Interpret Cash Flow to the firm
Evaluating Free CashFlow Recall that it is important for operating cash flows to... Read More
Several differences exist between how the cash flow statement is prepared under IFRS and US GAAP.
The most significant difference lies in the fact that IFRS gives companies more flexibility in regard to how interest paid or received and the dividend paid or received are reported and how income tax expense is classified. Despite the flexibility provided by IFRS, companies must use a consistent classification each year. Besides, they must separately disclose the amounts of interest and dividends received and paid and where the amounts are reported.
The elements below summarize the major differences between how the cash flow statement is prepared under IFRS and US GAAP.
Question 1
Which of the following statements is inaccurate?
- Under IFRS, dividends paid may be classified either as an operating activity or financing activity, while under US GAAP, it can only be reported as a financing activity.
- Under IFRS, interest paid may be classified either as an operating activity or financing activity, while under US GAAP, it can only be reported as a financing activity.
- Under IFRS, dividends received may be classified either as an operating activity or investing activity, while under US GAAP, it can only be reported as an operating activity.
Solution
The correct answer is B.
Under IFRS, interest paid may be classified either as an operating activity or financing activity. However, under US GAAP, it can only be reported as an operating activity and not a financing activity.
Options A and C give accurate statements.
Question 2
A company paid $500,000 as dividends during the year. How would that company classify this payment on the statement of cash flow under IFRS and US GAAP?
- It would be classified as a financing cash outflow under both accounting standards.
- Under IFRS, it would be classified as an operating or as a financing cash flow. Under US GAAP, it would be classified as a financing cash flow.
- Under IFRS, it would be classified as an operating or as a financing cash flow. Under US GAAP, it would be classified as an operating cash flow.
Solution
The correct answer is B.
Activity: Dividends paid
IFRS Classification: Operating/Financing
US-GAAP Classification: Financing