Of the three most important financial statements, I believe that the cash flow statement is most important for a business leader in Saudi Arabia. Although it is often overlooked, it is a critical element considering that no business would run without cash (Ramachandran & Kakani, 2010). Generally, the cash flow statement tells the business owners where the money has been spent for a company operating in any economic sector (Bhojraj & Libby, 2005). For instance, the cash flow will inform about the cash that has been used to increase the inventory for a retailer. These statements can be applied in the generation of excess cash (Haley & Sander, 2013). In this regard, it would show if the rate of collecting receivables is optimal or should be improved (Orpurt & Zang, 2009). In addition, it is used in monitoring of the company’s debt to ensure that it remains sufficiently liquid (Mantone, 2013).
The article by Harris, Stahlin and Shubita (2013) offers practical examples on the differences between the GAAP and IFRS accounting approaches using the cash flow statements. The first difference looked into is financial/capital lease, which is treated as a cash outflow in GAAP while it is a component of the balance sheet under IFRS as it is considered as a purchase of property, plant or equipment (Barth, Landsman, Lang & Williams, 2012). On the other hand, the Last In, First Out (LIFO) method is not accepted in IFRS although it is allowed in GAAP (Alsuhaibani, 2012). Instead, IFRS applies the First In, First Out (FIFO) approach and the differential between the pre-tax total and cost of goods sold (Nurunnabi, 2017). In addition, the authors show that dividend revenue and interest revenue are treated as either cash flow from investing activity or from operations in the IFRS while they are considered as inflows from operating activities as pointed out by van Tendeloo and Vanstraelen (2005).
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- Alsuhaibani, A. (2012). The Expected Impact of IFRS Adoption on Saudi Arabia based on Lessons from other Countries: A Focus on the Telecommunication Business. Procedia – Social And Behavioral Sciences, 62, 1190-1198.
- Barth, M., Landsman, W., Lang, M., & Williams, C. (2012). Are IFRS-based and US GAAP-based accounting amounts comparable? Journal Of Accounting And Economics, 54(1), 68-93.
- Bhojraj, S., & Libby, R. (2005). Capital Market Pressure, Disclosure Frequency‐Induced Earnings/Cash Flow Conflict, and Managerial Myopia (Retracted). The Accounting Review, 80(1), 1-20.
- Haley, J., & Sander, P. (2013). Value investing for dummies. Hoboken, N.J.: John Wiley & Sons.
- Harris, P., Stahlin, W., & Shubita, M. (2013). US GAAP Conversion To IFRS: A Case Study Of The Cash Flow Statement. Journal Of Business Case Studies (JBCS), 10(1), 15.
- Mantone, P. (2013). Using Analytics to Detect Possible Fraud: Tools and Techniques. John Wiley & Sons.
- Nurunnabi, M. (2017). IFRS and Saudi accounting standards: a critical investigation. International Journal Of Disclosure And Governance, 14(3), 191-206.
- Orpurt, S., & Zang, Y. (2009). Do Direct Cash Flow Disclosures Help Predict Future Operating Cash Flows and Earnings? The Accounting Review, 84(3), 893-935.
- Ramachandran, N., & Kakani, R. (2010). How to read a cash flow statement. New Delhi: McGraw Hill Education Private Litimed.
- van Tendeloo, B., & Vanstraelen, A. (2005). Earnings management under German GAAP versus IFRS. European Accounting Review, 14(1), 155-180.