Different Cash flow Methods for Reporting in some selected companies

Executive summary

Cash Flow Statement and Disclosure are potentially significant means for management to communicate company’s performance and governance to outside investors. Demand for Cash Flow Statement and disclosure arise from information asymmetry and agency problem between owners and management.

The 1^st chapter of this report is Introduction. It remain Origin of the project and thesis work, Background of the Report, Objective of the report, General objective, Project objective, Scopes, Methodologies, Data sources, Limitations and Research strategy.

The 2^nd chapters flash on IAS and BAS, it include History of IAS, Bangladesh Accounting Standard (BAS) Scopes, Current Status of Bangladesh Accounting Standard Data sources, IAS vs. BAS Data collection and IAS 1 Presentation of Financial Statement.

The 3^rd chapter of this report is Overview of Cash Flow Statement. It includes what is cash flow statement, Objective of cash flow statement, Structure of the Cash Flow Statement, Presentation of a Cash Flow Statement and History of IAS-7.

In 4^th chapter contains the analysis and findings about some selected companies in Bangladesh which includes Pharmaceuticals industry, Bank Industry, Leasing industry, Textiles industry, Food & beverage industry.

 And, final chapter of this report contains some finding and recommendations are given to touch the landmark of quality cash flow statement and some similarities & dissimilarities and note disclosure practices.

Introduction

A set of International accounting and reporting standards, that will help to harmonize company’s financial information, improve the transparency of accounting and ensure that investors receive more accurate and consistent reports. Statements of International Accounting Standards issued by the Board of the International Accounting Standards Committee (IASC) between 1973 and 2001 are designated International Accounting Standards.

International Accounting Standards (IASs) were issued by the IASC from 1973 to 2000. The IASB replaced the IASC in 2001. Since then, the IASB has amended some IASs and has proposed to amend others, has replaced some IASs with new International Financial Reporting Standards (IFRSs), and has adopted or proposed certain new IFRSs on topics for which there was no previous IAS. Through committees, both the IASC and the IASB also have issued Interpretations of Standards.

 The Companies Act 1994, which replaced the Companies Act 1913, provides the requirements for preparation and publication of financial statements, disclosures, among other provisions. However, in most cases, the Act lacks clarity with regard to statutory requirements on disclosures in the financial statements of the incorporated companies. The formats for presentation of financial statements and requirements on disclosures prescribed in the Act need updating or removing. Moreover, some accounting requirements prescribed by the Act are incompatible with International Accounting Standards (IAS).For example, contrary to IAS, the Companies Act requires capitalization of gains and losses arising from changes in foreign exchange rates under all circumstances. Inconsistencies between IAS and the Companies Act need to be eliminated. The committee, which has been formed by the Government for updating the Companies Act, should take it into consideration.

 Listed companies are required to comply with SEC accounting and disclosure requirements, despite inconsistencies with the requirements of the Companies Act 1994. The SEC, in protecting investor interests, issues various rules that apply to listed companies, including accounting and auditing requirements that, according to SEC Ordinance 1969 (Provision 2CC), supersede requirements set by the Companies Act. The October 1997 SEC rule required listed companies to follow IAS and adopted by the Institute of Chartered Accountants of Bangladesh (ICAB).Since the October 1997 SEC rule did not mandate full compliance with all IAS.

Accounting requirements set by the Bank Companies Act 1991 are in addition to the requirements set by Companies Act 1994. The Bank Companies Act prescribes the format of balance sheet and income statement, including disclosure requirements that each bank must follow for regulatory reporting to the Banking Inspection Department of the Bangladesh Bank. The same accounting and financial reporting rules are required to be followed by banks in preparing financial statements for external users. The Bank Companies Act empowered the Bangladesh Bank to approve appointment of bank auditors. In practice, the Bangladesh Bank maintains a list of approved auditors. The list contains both large and small audit firms.

Origin  of  the  Project  & Thesis  Work

This report has been made for the partial fulfillment of the “A Study of different cash flow Methods for reporting in some selected companies in Bangladesh”, with the specified time duration. I had to study on certain topics of Cash Flow Statement and Presentation of Financial Statement to prepare the report.

The report was originated to make a study on the preparation and presentation of financial statements of different Company in Bangladesh with special reference to International Accounting Standards (IAS) and as a part of the fulfillment of thesis program required for the completion of the MBA program of major in Accounting of the Faculty of Business Studies of Stamford University Bangladesh.

As a part of my study and completion of the MBA degree, the thesis and project work was assigned by “Md. Shajul Islam, Senior Lecturer of Stamford University, Bangladesh. I am very much thankful to him for assigning me such types of project work.

Background  of  the Report

International Accounting Standards – 7 are the authoritative statements of how particular types of transactions and other events should be reflected in cash flow statements prepared by the public limited companies listed in the Stock Exchanges of our country. According to Securities and Exchange Rules 1987, every listed company is required to prepare its cash flow statements in conformity with International Accounting Standards – 7. Some companies follow the requirements of IAS – 7 in presenting information with few exceptions.

Objective of the Report

Main objective

• The main objectives of this report are to analyze the Cash Flow Statement   of various companies and help their management in future policy formulation that is likely to improve the quality of their cash flow statement.
• To gain experience and view the application of theoretical knowledge in the real life.

Specific objective

To gain an understanding of relevant laws and rules followed in preparing financial statements.

• To identify the nature of Cash Flow Statement;
• To give a brief overview of BAS-7

• To analyze the Cash Flow to explain IAS –7 adopted in preparing Cash Flow Statement.
• To review the voluntary disclosure issues and reporting procedure of every financial information of the company.
• To suggest some policy measures for the Cash Flow Statement.

