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Cash Flow Accounting in Banks
Cash flow accounting in banks – a study of practicePhD thesisDepartment of Business AdministrationSchool of Business, Economics and LawUniversity of Gothenburg 2014 Asgeir B. TorfasonBAS PublishingSchool of Business, Economics and LawBox 610, 40530 Göteborg, Swedenbas@handels.gu.seCover: Brynjólfur ÓlasonPainting on cover: Hadda Fjóla Reykdalhttp://www.haddafjolareykdal.comPrint: Ale Tryckteam AB,Bohus, Sweden, 2014ISBN:978-91-7246-325-7 (print)978-91-7246-326-4 (PDF)Fulltext online: http://hdl.handle.net/2077/35272ii
Cash Flow Accounting in Banks—A study of practiceÁsgeir B. Torfason
Table of ContentsAbbreviations . xAbstract. xiAcknowledgements . xiiPrologue . xiiiPART I.Chapter 1: Cash Problems . 11.1 – Introduction . 2Motivation for the research . 3Credit creation and lending growth . 9Accounting model of bank lending . 111.2 – Background . 14Banking and accounting history . 16Liquidity and cash flows . 191.3 – Problem . 23Cash flow statements in crisis . 24Accounting of flow through payment systems . 28Studying the research problem . 301.4 – Research aim and question . 331.5 – Outline of the thesis . 34Roadmap for the reader . 36Chapter 2: Financial Context . 392.1 – Money and banking in the world of finance . 402.2 – Banks acting in financial markets . 41Purpose of banks . 41Bank accounts and accounting systems . 42Maturity transformation . 44Banking operations and credit creation . 46Origins of banks and development of money markets . 49Evolution of banking and accounting . 51Inherent instability of finance. 52Global financial regulation . 552.3 – Cash flow from financial operations . 56Purpose of financial operations. 56Statement of cash flows . 58Importance of cash flow from operations . 60Cash flow and banking. 62Accounting for financial markets . 64International accounting and finance . 652.4 – Summary of the financial context . 68Chapter 3: Accounting Theory . 693.1 – Theories and framework . 703.2 – Theory of financial accounting . 71Accounting problems . 71v
Theoretical problems . 72Accounting theorizing . 72Practical theory . 74Theory development . 753.3 – Classical approach . 78Inductive or deductive approaches to theory development . 803.4 – Decision usefulness . 82Theoretical usefulness . 833.5 – Information economics. 87Economy of accounting theory . 893.6 – Theory development . 90Assumptions of positive accounting theory. 90Economical and financial aggregation of accounting information . 91Summary of theory development . 923.7 – Theoretical framework . 94Overview . 95Practice research . 96Money view . 993.8 – Summary of theory. 105Chapter 4: Multiple Methods . 1074.1 – Methodology . 1084.2 – System of methods . 109Different levels of analysis . 112Perspectives on theories and methods . 114Different methods and studies . 1154.3 – Research process . 117Development of the research aim and question . 1184.4 – Data collection . 121Choice of accounting rules and comment letters . 122Selection of banks and financial statements . 123Approaching the bankers . 1254.5 – Analysis methods . 128Relevant accounting standards . 128Sorting out comment letters . 130Financial statement analysis of cash flow numbers in banks . 131Analysis methods for interviews . 1334.6 – Trustworthy methodology . 1354.7 – Summary of methods. 138PART II.Chapter 5: Accounting Rules . 1415.1 – Accounting regulation and banking . 1425.2 – Foundations of accounting standards . 143Criticism on accounting standards . 1455.3 – Regulating cash flow statements . 147Current state of debates on cash flow rules . 149vi
5.4 – Changing rules for banking . 151Global finance and regulation . 1545.5 – Summary of the regulation. 157Chapter 6: Comment Letters . 1596.1 – Comments on a standard . 160About the comment letters . 1616.2 – Finding arguments . 162Common critical comments . 1666.3 – Comments themes overview . 1696.4 – Arguments against cash flow statements in banks . 170Inconsistency in statements . 171Classification of activities . 172Definitions of cash and non-cash items . 173Net and gross cash flow . 175Direct or indirect method . 1766.5 – Results of comment letters analysis . 1786.6 – Recent comments on cash flow in banks . 179Later comment letters compared to the older . 181Future improvements on the statement . 1856.7 – Concluding comments . 187Chapter 7: Cash Flows . 1897.1 – Statements of cash flow . 1907.2 – Development of cash flow analysis . 1917.3 – Historical cash flow from operations . 1947.4 – Statements in Nordic banks . 197Nordea . 198SEB . 201Handelsbanken . 203Swedbank . 206Danske Bank . 207OP-Pohjola . 210Ålandsbanken . 212DNB . 214Kaupthing Bank . 2177.5 – Studies of cash flows in other banks . 2207.6 – Total cash flows . 2227.7 – Summary of the financial statements . 226Chapter 8: Bankers’ View . 2298.1 – Interview study . 2308.2 – Analysis model for the interviews . 2318.3 – Overview of the interviews . 234Analysis of the answers . 235Explanations gathered in the interviews . 237Purpose of preparing the statements . 238Substitutes for analysis of cash flow in banks. 239vii
