER 4; IAS 1.8d; IAS 7).

In all companies, however, the cash flow statement is almost always a prerequisite for the board of directors to be able to exercise financial control as required (Art. 716a para. 1 item 3 OR) and is therefore indirectly required, even if not as part of the published annual financial statements.

The cash flow statement is broken down into the company's operating, investing and financing activities.

See Art. 961 No. 2 OR and 961b OR; Swiss GAAP FER 4 and 21 section 13; IAS 1.8d; IAS 7.

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a) Example cash flow calculation:

b) Operating cash flow / cash flow from operations

The operative cash flow shows cash flows in direct connection with the actual operational activity, i.e. the generation or consumption of liquid funds in the context of procurement, production, administration and sales. It comprises the portion of the operating result affecting liquidity as well as all changes in net working capital. The portion of the operating result affecting liquidity can be determined directly or indirectly.

In the direct method the income affecting liquidity is compared to expenses affecting liquidity. If the income is higher, the operating cash flow is positive, if the expenditure is higher, the operating cash flow is negative.

If the income or income is taken from the income statement, the following must be observed: Because invoices that have been invoiced but not yet paid by the customer are already recognized in income, the increase in debtors must be deducted from the income or their decrease must be added. It is only after this process that the actual income that affects liquidity can be determined. The same applies to the effort: For its calculation, the changes in the inventory and in the accounts payable must be taken into account accordingly.

In the case of the indirect method, the reported annual profit is transferred to the operating result and corrected by the non-cash performance factors such as depreciation, creation of provisions, etc.

The operating cash flow is the starting point for determining the investment, financial and free cash flow.

The financial result (especially interest expense and income) is often allocated to financing or investing activities, insofar as it has an effect on liquidity.

c) Cash flow from investing activities

The cash flow from investing activities shows cash flows from the purchase / sale of machines, movables and real estate. Investing activities include cash purchases and sales of tangible and financial assets (including securities), intangible assets as well as interest and dividends received in cash. It is therefore primarily a question of changes affecting liquidity in the context of the management of fixed assets.

d) Cash flow from financing activities

The cash flow from financing activities shows the cash flows from taking out long-term debt or increasing equity. Financing activities include raising and repaying equity or borrowed funds, paying interest and paying dividends.

e) Free cash flow

The free cash flow is the difference between the cash flow from operating activities and the cash flow from investing activities. It represents the amount that remains after deducting investments from the operating cash flow in order to satisfy financing creditors and shareholders, i.e. H. Paying back debts and paying dividends.

f) Necessity to break down the cash flow statement into the three areas of business activity, investment activity and financing activity

The presentation of the cash flow statement in the three areas of business activity, investment activity and financing activity is required under the new law and is absolutely essential in order to ensure the informative value of the cash flow statement. Without this three-way division, the cash flow calculation is not meaningful, which can easily be seen from the following three examples, all of which show a total cash flow of -500.

Example A shows a healthy company, with a positive operating (it generates a positive cash flow from operating activities) and negative investing cash flow (it invests 500 net) of 500 and -500, respectively, and a negative financial cash flow of 500, which proves that the company is able to pay for its financing, be it in the form of dividends or in the form of loan repayment. The total cash flow is –500.

Example B shows a company in the start-up phase that has a negative cash flow of 500 operationally, an investment cash flow of -500 (the company invests 500) and a financial cash flow of 500 (the company raises or receives debt Payments due to a capital increase). Here, too, the total cash flow is –500.

Finally, in example C, there is a negative operative (–500) and a positive investing cash flow (500). The financial cash flow is also –500. (Total cash flow here too –500; the company disinvestments and forwards the liquidity gained to the shareholders or pays back financial liabilities. Although all three companies have the same total cash flow (–500), the statement is the cash -Flow calculation in each of the three cases a completely different one.

g) Function of the cash flow statement in the financial reporting system

The importance and necessity of the cash flow statement become clear when it is embedded in the reporting system in the context of the annual financial statements. The following numerical example illustrates this embedding. The example is a little simplified for didactic reasons. It moves between the opening balance and the closing balance. The cash flow statement and the income statement allow the reader of the two balance sheets to see the reasons why the figures in the closing balance sheet have changed compared to the opening balance sheet. The example shows that without a cash flow calculation, the information to be extracted from the reporting remains imprecise and incomplete. The items with the same exponent or grade refer to the same economic situation (example: in the opening balance sheet the accounts receivable (exponent “2”) were capitalized with 5. At the end of the year they are 10. In the cash flow statement the difference between the two amounts is also given with the exponent "2").

The cash and cash equivalents item changed from 50 to 220 (N 13). The causes of this change can only be found in the cash flow statement, not the income statement. The balance of the change in liquid funds of 170 can be taken from the cash flow calculation (N 13) as well as the cash flows of the individual funds, i.e. 35 from operating activities, 80 from investing activities and 55 from financial activities.

The securities item has changed from 30 to 25 (N 15). The cause of this change can be found in the income statement. A value adjustment of 5 has been made on the securities (N 15). This cannot be inferred from the cash flow statement, as value adjustments are not included in the cash flow statement.

The accounts receivable item has changed from 5 to 10 (N 2). The cause of this change can only be found in the cash flow statement, not the income statement. Changing the accounts receivable is part of the operational activity. Because the accounts receivable have increased by 5 (N 2), the cash flow from operating activities decreases by 5, since the change from 5 shows an increase in accounts receivable, but the money has not yet flowed.

The item stock has not changed (N 16). This is not evident in either the cash flow or income statement.

The machine item has changed from 10 to 15 (N 9). The cause of this change can only be found in the cash flow statement, not the income statement. New machines worth 5 were purchased (N 9). This can be seen in the cash flow statement in investing activities.

The properties are valued at 100 in the opening balance and 25 in the closing balance (N 7). The reason for this change cannot be found in the income statement, but it can be found in the cash flow statement. It results as part of the investing cash flow from proceeds of 75 in connection with the sale of the property (N 7).

The accounts payable item has changed from 100 to 90 (N 12). The cause of this change can only be found in the cash flow statement, not the income statement. A loan of 10 was repaid (N 12). This can be taken from the cash flow statement in the operational activity.

The mortgage item has changed from 5 to 65 (N 10). The cause of this change can only be found in the cash flow statement, not the income statement. A new mortgage of 60 has been taken out (N 10). This can be seen in the cash flow statement in the financial activity.

The item provisions has not changed (N 17).

The profit carried forward item has changed from 5 to 55 (N 11 and N 14). The causes of these changes can be found partly in the cash flow statement and partly in the income statement. The profit carried forward from the opening balance sheet was distributed in the course of the financial year, whereby the profit carried forward fell to 0 (N 11). This can be taken from the cash flow statement (cash flow from financial activities). The income statement then shows that a profit of 55 was generated during the financial year and this is transferred to the profit carried forward in the closing balance sheet, which now amounts to 55 (N 14). The changes in the profit carried forward can therefore only be correctly understood if both the cash flow and the income statement are considered.

The goods yield of 300 figures both in the income statement and in the cash flow statement (N 1). There it is part of the cash flow from operating activities.

The cost of goods (N 3), wage expenses (N 4), tax expenses (N 5) and interest expenses (N 6) are also shown in the income statement and the cash flow statement in operational activity.

The income from securities is shown in the income statement as well as in the cash flow statement in the area of ​​investing activities (N 8).