Scope of the Study

Financial reporting of a public limited company is a broad area. Within the limited time period of thesis, it is virtually impossible to cover all aspects of financial reporting. So, the scope of my report is limited only to the compliance of those International Accounting Standards (IAS’s) as followed by various companies in preparing its financial statements and some other areas of voluntary information disclosure. In preparing the report, I review and analyze the information published in the annual report for the year 2009. Any change in accounting policies in respect of providing information after this period is beyond the scope of my report.

Methodology  of  the  Study

This report has been prepared on the basis of experience gathered through learning various companies’ annual report. For preparing this report, I have also get information from website of various companies. I have presented my experience and finding by using different tables, which are presented in the analysis part.

The details of the work plan are furnished below:

Data Collection Method

Relevant data for this report has been collected primarily by direct investigations of different companies’ annual report and website.

Data Sources

The information and data for this report have been collected from primary and secondary sources. The secondary sources of information are annual reports, websites and different manuals.

Data Processing

Data collected from secondary sources have been processed manually and qualitative approach in general and quantitative approach in some cases has been used throughout the study.

Data Analysis & Interpretation:

Qualitative approach has been adopted for data analysis and interpretation taking the processed data as the base. So the report relies primarily on an analytical judgment and critical reasoning.

Sample Size

Sample size is Twenty five (25s) Annual Reports of different Company.

 Limitations  of  the  Study

In all respect some limitation and weakness remain within which I failed to escape by any means. These are follows:

The scope of the study is only limited to annual report and website. The report covers various companies’ Cash Flow Statement that is whether they followed applicable laws and regulations to prepare their financial reporting. Following are the main limitations of the report-

• It was very difficult to collect the information from various companies.

• Company policy was not disclosing some data and information for obvious reasons.
• Because of the limitation of information some assumption was made.

• The time was insufficient to know all activities of the different companies

• The annual report was the main secondary Information source of information that was not enough to complete the report and private the reader a clear idea about the Cash Flow Statement.

• Confidentiality of data was another important barrier that was faced during the conduct of this study. Every organization has their own secrecy that is not revealed to others. While collecting data, the personnel of different Pharmaceutical companies did not disclose enough information for the sake of confidentiality of the organizations.

Research Strategy

In preparing the report some methods was followed as preparing a report about the activities of any Pharmaceuticals Company a difficult and complicated task and no single methods is appropriate for preparing the report. Effective research involves six basic steps, shown in the following-

• Define the problem
• Research objectives
• Develop research plan
• Data collection
• Data analysis
• Finding & recommendation

 History  of  IAS

Historically, there have been four accounting standards models in the industrialized countries: The United Kingdom, Continental Europe, and the United States and Latin American models. The International Accounting Standards Committee (IASC) has taken the lead in the standardization of these models. The IASC is the result of efforts begun in 1973 by the United States, Canada and the United Kingdom toward internationalism in accounting standards. Currently there are representatives from accounting bodies in 106 countries and there have been 31 standards issued to date.

Most of these opinions correlate with American Institute of Certified Public Accountants’ (AICPA’s) Accounting Principles Board and Financial Accounting Standards Boards (FASB) statements.

Many of the standards forming part of IFRS are known by the older name of International Accounting Standards (IAS). IAS was issued between 1973 and 2001 by the board of the International Accounting Standards Committee (IASC).

In April 2001 the IASB adopted all IAS and continued their development, calling the new standards IFRS. Up to year 2008, IASB adopted 8 IFRS.

International Accounting Standards (IAS) is a set of standards stating how particular types of transactions and other events should be reflected in financial statements. The IAS are issued by the IASB, the Board of the International Accounting Standards Committee (IASC).

Many countries already endorse International Accounting Standards (IAS) as their own either without amendment or else with minor additions or deletions. Furthermore, important developments are taking place in the European Union, where the European Commission is progressing proposals that will require all listed companies in the European Union to prepare their consolidated financial statements using International Accounting Standards. Already, both inside and outside the EU, many leading companies have stated that they prepare their financial reports in accordance with International Accounting Standards.

Other countries do not permit companies to use International Accounting Standards (IAS) without reconciliation to domestic generally accepted accounting principles. Most notable among these countries are Canada, Hong Kong, Japan, and the United States.

Bangladesh  Accounting Standard (BAS)

BAS are developed by the ICAB and are based on older IASs-generally those developed by the IASC rather than the improved IASs and the IFRSs developed by the IASB. The Technical and Research Committee of the ICAB develops the standards. Adoption requires approval of the ICAB Council.

Adopted BASs are legally enforceable for listed companies under the SEC Rules. They are not mandatory or enforceable through the ICAB by-laws.

The auditor’s report and basis of presentation note refer to conformity with international accounting standards applicable in Bangladesh.

Accounting standards are authoritative statements of how particular types of transactions and other events should be reflected in financial statements. Accordingly, compliance with accounting standards will normally be necessary for the fair presentation of financial statements.

The application of BAS in the preparation, presentation, analysis, monitoring and evaluation of the financial statements and governance of corporate bodies is mandatory. This is in order to reflect the true and fair financial position of the entities with a view to safeguarding the interest of the stakeholders of all categories. We are aware that in the face of colossal corporate collapses caused by Enron, Parma at and others, the credibility and transparency of the accounting profession was called into question around the globe in recent years and there was a loss of public confidence in the profession. In order to regain the lost public confidence in the accounting profession in Bangladesh, ICAB has taken a very laudable step by adopting the IAS as BAS. Up to July 2006, the ICAB has adopted 29 IASs, IASB Framework and four Bangladesh Financial Reporting Standards (BFRS), (See Appendix).

