Dr. M. D. Chase
Accounting 400 605-84B
Statement of Cash Flows Rreview
Long Beach State University
Page 1
SFAS-95 STATEMENT OF CASH FLOWS
PURPOSE: Provide information about the entities cash receipts and disbursements classified by major category (operating, financing and
investing activities) so that investors and creditors can compare the cash flows of different firms in a uniform manner; provide a
methodology to eliminate the inconsistencies and ambiguities common with the statement of changes in financial position (APBO-19).
II. REQUIREMENTS:
A. Statement of Cash Flows is required as part of a full set of financial statements for all business enterprises in place of a
statement of changes in financial position.
B. The statement of cash flows shall explain the change in cash and cash equivalents that took place during the accounting period.
1. Cash equivalents: short-term, highly liquid investments that are both
a. readily convertible into known amounts of cash and
b. so near maturity value that they present insignificant risk of changes in value because of changes in interest rates
(generally considered to be original maturity to buyer within three months).
i.
Not all investments that qualify are required to be treated as cash equivalents.
(i)
Management will establish and disclose its policy of classification. Any change to that policy is a change in
accounting principle under APBO-20 and as such will require retroactive restatement of all prior periods presented
for comparative purposes. For example, cash purchases and sales of investments as part of a company's cash
management activities (as distinct from its operating, investing or financing activities) need not be reported.
2.The gross amounts of cash flows is more relevant than net amounts and should be utilized for reporting purposes;
a. Exceptions: net cash flows may be use for:
i.
cash equivalents;
ii. items where turnover is quick, large dollar value and maturities are short and the company is substantively holding or
disbursing cash on behalf of its customers (demand deposits and similar accounts)
iii. items where turnover is quick, large dollar value and maturities are short and pertain to
(i)
investments (other than cash equivalents)
(ii)
loans receivable
(iii)
debt with original maturity less than three months
iv. companies that elect to use the indirect method and reconcile net income to net cash flows from operating activities by
removing (from net income) the effects of
(i)
deferrals of past operating cash receipts and payments (i.e. changes in inventory and deferred income etc.) and
accruals of future operating cash receipts and payments (i.e. receivables and payables) and
(ii)
all items affecting investing or financing cash flows (i.e. depreciation, gains and losses on sales of PP&E, early
extinguishment of debt etc.)
I.
III. CONTENT AND FORM OF THE STATEMENT
A. Direct Method of determining cash flows from operating activities is encouraged;
1.a positive cash flows from revenues are reduced by negative cash flows from expenses
2.enterprises using the direct method are encouraged to report all breakdowns of operating cash receipts and payments that they feel
meaningful and feasible; at a minimum, companies must separately report the following classes of cash payments:
a. Cash collected from customers, including lessees, licensees, and the like;
b. Interest and dividends received;
c. Other operating cash receipts, if any;
d. Cash paid to employees and other suppliers of goods or services, including suppliers of insurance, advertising and the like;
e. Interest paid;
f. Income taxes paid;
g. Other operating cash payments if any;
3.Supplemental disclosure: if the direct method is used, a separate schedule of reconciliation of net income to net cash flow from
operating activities must be provided.
Direct Method: Credit Sales + decreases in receivables (- increases in receivables) = cash collections
B.
Indirect Method: of determining cash flows from operating activities;
1.Net income is adjusted for non-cash items included in its determination to yield net cash flows from operations
2.Supplemental disclosure: no separate schedule of reconciliation is required under the indirect method because the format is
essentially that of the supplemental disclosure required under the direct method;
Dr. M. D. Chase
Accounting 400 605-84B
Statement of Cash Flows Rreview
Long Beach State University
Page 2
Indirect Method (reconciliation method): Net income is reconciled to cash flow by adjusting for changes in receivables, payables, accruals,
deferrals and prepayments. Gains are deducted from accounting income; losses and non-cash expenses such as depreciation are added back to
income to determine net cash flows.
C.
For either Method:
1.The reconciliation of net income to the net cash flow from operating activities shall be presented.
a. The reconciliation will separately present all major classes of activity considered meaningful and feasible and at a minimum
such items as described above in the discussion of direct method.
2.Both investing and financing activities shall be reported separately in the statement of cash flows.
3.Information about all investing and financing activities of an enterprise that affect recognized assets or liabilities but do not result
in cash receipts or payments in the period shall be reported in related disclosures.
4.Financial statements will not report cash flow per share.
D. Disclosure Requirements: Cash flows will be classified as resulting from operating, investing, or financing activities.
1.Operating Activities: Transactions that are included in the determination of net income;
a. Any transactions not defined as investing or financing activities and involved in the production or delivery of goods and/or
services. Cash flows from operating activities are generally those that enter into the determination of net income.
