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Clarification needed in Cash flow statement

ANURADHA (CA Final) (108 Points)

14 November 2010

How is misappropriation or theft of cash shown in cash flow statement????

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11 Replies

vivek (CA Final) (296 Points)
Replied 14 November 2010

As what i think it would be treated as extra ordinary item

Gajanan Joshi (Manager (Accounts & Finance)) (81 Points)
Replied 14 November 2010

Originally posted by : vivek
	As what i think it would be treated as extra ordinary item

i think it should be taken in two different cases.

if the amount is considerable then only it should go under an exra ordinary item

if the amount is not a considerable one it should be merged with operating cash flows.

Faiz Ahmed ( Article Trainee) (1731 Points)
Replied 14 November 2010

Once theft of cash is reported & the cash is not traced(within reasonable time), Company will write off that amount of theft to its profits. It will be shown in P & L as a charge against profits.

So now , in CFS(prepared at the end of FY ) it will be disclosed by adding it back to N/P after taxation in cash flow from operating activities. It is added because it has no relation to operating activities of the enterprise(again see first para of this reply).

It cannot be shown as extraordinary items because its not outflow/inflow affecting the operating activity(Core business) directly. I mean its not the business of the enterprise to do theft or get any side money from theft of another enterprise. When any insurance proceeds is received for loss in your operating activity can be considered as example of extraordinary items. Extraordinary items basically can be easily & directly related to operating activity(core business of enterprise). Here theft is not core business.

Hope I have answered your query.

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ANURADHA (CA Final) (108 Points)
Replied 14 November 2010

what abt the treatment in indirect method???

Faiz Ahmed ( Article Trainee) (1731 Points)
Replied 14 November 2010

Originally posted by : ANURADHA
	what abt the treatment in indirect method???

My above answer is in relation to Indirect method only. Read 2nd para of my above reply for its treatment.

In direct method, it will NOT BE SHOWN as it will not have any effect in operational activities(core business) in terms of deriving Cash Flow From Operating Activity.

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ANURADHA (CA Final) (108 Points)
Replied 15 November 2010

ohhhh yeahhh.....now i understood..........thanx :)

Vaibhav (CA IPCC Student) (34 Points)
Replied 28 November 2010

The above recommended solution seems wrong in my opinion.

The misappropriated cash will be shown as an extra-ordinary item & added back to get "Net Profit before tax & extraordinary item". And then it will be shown as a deduction at the end, just as you show income tax paid.

In direct method, it will be disclosed just as you disclose payment for expenses. (because extra-ordinary items are treated this way only in direct method).

Hope that helps.

Regards,

Vaibhav Arora.

Faiz Ahmed ( Article Trainee) (1731 Points)
Replied 28 November 2010

Originally posted by : Vaibhav
	The above recommended solution seems wrong in my opinion. The misappropriated cash will be shown as an extra-ordinary item & added back to get "Net Profit before tax & extraordinary item". And then it will be shown as a deduction at the end, just as you show income tax paid. In direct method, it will be disclosed just as you disclose payment for expenses. (because extra-ordinary items are treated this way only in direct method). Hope that helps. Regards, Vaibhav Arora.

It means you are treating it as an extraordinary item. I would like to know from you the logic behind arriving at such conclusion.

Faiz Ahmed ( Article Trainee) (1731 Points)
Replied 28 November 2010

Originally posted by : Vaibhav
	The above recommended solution seems wrong in my opinion. The misappropriated cash will be shown as an extra-ordinary item & added back to get "Net Profit before tax & extraordinary item". And then it will be shown as a deduction at the end, just as you show income tax paid. In direct method, it will be disclosed just as you disclose payment for expenses. (because extra-ordinary items are treated this way only in direct method). Hope that helps. Regards, Vaibhav Arora.

When you are treating it as extraordinary item, then why you are taking it as an operating expense. Extraordinary items are not related to operating activities.

Please clarify your answer with some satisfactory justification.