will always be realized and unrealized portions of f/x gains and losses. They are rarely
disclosed. If a currency has been devalued, e.g. Dominican Republic in 2003, consider asking
for the unrealized portion and show both portions separately in the income statement. The
unrealized portion will be added back (loss) or subtracted (gain) from operating cash flow.
Also consider when the unrealized portion comes due.
• Monetary correction - The formal name is purchasing power loss (or gain) on net monetary
items. It only appears in statements that have been subject to comprehensive inflation
accounting adjustments such as prescribed by Bulletin B-10 in Mexico or I.A.S. 29. It is a
measure of the gain or loss experienced by a company because of inflation. The amount
depends on the relationship between monetary assets and liabilities and the changes to them
during the year and the adjustment of the income statement to end-of-the-year equivalents.
The key point is that this account does not affect cash flow, so it should be entered in a line
that does not result in an entry in the operating section of the statement of cash flows. In the
simplest terms, if a company had only one asset, cash of 100 pesos at the beginning and end of
the year, there were no transactions, and the inflation rate was 20%, it should have 120 pesos
at the end of the year to keep up with inflation. Since it has only 20, it has had a purchasing
power loss of 20 pesos.
• Extraordinary items - Also spread below operating income. To be considered extraordinary, a
transaction or event must be both unusual and of infrequent occurrence considering the
environment in which the company operates.
• Deferred taxation - Proper disclosure would show income tax expense broken down into the
amounts currently due and deferred. This topic is further discussed in the liability section.
Statement of cash flows:
Since this statement is generated by Moody’s Financial Analyst and most other spreading software, a
discussion of the three components of the statement is in order. Investing activities consist primarily of
the acquisition and disposal of property, plant and equipment and to a lesser extent loans and long-
term investments. Financing activities include loans from unrelated parties, additional contributed
capital and dividends. Operating activities are defined by SFAS 95 (July 1988) as all other activities
not specifically defined as investing or financing activities, or more specifically those activities and
accounts that involve the primary operations of a company which would be the production and sale of
goods and services, principally inventory, receivables, trade payables, and wages and salaries. I
recommend SFAS 95, paragraphs 14-24 for a more elaborate explanation.
With high quality audited statements, the assumption is that the cash from operations figure is
accurate. One of the most important comments in this entire paper is compare the software-generated
cash flow figure to the figure in the original statement of cash flows. Also, the software just picks up
the changes that it sees in the balance sheet, so stock dividends, revaluations of fixed assets, and fixed
assets acquired with debt will not be correctly reported in the software-generated statement.
Adjustments and changes in the spreads can and should be made so that the software generated
INST-12-002
REV 1/2012
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