USASBE 2008 Proceedings - Page 0568
Cash Flows Statements
The authors believe that an entrepreneur can reduce some of the risks mentioned above by carefully monitoring cash flow. Cash Flows Statements are required by Standard 31 of the PRCs New Accounting Standards for Business Enterprises (PRC NASBE) and closely conform to International Reporting Accounting Standards (IFRS), International Accounting Standard 7 as well as US GAAP (KPMG Primer, 2006).
Cash is not subjected to as many valuation rules as accrual based financial accounts and is less subject to interpretation. The verification of cash in-flows and cash out-flows is less time consuming than the verification of accrual based transactions and therefore less expensive to audit. The preparation of cash basis reports tends to require less time than accrual basis reports. These factors tend to improve the timeliness and reliability of the information.
A Cash Flows Statement discloses the cash received and cash disbursed during the same period reported by the income statement. The Cash Flows Statement explains the change in the enterprise’s cash position (bank account) during the report-period of activity. The Cash Flows Statement accounts for and classifies all of the cash in-flows and out-flows during the report- period of activity into three categories: operating activities, investing activities, and financing activities.
The operating activities section reports the cash inflows from customers and the cash outflows to suppliers, employees, and other operating expenses.
The investing activities section reports the cash outflows used to purchase property and equipment to be owned and used by the enterprise in the conduct of the business and cash received from the sale of assets no longer needed.
The financing activities section reports all cash inflows from lenders and investors and all cash outflows used to reduce debt, purchase treasury stock, and pay dividends.
The Statement of Cash Flows provides stakeholders with information, such as:
Significant sources and uses of cash
The ability of the company to generate net cash flows
The ability of the company to sustain operations during a decline in sales
The ability of the company to exercise discretionary spending to retire debt or to react to
Accrual based income statements are required by US GAAP and Chinese GAAP because they report economic transactions in the period in which income is earned and expenses are incurred. Accrual basis statements recognize revenue earned in an accounting period and “match” it to expenses incurred to generate that income. Such reporting provides the entrepreneur with the ability to compare the results of his operation with the results of other companies and the entire industry. Accrual based operating statements and cash based statements allow the entrepreneur to conduct valuable analyses for decision-making.