As the official standards setting body of this country and also as a regulatory body of the accounting profession, ICAB was one of the first Institutes in this region to start adoption IAS as a process of stringent technical review and considering their applicability to our country. With the passage of time, some of the IAS adopted by ICAB have been superseded, withdrawn or revised.

The present mechanism of setting accounting standards in Bangladesh is briefly discussed here. At present, the Technical and Research Committee (TRC) of the ICAB screens and evaluates IASs or IFRSs and recommends particular IAS or IFRS to the council of the ICAB for adoption. There is some legal backing to Bangladesh Accounting Standards (BASs) and Bangladesh Financial Reporting Standards (BFRSs) in that the Securities and Exchanges Rules, 1987 requires listed companies to prepare their financial statements in accordance with BASs and BFRSs.

There are two schools of thought on the adoption of IAS or IFRS by developing countries. The one school argues that IASs are generally as applicable in developing countries as they are in developed countries. The other school opposes the wholesale adoption of IASs for developing countries.

The second school of thought, those who oppose the wholesale adoption of IAS for developing countries, they have argued that we need to consider the accounting needs of each developing country before prescribing any set of standards (Wallace, 1993, Chaderton & Taylor, 1993). In this regard, Kabir wrote “It is to be noted that IFRSs are heavily influenced by the Anglo-American traditions. These are the result of evolution over a long period of time. It may be rightly asked whether the IFRSs that the applied by companies in developed countries are suitable for companies in developing countries whose socio-economic conditions are different from those in developed countries” (Kabir, 2005, P-6). Kabir  also criticized the present wholesale adoption procedure of IASs as BASs by ICAB. He wrote “The present approach to adoption is one of lagged adoption. This means that an IFRS is adopted at a time without modification and without any provision of subsequent changed in it. As IFRSs are being changed continuously, BASs may get out of line in some instances. For example, BAS 2 permits LIFO, which is now prohibited by IAS 2. This should not be taken as an advocacy of the approach in which the body, for example the ICAB, would only specify the relevant IFRSs adopted in Bangladesh and say that these IFRSa would be applicable as they stand at the time of preparing financial statements.” But in July 2006 ICAB had withdrawn the permission of LIFO to follow blindly LAS 2.

Standard setting is a continuous process. As and when new standards are adopted by ICAB, these will be published for use by all concerned. Once adopted, the next biggest challenge is to ensure application of these standards, where applicable. ICAB has a big role to play in dissemination of these standards on a big scale and providing training, technical support and overall guidance not only to its members but also to non-members as well. In this respect, ICAB has to work in close cooperation with SEC, Stock Exchanges, Bangladesh Bank, Chambers of Commerce and Industries, NBR and other regulatory agencies.

Presentation  of  Financial  Statements

The objective of this Standard is to prescribe the basis for presentation of general purpose financial statements, to ensure comparability both with the entity’s financial statements of previous periods and with the financial statements of other entities. To achieve this objective, this Standard sets out overall requirements for the presentation of financial statements, guidelines for their structure and minimum requirements for their content.

A complete set of financial statements comprises:

1. A balance sheet;
2. An income statement;
3. A statement of changes in equity showing either:

• All changes in equity, or
• Changes in equity other than those arising from transactions with equity holders acting in their capacity as equity holders;

4. A cash flow statement; and
5. Notes, comprising a summary of significant accounting policies and other explanatory notes.

The financial statements shall be identified clearly and distinguished from other information in the same published document. Financial statements shall be presented at least annually.

Financial statements shall present fairly the financial position, financial performance and cash flows of an entity. In virtually all circumstances, a fair presentation is achieved by compliance with applicable IFRSs.

An entity whose financial statements comply with IFRSs shall make an explicit and unreserved statement of such compliance in the notes. Financial statements shall not be described as complying with IFRSs unless they comply with all the requirements of IFRSs.

When preparing financial statements, management shall make an assessment of an entity’s ability to continue as a going concern. Financial statements shall be prepared on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so. When management is aware, in making its assessment, of material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern, those uncertainties shall be disclosed. The presentation and classification of items in the financial statements shall be retained from one period to the next.

Except when a Standard or an Interpretation permits or requires otherwise, comparative information shall be disclosed in respect of the previous period for all amounts reported in the financial statements. Comparative information shall be included for narrative and descriptive information when it is relevant to an understanding of the current period’s financial statements.

Each material class of similar items shall be presented separately in the financial statements. Items of a dissimilar nature or function shall be presented separately unless they are immaterial.

Omissions or misstatements of items are material if they could, individually or collectively; influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances. The size or nature of the item, or a combination of both, could be the determining factor. If a line item is not individually material, it is aggregated with other items either on the face of those statements or in the notes. An item that is not sufficiently material to warrant separate presentation on the face of those statements may nevertheless be sufficiently material for it to be presented separately in the notes.

Assets and liabilities, and income and expenses, shall not be offset unless required or permitted by a Standard or an Interpretation. An entity shall present current and non-current assets, and current and non-current liabilities, as separate classifications on the face of its balance sheet except when a presentation based on liquidity provides information that is reliable and is more relevant.

All items of income and expense recognized in a period shall be included in profit or loss unless a Standard or an Interpretation requires otherwise. An entity shall present an analysis of expenses using a classification based on either the nature of expenses or their function within the entity, whichever provides information that is reliable and more relevant.

