Spain Cash flow statement


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Hi,

I'd be so grateful if someone could help me clarify a question that keeps raising to me.

What is the reason why the changes in the operating working capital accounts shown in a cash flow statement are not equal to the changes of the same accounts in the balance sheets?

Gracias J
 
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kirby

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One of the accounts that compose working capital is accounts receivable. Non-cash transactions can change the A/R balance. For example, a writeoff of accounts receivable is a non-cash transaction. This is one example of items that will cause the difference you are seeing.
 
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If you are looking at a group cash flow statement, in the group presentation currency, then the movement in the WC accounts needs to be stripped of the CTA (cumulative translation adjustment) so that they are stated as Local Currency movements at average FX translation rate (2.75 in my example below) and not as the difference between month start at one FX rate (2.5 in my example below) versus month end at a different closing FX rate (3 in my example below)

E.g. +/- in AR as follows (EUR = group presentation currency, LC = Local Currency)

Beginning balance :
LC 100 @ 2.5 = EUR 40

Ending balance :
LC 150 @ 3 = EUR 50

Balance Sheet Movement in EUR = +10 (-10 for cash flow)
Cash Flow Movement = LC 50 @ 2.75 (say, average period rate) = EUR -18.18

Hence, the differences between the 2 deltas : -10 versus -18.18

Don't worry, the VP of FP&A once asked me the same question !

Makes you wonder, eh ?
 
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To add to the comments above, here are a couple of examples for reclassifications from Operating Cash Flow to other Cash Flows, e.g.

1. Increase in payables due to a purchase of a fixed asset

This is a non-cash transaction. Normally, you would not show payables for fixed assets separately in the Balance Sheet. However, you need to eliminate this movement from the Cash Flow. At a later point when the payable is paid, the cash flow is classified as "cash-out for fixed assets" in Investing Cash Flow. My observation is that not many companies do these adjustments because it's difficult to track when which payable becomes cash-effective for which purpose.

2. Working capital in the balance sheet of an acquired business on the consolidated level

If a group of companies acquires a new business, it also buys its inventory, receivables and payables. On the face of the consolidated balance sheet, there is no opening balance at the beginning of the year but a big increase after the acquisition. This is not an operating movement; therefore, all affected items from the acquired net assets are taken out of the Operating Cash Flow of the group and are shown as one line in Investing Cash Flow titled "Cash-out for business acquisitions net of cash acquired". In this case, the working capital movement in the balance sheet would deviate significantly from the working capital movement in the Operating Cash Flow.

3. Cash flows from hedging instruments are reclassified to the Cash Flow items which they hedge.

You may have some forward or similar contracts classified as receivables/payables in the balance sheet. However, if they are used to hedge, let's say, some external borrowings, the cash flows from this receivables/payables need to be reclassified into Financing Cash Flow to offset the cash flows from the underlying item.
 
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