Cash provided by:
--sale of goods or services;
--interest from any source;
--Dividends received from investments;
--all other income not directly related to operations such as other income; rental income etc.
Cash used to:
--purchase inventory;
--meet payroll expenses;
--pay direct and indirect operating costs of business: taxes, utilities, insurance etc;,
--pay interest on debt;
Note: Gains and losses and losses from the disposal of property plant and equipment are excluded from cash flows operating activities. These
items are reported with investing activities. Only items that produce revenue in accordance with the purposes for which the business
is operated may be included as cash flows from operations.
2.Investing Activities: Transactions that are involved in the acquisition or disposition of noncurrent assets
1. making and collecting loans
2. acquisition and disposal of debt and equity instruments
3. acquisition and disposal of long lived productive assets
Cash provided by:
--Sale of PP&E
--Collection of loans
--Sale of securities that are not cash equivalents such as stock and bonds of other companies;
Cash used to:
--Purchase PP&E
--Loan money to other companies (affiliated firms)
--Purchase securities that are not case equivalents such as stock and bonds of other companies;
3.Financing Activities: Transactions (other than payment of interest) involving borrowing from creditors;
a. Transactions (other than stock dividends and splits) involving owners of the company;
b. obtaining resources from owners (equity instruments) and providing owners a return on and of their investment
c. borrowing and repaying amounts borrowed
d. obtaining and paying for long-term credit to finance productive resources
Dr. M. D. Chase
Accounting 400 605-84B
Statement of Cash Flows Rreview
Long Beach State University
Page 3
Cash provided by:
--short and long-term borrowing (notes, bonds, mortgages etc.)
--sales of capital stock
Cash used to:
--pay off principal of short and long-term borrowing (excludes interest);
--pay cash dividends (excludes stock dividends and splits);
--purchase treasury stock;
E.
If foreign currency is a significant reporting factor, the statement must disclose:
1.the US$ equivalent of foreign currency cash flows, using the historical exchange rate in effect at the time of the cash receipt or
payment or an appropriately weighted average if the result is substantially the same as the specific rate;
2.the effect of exchange rate changes on cash held in foreign currencies (must be reported as a separate line item in the
reconciliation of the beginning and ending balances of cash and cash equivalents);
F.
Partial Cash Investing and Financing Activities:
1.Information about investing and financing activities not resulting in cash receipts or payments in the period must be reported
separately.
a. Investing and financing activities that do not affect cash may be disclosed at the bottom of the Statement in a separate
"schedule" or within the body of the statement.
b. For example, a company acquires an asset for $25,000 by paying $15,000 down and signing a note of $10,000 for the
balance. The following alternates would be appropriate:
Alternative a: Separate Schedule
Reported within the Statement of Cash Flows:
Cash Flows From Investing Activities:
Payment for purchase of asset...........................$(15,000)
Reported in a Separate Schedule:
Investing and Financing Activities not Affecting Cash
Issuance of note to acquire asset..........................$ 10,000
Purchase of land by issuance of note.......................(10,000)
Alternative b: within the body of the statement
Reported within the Statement of Cash Flows:
Cash Flows From Investing Activities:
Purchase of Asset by issuance of note and cash........$( 25,000)
Less: Issuance of note................................
10,000
Cash payment for purchase of asset....................
$ 15,000
NOTE: Alternative "b" details the entire transaction in one location but is showing the financing activity (issuance of the note) in the investing
section. The accountant should weight the relative importance of the financing/investing aspect of the transaction and select
the most appropriate reporting alternative.
G.
Cash dividends declared but not paid in the reporting period require special consideration.
1.Dividends are not related to operating activities but are a return of capital to owners. This means that the decrease in the current
liability (dividends payable) in the year of payment is not treated as an adjustment to net income.
2.In the year of declaration: account for the change in retained earnings and dividends payable.
3.In the year of payment: account for the change in dividends payable and cash without adjusting net income.
Dr. M. D. Chase
Accounting 400 605-84B
Statement of Cash Flows Rreview
Long Beach State University
Page 4
IV. PREPARING THE STATEMENT OF CASH FLOWS (all inclusive worksheet approach)
A. Compute the change in balance for each account in the trial balance from year 1 to year 2.
1.Debits are represented as positive numbers, credits as negative (bracketed)
B. Using accounting paper of sufficient width to accommodate all trial balance accounts in separate columns and allowing four (4)
additional columns for the Statement of Cash Flows, list the components of the Statement of Cash Flows down the left side of the
spreadsheet. List the account names and changes in balance across the top of the spreadsheet starting column five (5) with Cash. Be
certain to include:
1.The name of the company;
2.The title "Statement of Cash Flows"
3.Three sections labeled
a. "Cash flows from operating activities:"
b. “Cash flows from investing activities:"
c. “Cash flows from financing activities:"
4.those items that must always be included if present: (recall that companies must separately report the following classes of cash
payments at a minimum:
a. Cash collected from customers, including lessees, licensees, and the like;
b. Interest and dividends received;
c. Other operating cash receipts, if any;
d. Cash paid to employees and other suppliers of goods or services, including suppliers of insurance, advertising and the like;
e. Interest paid;
f. Income taxes paid;
g. Other operating cash payments if any;
C. The amount of change in each column must be reconciled to zero (footed to 0 balance); the total amount in each row must be cross
footed to zero (note that the cross footing will include only those rows reconciling trial balance accounts). This procedure is
illustrated in the following examples.
