Cash Flow Statement (EFE) and Corporate Management Report

Statement of Cash Flows (EFE): Purpose and Importance

The Statement of Cash Flows (EFE) is designed to show cash flows within the company, categorized by activity type. It details the origin (receipts) and utilization (payments) of monetary assets, representing liquid cash or cash equivalents. These flows are classified based on their origin: operating activities, investment activities, or financing activities.

The obligation to present the EFE stems not only from the legislature's desire to complement the financial image offered by the Income Statement (which focuses on economic circulation) with data related to receipts and payments, but also from a deep distrust of management based solely on the accrual principle (devengo).

The EFE is essential because it satisfies the user's need to understand the company's financial transactions across operating, investment, and financing activities. Interpreting this statement allows for the assessment of financial management and determines the company's viability based on the structure and behavior of its liquidity flows.

Structure of the Statement of Cash Flows (EFE)

The EFE reconciles the opening and closing balances of cash and cash equivalents. It classifies the variations in monetary assets into three main parts:

1. Operating Activities (F. Explotación)
2. Investment Activities (F. de Inversión)
3. Financing Activities (F. Financiación)

Presentation of Operating Cash Flows

Cash flows from operating activities (F. Explotación) represent the current receipts and payments derived from assets that regulate the period's expenditure and revenue. There are two methods for presentation:

1. Direct Method

This method details the major classes of gross cash receipts and gross cash payments. Key components include:

• Operating Flows (e.g., collections from clients, payments to suppliers, tax payments, other operating payments).
• Financial Income and Expenses (e.g., collections of interest and dividends, interest payments).
• Income Tax Payments (related to the year's profit).

2. Indirect Method

This method starts with the net profit figure and adjusts it for non-cash items and changes in working capital.

• Adjustments for Non-Fund Movements: Net profit is adjusted for items that do not involve cash movement (e.g., depreciation, provisions, imputation).
• Resources from Operations: Adjustments for changes in working capital (circulating variation settings).

The indirect method format presents the net income figure and then reconciles charges and credits. Operating cash flows are those incurred for transactions that constitute the company's primary source of income, provided they are not classified as investment or financing activities.

Cash Flows from Investment Activities

This section shows the company's effort to invest resources in fixed assets, whether tangible, intangible, or financial, during the accounting period. Net investment derived from investment activity indicates the cash flow generated or used by the company in this area.

Investment activities include payments originating from the acquisition of non-current assets (or current assets unrelated to core operations), as well as receipts derived from the disposal (sale) of these assets.

Cash Flows from Financing Activities

Financing activities record operations related to capital contributions, returns of capital, or the repayment of debts. This section addresses issues such as the treatment of loans and financial effects (e.g., discounts).

These flows show the resulting deficit or surplus and can be decomposed into:

1. Operations derived from the owner's equity (PN - Patrimonio Neto).
2. Operations related to capital obtained from external suppliers (external financing).

In summary, cash flows from financing activities include:

• Receipts and payments related to equity instruments.
• Receipts and payments related to financial instruments (debt).
• Payments of dividends.

The Management Report (Informe de Gestión)

The Management Report is prepared by the administration and presented to the shareholders, along with the annual accounts and the proposed application of results, for approval.

The report aims to provide a fair review of the business evolution and the company's situation, including a description of the principal risks and uncertainties to which the company is exposed. The analysis should be balanced and comprehensive, analyzing the evolution of the business to facilitate understanding. This analysis must include key performance indicators (KPIs) and, where applicable, references and explanations regarding the annual accounts.

The report must also detail:

• Significant events that occurred after the closing date.
• The company's expected future evolution.
• Material activities in Research and Development (R&D).
• Acquisitions of own shares.

Specific Requirements for Listed Companies

For listed companies, the Management Report must additionally include information regarding:

1. Capital structure.
2. Restrictions on the transfer of securities.
3. Significant direct or indirect investments (e.g., over 5% of capital).
4. Any restriction on voting rights.
5. Shareholders' agreements (pactos sociales).
6. Rules applicable to the appointment and replacement of members of the administrative body and the amendment of the statutes.
7. Powers of the administrative members.
8. Significant agreements to which the company is party.
9. Agreements between the company and its corporate management positions.

Exemptions

Companies that prepare abbreviated balance sheets and abbreviated Statements of Changes in Equity (ECPN) are not obliged to prepare the Management Report, provided the conditions are met. When these conditions are met, they may formulate the abbreviated Balance Sheet, Profit and Loss Account, ECPN, and abbreviated Notes (Memory), but they are not required to prepare the Statement of Cash Flows (EFE) or the Management Report (IDG).