Question

Compare the major similarities and differences between IFRS and GAAP in regard to authoritative guidance of the statement of cash flows. Identify two (2) differences in IFRS and GAAP, and suggest to the IFRS board which GAAP technique it should implement. Explain the primary way in which the differences you selected will benefit financial statement users. Compare and contrast each of the types of financial statements: balance sheet, income statement, and statement of cash flows. Give your opinion of the statement that is most useful to creditors. Provide at least two (2) specific examples of such usefulness to creditors.

Answer 1

Major Similarities are:
a) Both require the statement of cash flows during the period broken out into operating
activities, investing activites and financing activities.
b)Both permit use of direct and indirect methods of presenting cash flow from opeating
activities.
Major Differences are:
a) As regards the defination of cash and cash equivalents the US GAAP defines it as Cash and
short term, highly liquid investments are included while Bank overdrafts are excluded. Restricted
cash is not included in cash and cash equivalents. Instead changes, in restricted cash should be
generally presented in investing activities while the IFRS defines it as cash and short term, highly
liquid investments are included. Bank overdrafts are included in only cetain cases.
b) As far as the scope is concerned the US GAAP provides industry specific guidance i.e not
for profit entities) while IFRS provides principles for classification of cash flow but little industry
specific guidelines prevail.
IFRS should adopt the following things:
a) In regards to the cash and cash equivalents the restricted cash flows should be shown in the
investing activities (in difference) and not In the cash and cash equivalents like in IFRS. This will
give a better picture of our investing activities for the time period.
b) The IFRS should be more industry specific so that such specifications may help in customised
and more open and clear comparisions. The more the industry specific guidance prevails the better
it will be for the people who are trying to understand the statement.
The most important aspect that the creditors look is the way the company repays its dues:
a) It sees foremost the operating cycle of the company.
b) Second thing that is noticed is how quickly the money is being recovered from debtors or cash sales.
c) The last thing they see is the creditibilty of repayment of the entity.
The Profit and Loss account is most helpful in this regard as they are able to see the operating cycle more
clearly and also whether the company is generating enough cash to repay them.
Example 1) Operating Cycle : Looking at the Profit and Loss statement the creditors can know the
operating cycle of the person and know how quickly the money is replenished by the firm.
Example 2) The gross profit and net profit margins: These margins help the creditors to know the
capacity with which the firm is generating profits and how secure are they. If the margins are poor or negative
it means that they are consuming the capital and the creditors will take it as an alarm.