Cash flows - gaap360



• 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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