An entity shall disclose, in the summary of significant accounting policies or other notes, the judgments, apart from those involving estimations, that management has made in the process of applying the entity’s accounting policies and that have the most significant effect on the amounts recognized in the financial statements.

An entity shall disclose in the notes information about the key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year.

An entity shall disclose information that enables users of its financial statements to evaluate the entity’s objectives, policies and processes for managing capital.

 What  is  Cash Flow  statement?

The statement of cash flows is an essential financial statement in the accounting industry. It is one of four principal financial statements required by GAAP. The primary purpose of the statement of cash flows is to provide relevant information about the cash receipts and cash payments of a business during a period. The statement indicates why cash (including short-term investments that are equivalent to cash) changed during the period by reporting net cash provided or used by operating activities, investing activities, and financing activities. This paper will discuss the direct method and indirect method of the statement of cash flows and will also discuss the different sections for the statement of cash flows and how it assists a variety of different users.

The cash flow statement shows the sources of cash receipts and the purpose of cash payments during an accounting period. The statement is helpful to explain the changes in the balances of the cash account. The statement helps assist investors, creditors, and others in assessing the following factors:

• The ability of the company to generate positive cash flows.
• The ability of the company to meet its obligations and to pay dividends.
• The company’s need for external financing.
• The reasons for differences between reported profits and the related cash flows.
• The cash and non-cash aspects of the company’s investing and financing activities during the period.
• The causes of the change during the period in the company’s cash balance.

The statement of cash flows reports cash flows in the following categories: Operating activities which are transactions which affect net income, investing activities which are transactions that affect investments in fixed assets such as property, plant and equipment, and finally financing activities which affect the equity and debt of the business.
The user assisted most by the operating activities would most likely be accounts payable. This section of the cash flow statement includes cash payments such as inventory, payroll, taxes, interest utilities and rent. The net amount of cash provided (or used) by operating activities is the key figure on a statement of cash flows.  The user assisted most by investing activities would be investors and creditors. This section is used to evaluate managements’ abilities to manage cash now and in the future. It also assesses the company’s ability to pay dividends and to pay creditors.

Objective  of  Cash flow  Statement

The cash flow statement identifies the sources of cash inflows, the items on which cash was expended during the reporting period, and the cash balance as at the reporting date. Information about the cash flows of an entity is useful in providing users of financial statements with information for both accountability and decision making purposes. Cash flow information allows users to ascertain how a public sector entity raised the cash it required to fund its activities and the manner in which that cash was used. In making and evaluating decisions about the allocation of resources, such as the sustainability of the entity’s activities, users require an understanding of the timing and certainty of cash flows. The objective of this Standard is to require the provision of information about the historical changes in cash and cash equivalents of an entity by means of a cash flow statement which classifies cash flows during the period from operating, investing and financing activities.

• Cash flow statement makes it possible to predict the amounts, timing, and uncertainty of future cash flows on the basis of what has happened in the past, in other words it helps in predicting future cash flows.
• By comparing the cash flow statement with that of the budget which was made at the beginning of the year one can see whether company has spend more or less than original budget and if there is any big deviation between the two company can take steps to control such deviation.
• Usually cash and net profit tends to move together. Higher the net profit, higher will be the cash and vice versa. But sometimes there is shortage of cash even when there are good profits for the company. With help of cash flow statement its users can now what was the reason for shortage of cash.
• It facilitate management to plan and co-ordinate the financial operations properly, because with the help of cash flow statement management can know how much fund is needed, and what time it is needed, also it can decide the source from which fund will be raised, whether internally or externally.

Scope

1. An entity which prepares and presents financial statements under the accrual basis of accounting should prepare a cash flow statement in accordance with the requirements of this Standard and should present it as an integral part of its financial statements for each period for which financial statements are presented.

2. Information about cash flows may be useful to users of an entity’s financial statements in assessing the entity’s cash flows, assessing the entity’s compliance with legislation and regulations (including authorized budgets where appropriate) and for making decisions about whether to provide resources to, or enter into transactions with an entity. They are generally interested in how the entity generates and uses cash and cash equivalents.

3. This Standard applies to all public sector entities other than Government Business Enterprises.

4. Government Business Enterprises (GBEs) are required to comply with International Accounting Standards (IASs) issued by the International Accounting Standards Committee. The Public Sector Committee’s Guideline No. 1, “Financial Reporting by Government Business Enterprises” notes that IASs are relevant to all business enterprises, regardless of whether they are in the private or public sector. Accordingly, Guideline No. 1 recommends that GBEs should present financial statements that conform, in all material respects, to IASs.

Structure  of  the  Cash Flow  Statement

The most commonly used format for the cash flow statement is broken down into three sections:  cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities.

