We have published the following accounting study outline on cash flows (also available in word, here):
- Statement of Cash Flows Required
- o As part of a full set of general-purpose financial statements
- o For all business enterprises and not-for-profits
- § Some limited exclusions from requirement to provide
- o Provide for each period results of operations (income statement) provided
- § SEC Rules differ in some respects
- Cash & cash equivalents (C&C)
- § Cash
- Cash on hand
- Demand deposits
- § Cash equivalents
- Short-term, highly liquid investments that are
- o Readily convertible to amounts of cash, and
- o So near maturity (THREE months or less) that the risk of changes in value because of changes in interest rates is not significant
- Examples
- o Treasury bills
- o Commercial paper
- o Money market funds
- o Federal funds sold
- Company can elect to treat a by definition “cash equivalent” as something else
- o Accounting policy election (see disclosures below)
- o Any change in policy is a change in accounting principle
- § Restate financial statements for earlier years presented
- § Gross vs. net reporting
- Gross amounts of cash receipts and payments more relevant
- Qualify for net reporting
- o Turnover is quick
- o Amounts are large
- o Maturities are short
- o Specific items that qualify
- § Investments
- § Loans receivable
- § Debt (3 months or less)
- Purpose of Statement of Cash Flows
- o Provide information on cash receipts (sources of cash) and cash disbursements (uses of cash) during a period
- o Provide liquidity or cash information to interested parties, should help these parties assess:
- § Ability to generate positive future net cash flows
- § Ability to meet obligations, pay dividends
- § Need for external financing
- § Reasons for differences between net income and associated cash receipts and cash payments
- § Effects on financial position of both cash and noncash investing and financing transactions
- o Reconciles C&C of:
- § Balance of C&C presented on balance sheet at BEGINNING of period, with
- § Balance of C&C presented on balance sheet at END of period
- § Statement of Cash Flows shows the change between these two amounts
- Classification of cash flows (three, based on nature of activity):
- o Operating
- § Items that get to net income (activities involved in producing goods and delivering services to customers)
- § Transactions involving trading securities under 115
- § Residual category – item not classified as investing or financing, goes here
- § Differences how shown based on two methods (see below)
- o Investing
- § Noncurrent asset transactions
- Fixed assets
- Investments
- Lending to others
- § Uses
- Making loans to other entities
- Purchasing available for sale and held to maturity investment securities of other entities (remember trading securities are operating)
- Acquiring PPE
- § Sources
- Collecting on previous loans you made
- Disposing of available for sale and held to maturity investments (not trading)
- Disposing of PPE
- o Financing
- § Sources
- Obtaining resources from owners
- Borrowing debt
- § Uses
- Repurchasing stock
- Repayment of debt (principal, not interest)
- Paying dividends
- Non-cash investing and financing activities
- o Material, must be supplemental disclosure
- o Portion is cash, include that in cash flow statement
- § Fixed asset for stock
- § Convert bonds to equity
- § Acquire assets through capital lease obligation
- § Exchange of non-cash assets
- Two methods of presenting statement of cash flows(only operating different)
- o Direct method
- § Recommended
- § Shows major classes of operating cash receipts and cash disbursements
- Sources
- o Cash received from customers
- o Interest received
- o Dividends received
- o Other operating cash receipts (insurance proceeds, lawsuit settlements)
- o Cash from sale of securities classified as trading securities under 115
- Uses
- o Cash paid to suppliers or employees
- o Interest paid
- o Income taxes paid
- o Cash paid to acquire securities classified as trading securities under 115
- o Other operating cash payments
- § If use, also required to provide (in separate schedule) indirect – net income to net cash flows from operating activities
- § Cash collections
- Sales to customers -
- increase in receivables+
- decrease in receivables+
- increase in unearned revenue-
- decrease in unearned revenue
- § Cash paid to suppliers/employees
- COGS+
- Increase in inventory-
- Decrease in inventory+
- Expenses+
- Increase in prepaid-
- Decrease in prepaid
- -increase in AP/other liab+
- Decrease in AP/other liab
- o Indirect method
- § Reconciles net income to net cash flows from operating activities
- § Supplemental disclosure of cash paid for interest and income taxes is required
- § Adjustments to NI (remove the effects on NI for these items which don’t impact cash)
- Non-cash items, such as amortization, depreciation, gains/losses on sales
- Rules
- o Increase in asset or debit balance
- § decrease or use of cash
- o decrease in asset or debit balance
- § increase or source of cash
- o increase in liability, equity or credit balance
- § increase or source of cash
- o Decrease in liability, equity or credit balance
- § Decrease in source of cash
- o Gains
- § adjust out of operating – negative to net income – other side investing
- o losses
- § adjust out of operating – positive in net income – other side investing
- o CLAD
- § Current assets and liabilities
- § Losses and gains
- § Amortization and depreciation
- § Deferred items
- Disclosures
- o Accounting policy on classification of items as C&C
- § Which items are treated as C&C
- § Change to policy would be disclosed and is a change in accounting principle (restate prior periods)
- o Investing and financing noncash transactions
- o If direct method used, a reconciliation of net income to net cash flow from operating activities in separate schedule (indirect method)
- o Cash flow per share (similar to EPS)
- § Is not permitted
- § May fall into the SEC’s rules on “Non-GAAP” financial measures if presented
Filed under: Uncategorized
