Cash Flow question

[iamdan08]

Just a quick question about how this transaction would be classified in a cash flow statement.

Basically, one of the owners of a business goes overseas for research and development purposes and all expenses were charged to a credit card. They were issued the credit card statement and payed it within a month. Would the payment:

Be classified as operating (not sure if its payments to suppliers or something), investing (investing in possible assets maybe?) or Financing (payment of debt?). I'm reading the text book and looking on the internet but it is a bit vague. I can't really remember from my VCE accounting days, since it was 2 years ago. lol.

Thanks.

[Flaming_Arrow]

I think Operating because its's an expense

[monokekie]

lol i agree with flammingarrow and will elaborate a bit

As the question has stated the amount that has been charged to the credit card is an expense, i would regard its settlement as a "payment to creditor" and place it in the net operating outflow column in the cash flow statement. (note: Operating outflows include all payments related to expenses)

anyone feel free to add more, as i am not a hundred percent certain about this.

[iamdan08]

Awesome...thanks!

[Fyrefly]

There are rules about the classification of R&D expenditure... generally these MUST be classified as expenses, and not as assets in the General Purpose Financial Report.

[AppleXY]

Yeah our lecturer was talking about that R&D is an expense rather than an asset, even though it is something that will bring future economic benefit to the business.

Strange... lol

[Fyrefly]

Yeah our lecturer was talking about that R&D is an expense rather than an asset, even though it is something that will bring future economic benefit to the business.

Strange... lol

Think about how you would recognise an asset tho, Prav... Is this a reliable measure of the economic benefit that will be received? Is economic benefit probable? Unless there is a guaranteed market for something, there's no way of knowing that something produced thanks to R&D will indeed be able to generate revenue for an entity. It does seem a little odd, and it can sort of be justified as both an asset and as an expense, but if you think about it from the perspective of dependent users... it's probably best that they get a 'worst-case scenario' where there's a million dollar R&D expense that's been incurred, instead of a 'best-case scenario' where there's this one million dollar asset which, in reality, may never actually be realised.

[AppleXY]

omg, that is a perfect explanation for why it is classified as an expense, Jess! Thanks for clearing it up. I should've realised the accounting principle of conservatism and how we take the worse case scenario of any situation.

I just thoughr that the only real reason that businesses establish R&D divisions (investments) is to innovate new products, but no-one really knows if it will innovate.

Nice.