Cash flows from operating activities are related to your principal line of business and include the following:

• Cash receipts from sales or for the performance of services
• Payroll and other payments to employees
• Payments to suppliers and contractors
• Rent payments
• Payments for utilities
• Tax payments

Investing activities include capital expenditures – disbursements that are not charged to expense but rather are capitalized as assets on the balance sheet.  Investing activities also include investments (other than cash equivalents as indicated below) that are not part of your normal line of business.  These cash flows could include:

• Purchases of property, plant and equipment
• Proceeds from the sale of property, plant and equipment
• Purchases of stock or other securities (other than cash equivalents)
• Proceeds from the sale or redemption of investments

Financing activities include cash flows relating to the business’s debt or equity financing:

• Proceeds from loans, notes, and other debt instruments
• Installment payments on loans or other repayment of debts
• Cash received from the issuance of stock or equity in the business
• Dividend payments, purchases of treasury stock, or returns of capital

Cash for purposes of the cash flow statement normally includes cash and cash equivalents.  Cash equivalents are short-term, temporary investments that can be readily converted into cash, such as marketable securities, short-term certificates of deposit, treasury bills, and commercial paper.  The cash flow statement shows the opening balance in cash and cash equivalents for the reporting period, the net cash provided by or used in each one of the categories (operating, investing, and financing activities), the net increase or decrease in cash and cash equivalents for the period, and the ending balance. There are two methods for preparing the cash flow statement – the direct method and the indirect method.  Both methods yield the same result, but different procedures are used to arrive at the cash flows

3.3.1 Direct Method

Under the direct method, you are basically analyzing your cash and bank accounts to identify cash flows during the period.  You could use a detailed general ledger report showing all the entries to the cash and bank accounts, or you could use the cash receipts and disbursements journals.  You would then determine the offsetting entry for each cash entry in order to determine where each cash movement should be reported on the cash flow statement.

Another way to determine cash flows under the direct method is to prepare a worksheet for each major line item, and eliminate the effects of accrual basis accounting in order to arrive at the net cash effect for that particular line item for the period.  Some examples for the operating activities section include:

Cash receipts from customers:

• Net sales per the income statement
• Plus beginning balance in accounts receivable
• Minus ending balance in accounts receivable
• Equals cash receipts from customers

Cash payments for inventory:

• Ending inventory
• Minus beginning inventory
• Plus beginning balance in accounts payable to vendors
• Minus ending balance in accounts payable to vendors
• Equals cash payments for inventory

Cash paid to employees:

• Salaries and wages per the income statement
• Plus beginning balance in salaries and wages payable
• Minus ending balance in salaries and wages payable
• Equals cash paid to employees

Cash paid for operating expenses:

• Operating expenses per the income statement
• Minus depreciation expenses
• Plus increase or minus decrease in prepaid expenses
• Plus decrease or minus increase in accrued expenses
• Equals cash paid for operating expenses

Taxes paid:

• Tax expense per the income statement
• Plus beginning balance in taxes payable
• Minus ending balance in taxes payable
• Equals taxes paid

Interest paid:

• Interest expense per the income statement
• Plus beginning balance in interest payable
• Minus ending balance in interest payable
• Equals interest paid

Under the direct method, for this example, you would then report the following in the cash flows from operating activities section of the cash flow statement:

• Cash receipts from customers
• Cash payments for inventory
• Cash paid to employees
• Cash paid for operating expenses
• Taxes paid
• Interest paid
• Equals net cash provided by (used in) operating activities

Similar types of calculations can be made of the balance sheet accounts to eliminate the effects of accrual accounting and determine the cash flows to be reported in the investing activities and financing activities sections of the cash flow statement.

Indirect Method

In preparing the cash flows from operating activities section under the indirect method, you start with net income per the income statement, reverse out entries to income and expense accounts that do not involve a cash movement, and show the change in net working capital.  Entries that affect net income but do not represent cash flows could include income you have earned but not yet received amortization of prepaid expenses, accrued expenses, and depreciation or amortization.  Under this method you are basically analyzing your income and expense accounts, and working capital.  The following is an example of how the indirect method would be presented on the cash flow statement:

• Net income per the income statement
• Minus entries to income accounts that do not represent cash flows
• Plus entries to expense accounts that do not represent cash flows
• Equals cash flows before movements in working capital
• Plus or minus the change in working capital, as follows:
  • An increase in current assets (excluding cash and cash equivalents) would be shown as a negative figure because cash was spent or converted into other current assets, thereby reducing the cash balance.
  • A decrease in current assets would be shown as a positive figure, because other current assets were converted into cash.
  • An increase in current liabilities (excluding short-term debt which would be reported in the financing activities section) would be shown as a positive figure since more liabilities mean that less cash was spent.
  • A decrease in current liabilities would be shown as a negative figure, because cash was spent in order to reduce liabilities.

The net effect of the above would then be reported as cash provided by (used in) operating activities. The cash flows from investing activities and financing activities would be presented the same way as under the direct method. 

The cash flow statement should report cash flows during the period classified by operating, investing and financing activities. An enterprise presents its cash flows from operating, investing and financing activities in a manner which is most appropriate to its business.  Classification by activity provides information that allows users to assess the impact of those activities on the financial position of the enterprise and the amount of its cash and cash equivalents.  This information may also be used to evaluate the relationships among those activities.

A single transaction may include cash flows that are classified differently.  For example, when the cash repayment of a loan includes both interest and capital, the interest element may be classified as an operating activity and the capital element is classified as a financing activity.

Operating Activities

The amount of cash flows arising from operating activities is a key indicator of the extent to which the operations of the enterprise have generated sufficient cash flows to repay loans, maintain the operating capability of the enterprise, pay dividends and make new investments without recourse to external sources of financing.  Information about the specific components of historical operating cash flows is useful, in conjunction with other information, in forecasting future operating cash flows.

Cash flows from operating activities are primarily derived from the principal revenue-producing activities of the enterprise.  Therefore, they generally result from the transactions and other events that enter into the determination of profit or loss.  Examples of cash flows from operating activities are:

• Cash receipts from the sale of goods and the rendering of services;
• Cash receipts from royalties, fees, commissions and other revenue;
• Cash payments to suppliers for goods and services;
• Cash payments to and on behalf of employees;
• Cash receipts and cash payments of an insurance enterprise for premiums and claims, annuities and other policy benefits;
• Cash payments or refunds of income taxes unless they can be specifically identified with financing and investing activities; and
• Cash receipts and payments from contracts held for dealing or trading purposes.

