Disclosure of Cashflow and Cashflow-Related Ratios in DAX-30 Companies

Term Paper (Advanced seminar), 2013

43 Pages, Grade: 1,0


Table of content

List of tables

List of illustrations

List of abbreviations

1 Introduction

2 Cashflow
2.1 Relevance, basic concept and calculation
2.2 Legal requirements according to IAS 7
2.2.1 Definition of cash and cash equivalents
2.2.2 Classification of the statement of cashflows
2.2.3 Additional disclosure requirements

3 Cashflow related ratios

4 Empirical analysis of DAX-30 companies
4.1 DAX-30 companies
4.2 Disclosure of the statement of cashflows at DAX-30 companies
4.3 Disclosure of cashflow related ratios at DAX-30 companies

5 Conclusion

Reference list


Appendix 1: Statement of cashflows according to IAS 7

Appendix 2: Documentary of empirical analysis

Statutory declaration

List of tables

Table 1: Basic structure of the statement of cashflows

Table 2: Disclosure of notes on the statement of cashflows

Table 3: Basis of cashflows from operating activities…

Table 4: Classification of interests paid / interests received at DAX-30 companies17

Table 5: Types of cashflow related ratios and their absolute frequency in DAX-30 companies

List of illustrations

Illustration 1: Comparison of EBITDA and operating cashflow for Adidas AG, Bayer AG and Deutsche Lufthansa AG

List of abbreviations

illustration not visible in this excerpt

1 Introduction

The financial crisis revealed that in addition to profitability, solvency and liquidity are indispensable for the sustainability of a business. Thus, instruments considering these aspects have gained in importance in recent years. In the framework of external reportings the statement of cashflows provides relevant information for shareholders as well as for potential investors in order to assess an entities’ ability to meet financial obligations and obtain liquid. Further information relating to these aspects are addressed in the management commentaries and are communicated, inter alia, in the form of key figures. Both, the statement of cashflows and cashflow related ratios aim to provide an insight into a companies’ financial standing. However, different requirements apply for their determination. An own standard for cashflow statements grant a uniform establishment of the cashflow statement whereas entities are not required to accommodate any requirements offered by legal authorities when reporting cashflow related ratios. As a result of the latter, entities tend to provide a broad range of different figures based on various computations.

The objective of this seminar paper is to examine the disclosure of the cashflow statement as well as that of cashflow related ratios. The following research questions will be addressed at the end of the paper:

- How are the legal requirements of cashflow statements applied at DAX-30 companies and what differences can be identified?
- Which cashflow related ratios are provided by DAX-30 companies and what added value can be identified through their application?

The research methodology applied in this seminar paper is a review of relevant literature in order to draw an overview of the main theoretical aspects regarding the statement of cashflows and cashflow related ratios. The literature review serves as the fundamental for the aspects examined in the empirical analysis of consolidated financial statements of DAX-30 companies.

The introductorily paragraph aims to provide a general understanding of the cashflow concept and further addresses its relevance and historical development.

The following paragraph approaches the legal requirements for DAX-30 companies when applying statement of cashflows. With regard to International Accounting Standard 7 (IAS 7), the components of cash and cash equivalents, the classification of cashflows arising from different activities and additional disclosure requirements for reporting entities will be assessed.

Subsequently, the seminar paper will outline an overview of relevant cashflow related ratios after defining the general term of ratios and explaining its relevance for companies.

In the fourth paragraph, the classification of DAX-30 companies will be illustrated and will be followed by a description of the main findings from the empirical analysis. Hereby, the statement of cashflows and cashflow related ratios will be addressed separately.

The last paragraph aims to summarize the main findings of the seminar paper and will draw a conclusion with regard to the research questions.

2 Cashflow

2.1 Relevance, basic concept and calculation

A general definition of a cashflow cannot be found in any literature. However, the basic concept is mainly consistent with the definition put forward by Eiselt and Müller who state that the cashflow equals the surplus of cash-inflows over cash-outflows during certain period[1]. Thus, the cashflow provides payment-related information whereas other instruments of the financial statement, such as balance sheet and income statement, supply asset-oriented and success-oriented information[2].

The cashflow as part of the financial statement provides information about the origin and disposition of financial resources and thus, about the solvency of a company[3]. Alfredson et al. state that a cashflow enables the analysis of a given financial structure and accordingly the entities’ ability to meet financial obligations. Furthermore, the authors suggest that different companies and their performances can be compared by the usage of the cash flow especially because of the fact that the calculation is mainly unaffected by accounting policies[4]. Furthermore, the cash flow also applies internally as an instrument for analyzing, planning and control[5]. Moreover, cash flows form the basis of various business valuation methods (e.g. discounted cashflow method)[6].

Historically, the first application of an instrument, resembling a cashflow concept, was by the American “Chicago and Nothernwestern Railroad Company”. In 1905, they provided cash-related information in their financial statement by mentioning the intended purpose of payments[7]. However, the very term “cashflow” first appeared in the financial statement of the British company “Imperial Chemical Industries” in 1959[8].

