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Statement of Cash Flow Study Outline Published

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
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