Question

A company under IFRS standards decides to include interest paid in the Financing Section of their Statement of Cash Flows. How will this company's Statement of Cash Flows differ from how it would appear if the company were abiding by US GAAP standards?

1)There will be no difference in the statements.
2)The company under IFRS will have lower cash flow in the financing section and higher cash flow in the operating section than the company under US GAAP.
3)The company under IFRS will have lower cash flow in the financing section and lower cash flow in the operating section than the company under US GAAP.
4)The company under IFRS will have higher cash flow in the financing section and lower cash flow in the operating section than the company under US GAAP.
5)The company under IFRS will have higher cash flow in the financing section and higher cash flow in the operating section than the company under US GAAP.

Answer 1

A company under IFRS including interest paid in the Financing Section will result in a lower cash flow in that section and a higher cash flow in the Operating Section compared to a company under US GAAP. The correct option is 2.

Step-by-step explanation:

When a company under International Financial Reporting Standards (IFRS) includes interest paid in the Financing Section of their Statement of Cash Flows, the presentation of their cash flows will be different from a company following US Generally Accepted Accounting Principles (US GAAP).

Under IFRS, firms have the flexibility to classify interest paid as either operating or financing activities, while US GAAP requires interest paid to be classified under operating activities.

Therefore, the company utilizing IFRS that includes interest in the financing section will have a lower cash flow in the Financing Section and a higher cash flow in the Operating Section relative to a company under US GAAP, making option 2 the correct answer.

Answer 2

The company under IFRS will have lower cash flow in the financing section and higher cash flow in the operating section than the company under US GAAP.

Step-by-step explanation:

Interest payments are a capital outflow and are viewed as a part of the Cash Flow Statement under US GAAP. The Cash Flow from transactions under IFRS is higher than that under the US GAAP if it is presented in the finance segment of IFRS.

As, on the other hand, the cash outflow for the company is smaller under IFRS than the US GAAP, if interest payments is included in the funding segment of IFRS.

The company under US GAAP would be required to include interest paid in the operating section, which lowers cash flows for that section