In Germany, the first cashflow related applications appeared in the nineteen thirties, which was broadly a modification off the American concept of funds calculation, however only achieved a higher regulatory relevance in 1998 by the KonTraG that requires publicly listed parent companies to include a cashflow statement in their financial statements[9]. In more recent times, the legal requirements of cashflows in Germany are mainly determined by the German Commercial Code, the German Accounting Standard 2 and IAS 7.

Within the framework of an annual report, the cashflow is extended to a statement of cashflows. This statement is structured in two parts: the “cause-calculation”[10] and “changes of cash funds”[11].

The “cause-calculation” structures cashflows into the three segments[12]

- cashflow from operating activities
- cashflow from investing activities
- cashflow from financing activities

and enables a classification based on different business activities[13]. In “changes of cash funds”, the total cash funds at the beginning and at the end of the period is disclosed as well as the effects from changes in exchange rates and other possible effects. In general it is valid that the sum of cashflows equals the changes of the cash funds after considering special effects[14]. The table one on page five illustrates the structure of the statement of cashflows.

illustration not visible in this excerpt

Table 1: Basic structure of the statement of cashflows[15]

The statement of cashflows can be determined in two different ways: original and derivative. By applying the original method, information is directly received from the data of financial accounting. In contrast, the derivative method derives cashflows from the balance sheet, the statement of income and the summary of fixed assets[16]. Due to the required information, the original method can only be applied internally whereas the derivative method is also exercisable by external analysts[17]. In practice, the derivative application is the most common determination.

The following paragraph focuses on the legal requirements for the statement of cashflows at DAX-30 companies.

2.2 Legal requirements according to IAS 7

In Germany, all capital market oriented parent companies are required by law to establish a consolidated statement according to IFRS[18]. For parent companies, that are not capital market oriented there exists an option for the application of the IFRS requirements[19]. Additionally, this option also applies for companies that are not involved in a group and thus, establish a single financial statement. Since these financial statements are the bases for the distribution of dividends and taxation, the establishment of a financial statement according to the German Commercial Law is obligatory. For this reason the additional preparation of an IFRS annual report is merely for information purposes[20].

This seminar paper examines the application of cashflows at DAX-30 companies and due to the fact that all of these entities apply IFRS, the following explanation is focused on IAS 7, the standard that defines the regulations for the statement of cashflows.

2.2.1 Definition of cash and cash equivalents

As described in the above paragraph, the cashflow represents cash in- and outflows. Its extension to the cashflow statement enables companies to determine the changes of cash funds at the end of the period. The IFRS accounting regulations determines the cash funds as cash and cash equivalents.

Firstly, the terms cash and cash equivalents are defined by IAS 7.6. According to the standard cash comprise “cash on hand and demand deposits” as well as determining “short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes” as cash equivalents[21].

In general, only asset items are considered part of the cash funds.[22] However, the standard offers an exception for bank overdrafts to be classified in cash[23]. Additionally, for items to be classified as cash equivalents all of the following criteria must be met:[24]

- Cash equivalents should only be held for the purpose of short-term cash commitments and not for the purpose of investments or others.
- Cash equivalents should be readily convertible to known amounts of cash due to their low risk of value changes.
- Cash equivalents should have a short maturity of ordinarily three months or less

Cash equivalents include, for instance, cash on hand, bank balances as well as short-term market securities. For the most part, equity instruments are not considered in the cash funds. However, an exception exists for preferred shares with a maturity date of less than three months[25].

Furthermore, entities are required to disclose the components of cash and cash equivalents in the notes and shall report a reconciliation when cash and cash equivalents reported in the cashflow statement do not correspond to the reported amount in the balance sheet[26].

2.2.2 Classification of the statement of cashflows

The cashflow statement is established in a single-column format[27]. As already stated in paragraph 2.1, the cashflow is classified in operating, financing and investing activities. The classification of cashflows will be assessed in the following explanations.

Firstly, the cashflow from operation provides information about the entities’ ability to generate cash in order to invest in assets, pay back loans and payout dividends to shareholders[28]. Transactions that affect the amount of profit or loss, and occur e.g. in production, services and procurement, are generally recognized in the operating cashflow[29].

The cashflow from operating activities is either applied directly or indirectly[30]. The direct cashflow application is calculated by deducting cash related expenditures from cash related incomes. The indirect determination is based on the fact that income and expenditure do not necessarily lead to cash-in and outflows. This way of computing the operating cashflow uses an earning figure as a basis and adjusts non-cash related transactions (e.g. depreciation and provisions) and in addition considers changes of working capital[31] in its calculation[32]. Nevertheless, as emphasized also by Sonnabend and Raab, IAS 7 encourages companies to apply the direct method since it provides more information for the users of financial statements and facilitates the estimation of future cashflows[33].

