Flashcard Cash Flow Statements & China in accounting | Quizlet

Why is the income statement important?

It track incomplete & complete transactions in terms of cash (selling on credit is incomplete in terms of cash) and gives a more objective viewpoint than IS.

What is the regulatory framework used for the Cash flow statement?

It is the IAS (International Accounting Standards) 7, which is required by IFRS. There is no EU-specific regulation but it is also ruled by IAS 7.

How does the IAS 7 define cash equivalents?

They are defined as short-term, highly liquid investments, but the interpretation varies by country.

What are investing flows?

They are cash flows related to acquiring or disposing long-term assets or other investments which are NOT included in cash equivalents

What are financing flows?

They are cash flows related to financing the business, such as changes in equity and borrowings

Where in the cash flow classification do interest received and paid, dividends received and paid and taxes paid go?

They all go either in financing or operating cash flows, BUT dividends paid can only go to financing while taxes paid can only go to operating

How is the cash flow statement reported?

The IAS 7 allows 2 reporting methods: direct and indirect. The direct method shows the actual inflow and outflow of cash of operating activities item by itmed; the indirect method start from the net profit/loss and then makes adjustments for: non-cash items, accruals/deferrals for past/future transaction and items relating to financing/investing.

The IAS 7 encourages the direct method since it discloses more and the future estimates of cash flows are more clear

What are some key economic characteristics that have impact on accounting when it comes to China?

China is the second-largest economy globally only after the US. The key economic characteristics that have had an impact on accounting are: long-standing tradition of centralized imperial control, commercial legal system and external influence (mainly western)

How is accounting in a command economy?

The purpose of accounting in a command economy is to collect quantitative stats for central planning, with little focus on accountability, transparency and true and fair view.

It is hierarchical and a tool of state control: bookkeeping is prioritised over financial statements, the accountancy profession has a low status and it cannot be independent

How is accounting in a market economy?

The state enables rather than controls accounting by: setting the legal framework, pushing private ownershipe and enterprise and making management accountable to shareholders.

Financial reporting is more focused on fair representaion, with emphasis on decision-making and transperancy

How does accounting transition from a state administration tool to a business support function?

Throught the dominant position of the Ministry of Finance in: the role of state-directed economic planning, tax assessors and collectors and legislate accounting reforms consistent w/the global market

What has been China's regulatory evolution?

From 1976 to 1992 there had been the beginning of the reforms: the ownership remains of the state but management is separated. In 1984 there is the institution of the Central National Bank and 1990 Stock exchanges open.

From 1992 to 2006 there had been the creation of the ASBE (Accounting Standards for Business Enterprises) with progressive steps towards IFRS alignment.

From 2006 to nowadays, there has been more of a convergence towards IFRS (there are still differences) and much more institutional strengthening

What is the Cash flow statement?

It is one of the financial statements which shows the change in cahs: it gives an actual insight on the liquidity of the company by showing cash movements

Why is the cash flow statement important?

It shows the actual liquidity of the company, which means whether it generates enough cash to meet obligations, pay dividends and invest. It also complements the IS that shows the profit of the company. Profits are different from cash, in the IS items other than cash can be seen (depreciation), but in the cash flow statement only inflows and outflows of cash are shown.

How are cash flows classified by IAS 7?

They are classified into 3 main categories based on their nature: operating flows, investing flows and financing flows

What are operating flows?

They are cash flows related to the main revenue-producing activity: they depend on business nature (for a bank it would be lending money etc)

Does IAS 7 allow flexibility when it comes to the classification of cash flows?

Some flexibility is allowed based on the business nature, but consistency is the key: once a policy is chosen, it must be followed

What have been the shifts in China's economic system?

Before 1976 it was a command economy (planned socialist economy), there was no private property and the state controlled everything (production and prices of goods), industries were public owned.

In 1976 there was the beginning of the economic liberalization through the socialist market economy, which further pushed at the end of the '80s - start of the 90s.

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