It appears that the Manager software is misclassifying the investment activities of payment for the purchase of property, plant and equipment assets through the direct method. What I identified is that under the direct method, the software locates property, plant and equipment assets in the “operating activities” section. And it’s interesting to note that the software does accurately classify those assets using the indirect method.
The technical foundation of what I am asserting regarding the classification of payment for the purchase of property, plant and equipment assets as investment activities can be found in paragraph 16 of IAS 7, which I note verbatim:
Investing activities
The separate disclosure of cash flows arising from investing activities is important because the cash flows represent the extent to which expenditures have been made for resources intended to generate future income and cash flows. Only expenditures that result in a recognized asset in the statement of financial position are eligible for classification as investing activities.
Examples of cash flows arising from investing activities are:
(a) cash payments to acquire property, plant and equipment, intangibles and other long-term assets. These payments include those relating to capitalized development costs and self-constructed property, plant and equipment;
If anyone wants to try creating a low cash flow report to analyze and identify the error, welcome. It is important that the developers intervene in this incident for the benefit of the entire accounting community.
I tested Manager and found fixed assets entered using the Fixed Assets module are correctly classified as Investing Activities in the Direct and Indirect Cash Flow Statements. I tested it on the Cloud version but if you are using the Desktop edition you should try upgrading it to the latest version.
I’m surprised that you say that reporting cash flows using the direct method is fine. A moment ago I updated desktop edition again to version 22.12.24.573 and the error persists. And to make it more illustrative, I will attach the reports with a pdf extension that manager generates so that you can see that they are not my ideas. The software is misclassifying property, plant and equipment using the direct method.
Even if the results are the same, the classification is wrong. Accounting is wrong. The IAS 7 standard regarding the classification of the purchase of property, plant and equipment in investment activities is not being complied with.
I believe I can replicate this behavior; it seems to stem from acquiring Fixed Assets via Purchase Invoices (i.e. acquiring an asset on credit) and then paying for it within the same accounting period.
When going through the workflow of;
• setting up the asset in Fixed Assets,
• issuing a purchase invoice in Purchase Invoices for the asset, and then,
• issuing a payment on the purchase invoice via Payments
The Direct Method cash flows statement indeed shows the cash as an outflow from Operating Activities’ Accounts Payable rather than from Investing Activities’ Fixed Assets, at cost.
However, when setting up a Fixed Asset, then directly issuing a Payment against it (i.e. acquiring an asset for cash), both Direct and Indirect method cash flows reports show the outflow from Fixed Assets, at cost.
I’m not certain I would say this is a bug, though; the proper classification of cash flows for PP&E acquired on credit is a general accounting situation that almost always requires manual adjustment.
His explanation is detailed and that’s how I do it. But regardless of the process, the only parts of a cash flow that maintain its structure regardless of the method used (direct or indirect) are investing and financing activities. Note that purchased property, plant and equipment are classified as investing activities using the indirect method (correct classification) and as operating activities using the direct method (incorrect classification).