Furthermore, the basis of the operating cashflow needs to be considered when assessing the structure of the statement of cashflows. Generally, a structural proposal provided by IAS 7 (Appendix A) uses earnings before interests and taxes (EBIT) as the starting point of the indirect determination[34]. However, the literature discusses other earning figures as well. That is why, profit or loss, earnings before taxes (EBT) and even earnings before taxes, interests, depreciation and amortization (EBITDA) are also stated to be suitable as the basis of the operating cashflow[35].

The second part of the cashflow statement, the cashflow from investing activities provides information relating to investments in company resources and therefore imply future income and cash-outflows for the users of financial statements[36]. Transactions that are recognized in the investing cashflow refer mainly to investments and divestments in long-term assets as well as in equity- and debt instruments that are not classified as cash and cash equivalents[37].


[1] cp. Eiselt, A, Müller, S 2008, p. 22.

[2] cp. Schmidt, A 2003, pp. 27; cp. Coenenberg, A G, Haller, A, Schultze, W 2012, pp. 3 – 5.

[3] cp. Baetge, J, Kirsch, H-J, Thiele, S 2012, p. 798; cp. Freiberg, J 2010, p.127.

[4] cp. Alfredson et al. 2009, p. 708.

[5] cp. Siegwart, H 1994, p. 23.

[6] cp. Behringer, S 2010, pp. 172 – 175.

[7] cp. Chwallek, C 1998, p. 22

[8] cp. Behringer, S 2010, p. 59.

[9] cp. Meyer, M A 2006, p.4; cp. Behringer, S 2010, p. 61.

[10] The term „cause-calculation” was translated from the German term “Ursachenrechnung”.

[11] cp. Freiberg, J 2010, pp. 137 – 138; Coenenberg, Haller and Schultze define the term “cash funds” as a

“summary of various balance sheet items”; Coenenberg, A G, Haller, A, Schultze W 2012, p. 795.

[12] The classification into three segments is described as “activitiy-format“. Another format described in the

literature requires entities to distinguish between the sources of funds and application of funds. In theory

and practice the “activity-format” is the main application and also required by IAS 7, cp. Eiselt, A, Müller

S 2008, p. 25.

[13] cp. Rudolph, R 2013, p. 814.

[14] cp. Sonnabend, M, Raab, H 2008, p. 55 – 56.

[15] Own representation adapted from Sonnabend, M, Raab, H 2008, p. 56.

[16] cp. Gebhardt, G, Mansch, H 2012, pp. 5 – 6.

[17] cp. Eiselt, A, Müller, S 2008, p. 43.

[18] cp. German Commercial Code n.d.(a), § 315a (1) and (2).

[19] cp. German Commercial Code n.d.(a), § 315a (3).

[20] cp. German Commercial Code n.d.(b), § 325 (2a) and (2b); cp. Coenenberg, A G, Haller, A, Schultze, W

2012, pp. 14.

[21] cp. IFRS 2012, IAS 7.6.

[22] cp. Rudolph, R 2013, p. 813.

[23] cp. IFRS 2012, IAS 7.8; When classified as cash, bank overdrafts need to be recognized with a negative

algebraic sign, cp. Sonnabend, M, Raab, H 2008, p. 46.

[24] cp. IFRS 2012, IAS 7.7; cp. Alfredson et al 2009, p. 708.

[25] cp. IFRS 2012, IAS 7.7; cp. Schmidt, A 2003, pp. 80 – 81.

[26] cp. IFRS 2012, IAS 7.45 and 7.46

[27] cp. Eiselt, A, Müller, S 2008, p. 25.

[28] cp. Alexander, D, Britton, A, Jorisson, A 2009, p. 541.

[29] cp. Müller, A, Eiselt, S 2008, p. 30.

[30] In general it is valid, that the direct and indirect methods lead to the same result. However, depending

on the basis used for the indirect computation, corrective calculations have to be included in order to

determine the same result, cp. Kaiser, D, Bierwulff, L 2011, pp. 9 – 10.

[31] Working capital is defined as the difference of current assets (inventory and accounts re-

ceivable) and current liabilities (accounts payable), cp. Brockmann, C M, Russell, J W 2012, p. 86.

[32] cp. Sonnabend, M, Raab, H 2008, p. 37 – 38.

[33] cp. Sonnabend, M, Raab, H 2008, pp. 83 – 84.

[34] cp. Appendix 1.

[35] cp. Freiberg, J 2010, p. 156; cp. Sonnabend, M, Raab, H 2008, pp. 89 – 90.

[36] cp. Alexander, D, Britton, A, Jorisson, A 2009, pp. 541 – 542.

[37] cp. Freiberg, J 2010, p. 149; cp. IFRS 2012, IAS 7.16.

Excerpt out of 43 pages


Disclosure of Cashflow and Cashflow-Related Ratios in DAX-30 Companies
Berlin School of Economics and Law
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ISBN (Book)
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Accounting, Cashflow, Ratios, Kennzahlen, DAX, IAS7
Quote paper
Anne Heyer (Author), 2013, Disclosure of Cashflow and Cashflow-Related Ratios in DAX-30 Companies, Munich, GRIN Verlag, https://www.grin.com/document/230732


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