Cash flow statement: the most common mistakes

Leszek Woziński
Audit Manager at RSM Poland

The Cash flow statement is an element of financial statements. However, not all entities applying the provisions of the Accounting Act are obliged to prepare a cash flow statement. This obligation is imposed on entities whose financial statements must be audited by a certified auditor on a yearly basis pursuant to Article 64 sec. 1 of the Accounting Act (hereinafter: the AA).

It should be noted, however, that even the entities whose financial statements must be audited can be exempt from the obligation to prepare a cash flow statement. In line with the AA, such an exemption can be granted to small and micro-entities. A precondition for applying the simplified procedure by small and micro-entities is not only about maintaining revenue thresholds, balance sheet total and the number of employees as set forth in the AA; it also involves a decision by the approving authority (e.g. shareholders’ meeting in the case of a limited liability company) on the simplified financial statements.

The most common mistakes in the cash flow statement are as follows:

• erroneous exclusions from the operating activity: it happens that persons preparing a cash flow statement forget to exclude non-cash operations, e.g. change of inventories following the receipt or transfer of a non-cash contribution (in-kind contribution) in the form of inventories, acquisition of assets through taking over liabilities directly related to those assets or through financial lease, changes of investment receivables and liabilities, e.g. unpaid purchases and sales of fixed assets, offset of trade receivables and payables, conversion of liabilities into equity (own fund) and receivables into shares. It should be borne in mind that the reason for the discrepancy between the change of balance sheet items shown in the balance sheet and the cash flow statement must be explained in additional notes and explanatory notes in accordance with Appendix 1 item 4 of the additional notes and explanatory notes of the AA;
• erroneous transfers from the operating activity: a very common mistake here is the transfer of interest and foreign exchange differences from trade receivables and liabilities to financial operations. Such an approach is not correct, because paid interest and realised foreign exchange differences on accounts for supplies and services pertain to operational activity, whereas unpaid interest and unrealised foreign exchange differences should be automatically eliminated through a change of the balance of these accounts;
• no exclusion of foreign exchange differences arising from the valuation of cash held on foreign currency accounts and the entity’s cash in hand (positive with a ‘minus’ sign, negative with a ‘plus’ sign). The valuation of cash held on foreign currency accounts and the cash in hand did not result in any cash flows in the period covered by the cash flow statement;
• no exclusion from the change of balance of accruals and deferred income recognised on assets or liabilities accounts, and in particular: change of negative goodwill in the year of the company’s incorporation, value of non-cash donations received in the form of fixed assets, as well as donations in the year of their receipt;
• incorrect determination of expenditures for the acquisition of fixed assets: it is often the case that persons preparing the cash flow statement use the amount of increases of fixed assets in the financial year under this item, at the same time forgetting about increases resulting from transfers from capital work in progress, donations, increases due to financial lease or disclosures of fixed assets. What is more, persons preparing a cash flow statement do not regularly eliminate the change in the balance of investment liabilities related to the purchased fixed assets.

Clearly, the presented examples do not exhaust errors identified in a cash flow statement. The best way to eliminate irregularities is surely to analyse every operation in detail and read KSR 1 (National Accounting Standard) Cash flow statement and, in the case of any doubts, contact our experts.