Indirect Cash Flow Statement Preparation

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Warren Buffett

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My question is around preparing cashflow statements using the indirect method…
Will the balance sheet movements for working capital match 1 for 1 on the cashflow statement?
I’m currently looking at a client’s preparation of their cashflow statement (I work in audit) and they are stripping out non-cash items from their creditor line…
I’m really confused now … I thought the cashflow statement should match the balancesheet in the working capital adjustment section.. So movement on BS = cashflow impact on CFS…
 
Short term debt will be in the financing section, also there will probably be a few items where they separate out multiple adjustments, like seperating out accounts receivable and bad debt expense on the cash flow from operations section.
I wasn’t exactly sure what you were asking, does this help at all?
 
Thanks both.
I figured out what they’re doing, they are taking the creditor line and stripping out the opening and closing tax accrual because they are starting from profit before tax rather than net income…
 
Warren Buffett wrote:Thanks both.
Click to expand...
My pleasure.
Warren Buffett wrote:I figured out what they’re doing, they are taking the creditor line and stripping out the opening and closing tax accrual because they are starting from profit before tax rather than net income…
Click to expand...
That’s wonky.
 
Warren Buffett wrote:
Will the balance sheet movements for working capital match 1 for 1 on the cashflow statement?
Click to expand...
In theory they should but in practice they almost never do. Just to pick a company at random, Alcoa’s balance sheet movement for H1 2015 implies a $143m delta in trade accounts payable whereas the CF shows $130m. The differences are due to the minor adjustments in accruals as you yourself noticed on your example. In my 10+ years of analyzing different companies it is very rare to see balance sheet changes ideally match up to the cash flow statement. Sometimes there is a reconciliation between the two, however.
http://www.sec.gov/Archives/edgar/data/4281/000119312515259994/d943108d1...
 
picton wrote:
Warren Buffett wrote:
Will the balance sheet movements for working capital match 1 for 1 on the cashflow statement?
Click to expand...
In theory they should but in practice they almost never do. Just to pick a company at random, Alcoa’s balance sheet movement for H1 2015 implies a $143m delta in trade accounts payable whereas the CF shows $130m. The differences are due to the minor adjustments in accruals as you yourself noticed on your example. In my 10+ years of analyzing different companies it is very rare to see balance sheet changes ideally match up to the cash flow statement. Sometimes there is a reconciliation between the two, however.
http://www.sec.gov/Archives/edgar/data/4281/000119312515259994/d943108d1...
Click to expand...
Same experience over here.
 
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