Cash Flow Statement – The most common errors

This article answers the following questions:

• When must a cash flow statement be prepared?
• How should expenditures on the acquisition of fixed assets be determined?
• What are the conditions for applying the simplifications provided for small and micro entities?

Although the cash flow statement is one of the components of the financial statements, not all entities applying the provisions of the Accounting Act are required to prepare it. This obligation applies to entities whose financial statements, pursuant to Article 64(1) of the Accounting Act (hereinafter the “AA”), are subject to mandatory annual audit by a statutory auditor. What should the accountants of these entities pay attention to in order to avoid errors when preparing the documentation necessary for year‑end closing?

Who is required to prepare a cash flow statement?

It is worth noting that even in the case of entities whose financial statements are subject to mandatory audit by a statutory auditor, it is possible to benefit from an exemption from the obligation to prepare a cash flow statement. According to the AA, such an exemption applies to entities qualifying as small and micro units.

A necessary condition – enabling the application of the simplifications available to small and micro entities – is not only compliance with the revenue, balance sheet total and employment thresholds set out in the AA, but also the adoption by the approving body (e.g. the shareholders’ meeting of a limited liability company) of a resolution on preparing simplified financial statements.

What should be considered when preparing a cash flow statement?

Below are the mistakes most frequently made by accountants when preparing a cash flow statement.

Incorrect exclusions from operating activities

It happens that individuals preparing the cash flow statement forget to exclude non‑cash operations, such as: 

• changes in inventories resulting from receiving or contributing non‑cash contributions (in‑kind contributions) in the form of inventory items,
• acquisition of assets through the assumption of liabilities directly related to them (or through finance lease),
• changes in investment receivables and liabilities (e.g. unpaid purchases and sales of fixed assets, offsets of trade receivables and liabilities),
• conversion of liabilities into equity and receivables into shares.

It should be remembered that the reasons for differences between changes in balance sheet items presented in the balance sheet and those shown in the cash flow statement must be explained in the notes to the financial statements, pursuant to Annex 1, point 4 of the AA concerning additional information and explanations.

Incorrect transfers from operating activities

A very common error involves transferring interest and exchange differences from trade payables and receivables to financial activities. Such treatment is incorrect, because paid interest and realised foreign exchange differences on trade balances relate to operating activities, and unpaid interest and unrealised exchange differences are automatically eliminated through changes in those balances.

Failure to exclude foreign exchange differences arising from the valuation of cash held in foreign currency accounts and in hand (positive differences with a minus sign, negative with a plus sign)

Valuation of cash held in foreign currency accounts or in cash on hand does not generate cash flows in the period covered by the cash flow statement.

Failure to exclude changes in accruals recognised simultaneously in assets or liabilities

Problems concern in particular:

• changes in negative goodwill in the year it arises,
• value of non‑cash donations received in the form of fixed assets,
• grants in the year they are received.

Incorrect determination of expenditures on the acquisition of fixed assets

Individuals preparing the cash flow statement often use the amount of increases in fixed assets during the financial year, while overlooking increases resulting from transfers from assets under construction, donations, increases due to finance lease, or the recognition of previously undisclosed fixed assets. Additionally, they often fail to eliminate changes in investment liabilities related to acquired fixed assets.

Failure to disclose cash with restricted availability, separated from the cash balance at the end of the period

These include, among others, funds held in the VAT account as well as funds held in the Company Social Benefits Fund account.

Avoiding errors in financial statements is not easy

The examples presented above do not exhaust the full range of issues related to errors appearing in cash flow statements and in the financial statements of companies operating in Poland. The best way to eliminate inaccuracies is certainly through a detailed analysis of each transaction and careful study of National Accounting Standard No. 1 “Cash Flow Statement”. In case of doubt, it is advisable to consult with statutory auditors who have extensive experience supporting both small entities and internationally operating companies.