How does the statement of cash flows sometimes cause a non-articulation problem?
What will be an ideal response?
ANSWER:
A recent study has found that where the indirect method is used, non-articulation occurs when the cash flows arising from the changes in the working capital accounts of consolidated enterprises are not equal to the working capital adjustments listed in the operations section of the cash flow statement. One important reason for non-articulation occurs when acquisitions of subsidiaries occur during the year. Beginning-of-year working capital balances of acquired firms are not included in beginning consolidated balance sheets.
In addition to the acquisition problem, other non-articulation problems arise when transactions involving working capital accounts do not affect cash. These types of transactions affect non-consolidated firms as well as consolidated ones. Examples include: (1) write-ups or write-downs of working capital items when firms are purchased; (2) depreciation allocations within manufactured inventories; and (3) any type of reclassification of working capital accounts between current and non-current categories, such as when operating notes payable that are currently due are expected to be refinanced.
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What will be an ideal response?
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