Some transactions, such as the sale of an item of plant, may give rise to a gain or loss which is included in the determination of profit or loss.  However, the cash flows relating to such transactions are cash flows from investing activities.

An enterprise may hold securities and loans for dealing or trading purposes, in which case they are similar to inventory acquired specifically for resale.  Therefore, cash flows arising from the purchase and sale of dealing or trading securities are classified as operating activities.  Similarly, cash advances and loans made by financial institutions are usually classified as operating activities since they relate to the main revenue-producing activity of that enterprise.

Investing Activities

The separate disclosure of cash flows arising from investing activities is important because the cash flows represent the extent to which expenditures have been made for resources intended to generate future income and cash flows.  Examples of cash flows arising from investing activities are:

• Cash payments to acquire property, plant and equipment, intangibles and other long-term assets.  These payments include those relating to capitalized development costs and self-constructed property, plant and equipment;
• Cash receipts from sales of property, plant and equipment, intangibles and other long-term assets;
• Cash payments to acquire equity or debt instruments of other enterprises and interests in joint ventures (other than payments for those instruments considered to be cash equivalents or those held for dealing or trading purposes);
• Cash receipts from sales of equity or debt instruments of other enterprises and interests in joint ventures (other than receipts for those instruments considered to be cash equivalents and those held for dealing or trading purposes);
• Cash advances and loans made to other parties (other than advances and loans made by a financial institution);
• Cash receipts from the repayments of advances and loans made to other parties (other than advances and loans of a financial institution);
• Cash payments for futures contracts, forward contracts, option contracts and swap contracts except when the contracts are held for dealing or trading purposes, or the payments are classified as financing activities; and
• Cash receipts from futures contracts, forward contracts, option contracts and swap contracts except when the contracts are held for dealing or trading purposes or the receipts are classified as financing activities.

When a contract is accounted for as a hedge of an identifiable position, the cash flows of the contract are classified in the same manner as the cash flows of the position being hedged.

Financing Activities

The separate disclosure of cash flows arising from financing activities is important because it is useful in predicting claims on future cash flows by providers of capital to the enterprise. Examples of cash flows arising from financing activities are:

• Cash proceeds from issuing shares or other equity instruments;
• Cash payments to owners to acquire or redeem the enterprise’s shares;
• Cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short or long-term borrowings;
• Cash repayments of amounts borrowed; and
• Cash payments by a lessee for the reduction of the outstanding liability relating to a finance lease.

NETTING OF  Cash Flows

Generally cash flows should be shown gross. The primary exceptions are when [IAS7.22]:

a)      Cash receipts and payments are made on behalf of a customer and therefore represent the customer’s transactions and not the reporting entity’s; or

b)      cash receipts and payments are in respect of items for which the turnover is quick, the amounts are large and the maturities are short

The opportunities for reporting cash flows on a net basis will usually arise only in a bank or similar financial institution [IAS7.23].The derivation of operating cash flows by use of the indirect method also results in some netting of cash flows.

Foreign  Currency  Cash Flows

Foreign currency cash flows should be translated into the functional currency at the rate of exchange on the date of the transaction [IAS7.25]. This is consistent with the translation of the transaction for inclusion in the income statement.

A foreign subsidiary’s cash flows should also be translated at the exchange rates relevant to the underlying transactions [IAS7.26]. However, a rate that approximates the actual rate, for example a weighted average rate, may be used, consistent with the guidance in IAS 21.

The period-end rate cannot be used to translate foreign currency cash flows [IAS7.27]. However, residual balances arising as a result of a foreign currency transaction will be included in the balance sheet at the period-end rate. Consequently, a reconciling difference will arise between the changes in cash and cash equivalents reported in the cash flow statement and the equivalent amounts obtained from the balance sheet. This reconciling difference is not a cash flow but is reported separately in the cash flow statement [IAS7.28].

Summary of IAS 7

Fundamental Principle in IAS 7

All enterprises that prepare financial statements in conformity with IAS are required to present a cash flow statement.

The cash flow statement analyses changes in cash and cash equivalents during a period. Cash and cash equivalents comprise cash on hand and demand deposits, together with short-term, highly liquid investments that are readily convertible to a known amount of cash and that are subject to an insignificant risk of changes in value. Guidance notes indicate that an investment normally meets the definition of a cash equivalent when it has a maturity of three months or less from the date of acquisition. Equity investments are normally excluded, unless they are in substance a cash equivalent (e.g. preferred shares acquired within three months of their specified redemption date). Bank overdrafts which are repayable on demand and which form an integral part of an enterprise’s cash management are also included as a component of cash and cash equivalents.

Rules

The following rules are used to make adjustments for changes in current assets and liabilities, operating items not providing or using cash and non operating items.

• Decrease in noncash current assets are added to net income
• Increase in noncash current asset are subtracted from net income
• Increase in current liabilities are added to net income
• Decrease in current liabilities are subtracted from net income
• Expenses with no cash outflows are added back to net income
• Revenues with no cash inflows are subtracted from net income (depreciation expense is the only operating item that has no effect on cash flows in the period)
• Non operating losses are added back to net income
• Non operating gains are subtracted from net income

Disclosure of noncash activities

Under IAS 7, noncash investing and financing activities are disclosed in footnotes to the financial statements. Under US GAAP, noncash activities may be disclosed in a footnote or within the cash flow statement itself. Noncash financing activities may include:

• leasing to purchase an asset
• converting debt to equity
• exchanging noncash assets or liabilities for other noncash assets or liabilities
• issuing shares in exchange for assets .

