PROBLEM SOLVING: Cash flows of Australian company (Westpac Group)
From the cash flow statements of Westpac annual report (2013 and 2014), they were highly followed the AASB 107. This report analysis the Westpac annual reports by the structure, which AASB 107 provided for cash flow reporting (paragraph 18-34).
Reporting cash flow from operating activities (direct vs indirect)
According to AASB 107 paragraph 18, an entity may report their cash flow from operating activities using indirect or direct method. In particular, AASB 107 recommends the use of direct method. It is find that Westpac group also uses the direct method to illustrate cash flow from operating activities which is disclosed its major classes of gross cash receipts and gross cash payments. (see Appendix cash flow statement of Westpac).
Direct method and indirect method have their own feature respectively. The direct method reveals operating cash receipts and payments and also ‘provides information which may be useful in estimating future cash flows and which is not available under the indirect method. ‘(19 AASB 107)
Even though AASB encourage entities use direct method to prepare cash flow statement, Epstein and Pave (1992) stated that the indirect method usually needs sophisticated understanding than the direct method. By using the indirect method, firms begin with net income and make adjustments to arrive at cash flows from operations.
Reporting cash flows from investing and financing activities
Paragraph 21 of AASB 107 states that an entity should separate its major class of gross cash receipts and gross cash payments from investing and financing activities. In Westpac’s cash flow statements, it is a clear view that they report their investing and f...
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...notes, it also disclosed the detailed information of cash and cash equivalents in subsidiaries.
Which form of information is more useful for evaluating the financial performance and position of a reporting entity: cash-flow data or information about accounting profits? Explain your answers.
According to Loftus et al (2015), they believe that the cash flow data help financial statement users to not only predict future cash flows but also evaluate an entity’s financial structures. Moreover, the managers of a company can use cash flow to compare the operating performance of different entities because the cash flow are not affected by different accounting choice and judgment. As a result, by using cash flow statement, the management department could get a better understanding of company’s financial performance than other financial information about accounting profits.
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