Financial Accounting: In an Economic Context

INTERNATIONAL PERSPECTIVE: THE STATEMENT OF CASH FLOWS

The importance of debt capital to many foreign companies places a premium on cash flow information, which banks and other lenders use to assess solvency. As indicated earlier, international financial reporting standards (IFRS) require a statement of cash flows in the same format as required by U.S. GAAP

Interpreting the statement of cash flows for a multinational company can be tricky. Multinational companies, based in the United States and elsewhere, conduct operations in a variety of countries, many of which use different currencies. A U.S. corporation for example, may sell goods or services to a customer in France, giving rise to a receivable expressed in euros. When the value of the euro changes relative to that of the U.S. dollar, the value of the receivable on the U.S. company's balance sheet must be restated, which, in turn, gives rise to a gain or loss reported on the income statement.

Foreign currency exchange gains and losses, however, involve no cash flow. Consequently, when the statement of cash flows is prepared under the indirect method, an adjustment must be made to net income. Partly because these adjustments are becoming more and more significant, accounting pronouncements now require that they be disclosed separately at the bottom of the statement, immediately before “net increase (decrease) in cash and cash equivalents.”

Refer to Figure 14-4, the statement of cash flows of La-Z-Boy, and find the adjustment ...