8.4 – Functions of cash flow statements . 241Performance from operational activity . 242Financial strength from investment activity . 245Funding from financial activity . 249Liquidity of cash flow in banks . 2528.5 – Summarizing the analysis . 2568.6 – Explaining negative operative cash flow . 2598.7 – Concluding the interview study . 261Chapter 9: Conclusions. 2639.1 – Results . 2649.2 – Answer to the research question . 265Purpose of the standard cash flow . 266Functions of the cash flow statement . 267Operative cash outflow . 270Cash flow statements not used in banks . 2739.3 – Theoretical contribution . 2769.4 – Reflections on the conclusions . 2809.5 – Suggestions for further research . 282Epilogue . 285References . 289Financial reporting and accounting standards publications . 301Appendices . 304Appendix 1: Balance sheets of central banks . 305Appendix 2: Bankruptcy lists . 306Appendix 3: Interviews list . 307Appendix 4: Interview questions . 309Appendix 5: Interview guide. 310Appendix 6: Interview letter. 311Appendix 7: Interview presentations . 312Appendix 8: Comment letters overview . 317Appendix 9: Accounting model scenarios . 319Table of Tables:Table 1: Overview of the problems in each chapter . xvTable 2: Theory, development approaches and perspectives . 77Table 3: Methods matched with theory and perspectives of each study . 115Table 4: Summary of the selected comment letters from 1986 . 163Table 5: Summary of the banking industry comment letters from 2009 . 165Table 6: Problem themes found in the critical comment letters . 169Table 7: Summary of cash flow in biggest four banks in Sweden 1999-2012 . 223Table 8: Summary of cash flow in four biggest banks in Sweden 2
ii Cash flow accounting in banks – a study of practice PhD thesis Department of Busi
Meaning : It is a statement that shows flow (Inflow or outflow) of cash and cash equivalents during a given period of time. As per Accounting Standard-3 (Revised) the changes resulting in the flow of cash & cash equivalent arises on account of three types of activities i.e., Cash flow from Operating Activities. Cash flow from Investing Activities.
FINANCIAL ACCOUNTING : MEANING, NATURE AND ROLE OF ACCOUNTING STRUCTURE 1.0 Objective 1.1 Introduction 1.2 Origin and Growth of Accounting 1.3 Meaning of Accounting 1.4 Distinction between Book-Keeping and Accounting 1.5 Distinction between Accounting and Accountancy 1.6 Nature of Accounting 1.7 Objectives of Accounting 1.8 Users of Accounting Information 1.9 Branches of Accounting 1.10 Role .
Cash flow statements AS 3 cash flow statements IAS 7 statement of cash flows Ind AS 7 statement of cash flows Bank overdraft Financing activities Cash &cash equivalents Same as IFRS Cash flows from extra ordinary items to be classified as operating, financing and investing activities. Cash flow statements do not reflect any
Cash flow from Operations Cash flow from Investing Cash flow from Financing ÎWe will need to place each cash transaction and put it in one of the above sections. Remember, the total of the cash inflows less the outflows balance to the net change in the cash account from one year to the next. ÎThis is always the total of the cash account and the
To search the Cash Flow Process , follow these steps: 1. Navigate to the Cash Flow Process Summary page. 2. Enter the Name, Description, or Folder in Search Criteria. 3. Click the Search. Only Cash Flow Process that match the search criteria are displayed. 2.3 Create Cash Flow Process To create a new Cash Flow process, perform the following .
Statement of Cash Flow (Indirect Method) Cash flow from operating activities Sources: Cash Sales and collections of A/R Uses: Cost of goods sold Cash operating expenses . however, the methodology and format are quite different. The objective of the statement of cash flow is to show the three types of activities on a pure cash basis. However .
Unit 4: Cash Flow Statement(Marks 8) . Sample Format for Cash Flow from Operating Activity Statement of Cash Flow from Operating Activities (Indirect Method) . (13) Give any two items of cash & cash equivalents’ as per Accounting Standard – 3. (2008,11,14) Ans.:
C. Mulford: Cash Flow Analysis, p. 1 Analyzing Cash Flows Selected income statement data and a cash flow statement in the UCA format are provided below for 5 cases. Each case is a variation on the income and cash flow statement for the same company. In fact