Pharmaceuticals  Industry

Beximco Pharmaceutical

               The company fully followed the IAS-7. The company followed Direct Method for the cash flow statement .The company fully recorded the cash & cash equivalent on the step of operating, financing & investment part. Cash were recorded as their received & payment. The company accumulates tax, dividend, and interest and as flows all document of cash or cash equivalent. The exchange rate was not used in a foreign currency. The company compares the cash flow towards the old one. It means it contain two years cash flow on their annual report & also their website. As their operating balance year 2009 is 880,728,275, investing balance is (1,180,383,641) and financial balance is 287,604,184. For the total balance of cash flow are 73,647,728.

Table 1

The operating balance of Beximco pharmaceticuls ltd. in 2009 is 100,045,897 more than 2008, the investing balance in 2009 is (189,507,092) more than previous year which indicate that there investment is increasing & the financing balance in 2009 is 91,100,595 more than 2008.

Square Pharmaceuticals Ltd

 By analyzing from the annual Report 2009 about IAS 7, we can see that the company follows Direct Method for the cash flow statement .The company fully recorded the cash & cash equivalent on the step of operating, financing & investment part. Cash were recorded as their received & payment. The company accumulates tax, dividend, and interest & as flows all document of cash or cash equivalent. The exchange rate was not used in a foreign currency. The company declaring the cash dividend on 2009.The Company compares the cash flow towards the old one. It means it contain two years cash flow on their annual report & also their website. As their operating balance year 2009 is 130,828,704 investing balance is (1,873,856,298) and financial balance is 638,468,109. For the total balance of cash flow are 205,295,694.

Table 2

The operating balance of Square pharmaceuticals ltd. in 2009 is 149, 96,955 less than 2008, the investing balance in 2009 is (884,600,140) more than previous year which indicate that there investment is increasing & the financing balance in 2009 is 39,880,840 more than 2008.

Advanced Chemical Industries (ACI) Limited 

The company fully followed the IAS-7. The company follows Direct Method for the cash flow statement .The company fully recorded the cash & cash equivalent on the step of operating, financing & investment part. Cash were recorded as their received & payment. The company accumulates tax, dividend, and interest and as flows all document of cash or cash equivalent. The exchange rate was not used in a foreign currency. The company compares the cash flow towards the old one. It means it contain two years cash flow on their annual report & also their website. As their operating balance year 2009 is 1,514,227,333 investing balance is (194,948,725) and financial balance is 964,954,678. For the total balance of cash flow are (975,803,619).

                                                                  Table 3

 The operating balance of ACI pharmaceuticals ltd. in 2009 is 515,690,436 more than 2008, the investing balance in 2009 is (38,027,466) more than previous year which indicate that there investment is increasing & the financing balance in 2009 is 63,990,099 more than 2008.

The IBN SINA Pharmaceutical Ltd

The company fully followed the IAS-7. The company followed Direct Method for the cash flow statement .The company fully recorded the cash & cash equivalent on the step of operating, financing & investment part. Cash were recorded as their received & payment. The company accumulates tax, dividend, and interest and as flows all document of cash or cash equivalent. The exchange rate was not used in a foreign currency. The company compares the cash flow towards the old one. It means it contain two years cash flow on their annual report & also their website. As their operating balance year 2009 is 41,161,523, investing balance is (54,925,181) and financial balance is 60,821,435. For the total balance of cash flow are 81,100,322.

                                                                     Table 4

 The operating balance of  IBN SINA  pharmaceuticals ltd. in 2009 is 89,97,735 less than 2008, the investing balance in 2009 is (40,43,075) less than previous year which indicate that there investment is decreasing & the financing balance in 2009 is 11,232,179 more than 2008

Renata Limited

The company fully followed the IAS-7. The company follows Direct Method for the cash flow statement .The company fully recorded the cash & cash equivalent on the step of operating, financing & investment part. Cash were recorded as their received & payment. The company accumulates tax, dividend, and interest and as flows all document of cash or cash equivalent. The exchange rate was not used in a foreign currency. The company compares the cash flow towards the old one. It means it contain two years cash flow on their annual report & also their website. As their operating balance year 2009 is 217,478,117 investing balance is (556,764,226) and financial balance is 414,177,169. For the total balance of cash flow are 123,148,038.

                                                                Table 5

The operating balance of Renata pharmaceuticals ltd. in 2009 is 19,899,888 more than 2008, the investing balance in 2009 is (23, 94,033) less than previous year which indicate that there investment is decreasing & the financing balance in 2009 is 91,100,595 more than 2008.

Banking Institution

City Bank

 The Bank fully followed the IAS-7. The Bank follows Direct Method for the cash flow statement .The company fully recorded the cash & cash equivalent on the step of operating, financing & investment part. Cash were recorded as their received & payment. The company accumulates tax, dividend, and interest and as flows all document of cash or cash equivalent. The exchange rate was used in a local currency. The company compares the cash flow towards the old one. It means it contain two years cash flow on their annual report & also their website. As their operating balance year 2009 is 1,340,595,190 investing balance is (556,764,226) and there is no financial balance. For the total balance of cash flow are 123,148,038.

Table 6

 The operating balance    City Bank ltd. ltd. in 2009 is 359,897,217 more than 2008, the investing balance in 2009 is (118,552,485) less than previous year which indicate that there investment is decreasing.

Eastern Bank

The Bank fully followed the IAS-7. The Bank follows Direct Method for the cash flow statement .The company fully recorded the cash & cash equivalent on the step of operating, financing & investment part. The Statement shows the structure of cash received & payment. Cash were recorded as their received & payment. The company accumulates tax, dividend, and interest and as flows all document of cash or cash equivalent. The exchange rate was used in a local currency. The company compares the cash flow towards the old one. It means it contain two years cash flow on their annual report & also their website. As their operating balance year 2009 is(1,744,450,052) investing balance is 38,388,570 and financial balance is 4,580,036,287. For the total balance of cash flow are 10,513,933,056.

The operating balance of  Eastern Bank ltd. in 2009 is 346,032,526 more than 2008, the investing balance in 2009 is (677,228,161) less than previous year which indicate that there investment is decreasing & the financing balance in 2009 is 3,426,737,351 more than 2008.

Brac Bank

 The Bank fully followed the IAS-7. The Bank follows Direct Method for the cash flow statement .The company fully recorded the cash & cash equivalent on the step of operating, financing & investment part. Cash were recorded as their received & payment. The company accumulates tax, dividend, and interest and as flows all document of cash or cash equivalent. The exchange rate was not used in a foreign currency. The company compares the cash flow towards the old one. It means it contain two years cash flow on their annual report & also their website. As their operating balance year 2009 is 61, 66,334,191 investing balance is (1,489,113,259) and financial balance is 903,263,750. For the total balance of cash flow are 17,949,683,740.

                                                             Table 8

The operating balance of Brac Bank ltd. in 2009 is 55, 67,744,933 more than 2008, the investing balance in 2009 is (408,156,328) less than previous year which indicate that there investment is decreasing & the financing balance in 2009 is 1, 64,003,859 more than 2008.

Uttara Bank

 The Bank fully followed the IAS-7. The Bank follows Direct Method for the cash flow statement .The company fully recorded the cash & cash equivalent on the step of operating, financing & investment part. Cash were recorded as their received & payment. The company accumulates tax, dividend, and interest and as flows all document of cash or cash equivalent. The exchange rate was not used in a foreign currency. The company compares the cash flow towards the old one. It means it contain two years cash flow on their annual report & also their website. As their operating balance year 2009 is (1,437,505,057) investing balance is 857,087,821 and there is no financial balance in this year. For the total balance of cash flow are 5,644,325,697.

                                                                      Table 9

The operating balance of Uttara Bank ltd. in 2009 is ( 337,244,090) less than 2008, the investing balance in 2009 is (1,009,810,975) less than previous year which indicate that there investment is decreasing.

Mutual Trust Bank

The Bank fully followed the IAS-7. The Bank follows Direct Method for the cash flow statement .The company fully recorded the cash & cash equivalent on the step of operating, financing & investment part. Cash were recorded as their received & payment. The company accumulates tax, dividend, and interest and as flows all document of cash or cash equivalent. The exchange rate was not used in a foreign currency. The company compares the cash flow towards the old one. It means it contain two years cash flow on their annual report & also their website. As their operating balance year 2009 is 4,676,109,898 investing balance is (467,334,314) and there is no financial balance in this year. For the total balance of cash flow are 8788206245.

Table 10

 The operating balance of Mutual Trust Bank ltd. in 2009 is more than 2008; the investing balance in 2009 is (4,317,001,641) more than previous year which indicate that there investment is increasing.

Conclusion

For preparing this report, I knew how to prepare cash flow statement in corporate sector of Bangladesh and International Accounting Standards (IAS’s) adopted as Bangladesh Accounting Standards (BAS’s) applicable for preparing cash flow statements. All of the company in my analysis followed direct method in preparing their cash flow statement as prescribed as the requirements of IAS 7. Some companies follow long form in preparing their cash flow statement, where some company followed short form. Those company which followed short form in preparing their cash flow statement, have to disclose their necessary information in the notes to accounts

The Cash Flow disclosure in annual report by the different companies is not satisfactory. The practice of these companies may lead to fraudulent financial reporting and fail to enhance the reliability of the published information.

The reason for this phenomenon may be attributed to the absence of proper monitoring by the regulatory bodies and lack of awareness by the both companies and users of information. This situation remaining same day by day because neither there is many provisions for penalty for non-compliance with the statutory requirements nor any practice of providing award for best practice. It can be inferred from this fact that stakeholders of different companies want detail disclosures of important information of Cash Flow Statement from the annual report. So the companies should give attention to these matters when preparing the annual reports. It will be the duty of the regulatory bodies to ensure standard practice by providing different mechanism for the provision of penalty and encourage best practice.

Recommendation

Some similarities and dissimilarities are found among these  selected Companies maintain the maximum rules and some Companies are not maintain the some rules, because of their Organization structure and some Application problem and some rules and regulation are not accepted by the companies rules and regulation, some rules and regulation are not yet adopted by the BAS. On the other hand the time is very important thing that is one of the reasons they can does not properly disclose all the items.  Based on my analysis I would recommend the following:

• They should provide more disclose about the flowing items including interest paid and income, investment income, other income, legal expenses, provision for doubtful income and assets, depreciation, earning per share, receipt from other operating activities and payments for other operating activities.
• The company should provide highly disclosure about cash items which are very necessary for the investor.
•  They should provide more disclosed about profit and loss account and change in owner’s equity.
• They should more disclose about the increase and decrease of Assets and Liabilities.