Dr. M. D. Chase
Accounting 400 605-84B
Long Beach State University
Page 5
Statement of Cash Flows Rreview
Example 1: Unconsolidated Firm, Direct Method
--Assume the following trial balance data is available.
--Present the statement of cash flows and accompanying worksheets in the "all inclusive spreadsheet format"
Trial Balance Input Screen
12/31/75
Post Closing
Account:
12/31/76
Adjusted
Trial Balance
Difference
Trial
Balance
Dr (Cr)
Cash
$5,300
$9,800
$4,500
A/R
9,600
10,900
1,300
Inventory
12,500
11,000
(1,500)
L/T Inv
22,000
20,000
(2,000)
PP&E
82,600
107,300
24,700
A/D-PP&E
(32,800)
(41,900)
(9,100)
A/P
(10,300)
(12,100)
(1,800)
Sal Pay
(1,100)
(800)
300
Int Pay
(300)
(500)
(200)
C/S
(64,000)
(74,000)
(10,000)
RE
(23,500)
(20,000)
3,500
(98,700)
(98,700)
(2,500)
(2,500)
(800)
(800)
COGS
51,000
51,000
Sal Exp
23,000
23,000
Depr Exp
9,100
9,100
Int Exp
4,000
4,000
Other Exp
1,900
1,900
Tax Exp
3,300
3,300
$0
$0
Sales
Int Rev
Gain:LTI
Total
$0
Statement of Cash Flows
Cash
A/R
Inventory L/T Inv
PP&E
A/D
PP&E
A/P
Sal Pay
Int Pay
C/S
RE
Sales
Int Inc
Dallas, Inc.
Gain on
COGS
Sal Exp
L/T Inv
For Year Ended, 12/31/x2
4,500
1,300
(1,500) (2,000)
Operating Activities:
24,700 (9,100) (1,800)
300
(200) (10,000)
3,500 (98,700)
(2,500)
(800)
Exp
51,000
23,000
9,100
Increases in A/R
(1,300)
Sales
1,300
97,400
0
2,500
(2,500)
9,100
Other
Exp
4,000
1,900
Tax
Bal
Exp
3,300
(9,100)
0
0
(1,300)
0
98,700 (98,700)
Cash Collections
Deprec Int Exp
98,700
0
0
Interest & Div Rev:
Change in Interest Rec.
2,500
0
Amort Prem/Disc Bond
Invest.
Interest & Div
Collected
Other Revenues:
Change in Unearned
Revenues:
Cash In from Ops
99,900
0
Owtflows:
0
Change in Inventory
1,500
(1,500)
Change in A/P
1,800
(1,800)
(51,000)
51,000
COGS
Payments to Suppliers
(47,700)
Change in Salary Pay
Salary Exp
Payments to
Employees
0
0
1,800
0
(51,000)
0
0
(300)
300
(23,000)
23,000
(23,300)
Change in Int Payable
0
1,500
0
(300)
0
(23,000)
0
0
200
(200)
(4,000)
4,000
0
200
0
Amort Prem/Disc Bonds
Pay:
Int Expense
Interest Paid
(3,800)
0
(3,300)
3,300
(1,900)
1,900
(4,000)
0
0
Change in Prepaid Exp:
Prepaid Taxes
Payment of other Exp
Change in Tax Payable
Deferred Taxes
Income Tax Expense
Payments of Inc Tax:
(3,300)
(1,900)
0
0
Dr. M. D. Chase
Accounting 400 605-84B
Long Beach State University
Page 7
Statement of Cash Flows Review
Cash Out from Ops
(80,000)
0
0
Net Cash from Ops
19,900
0
0
Investing Activities:
0
Sale of Investments
2,800
(2,800)
(24,700)
24,700
0
2,000
800
0
Purchase of Investments
Sale of PP&E
Purchases of PP&E
Net Cash: Inv. Activ.
(21,900)
Financing Activities:
(24,700)
0
0
0
0
0
Sales of C/S
10,000 (10,000)
Payment of Dividends
(3,500)
0
10,000
3,500
0
(3,500)
0
Change in Short-term
Debt
Change in Long-term
Debt
Change in InterCo Debt
Treasury Stock
Net Cash: Fin. Activ.
6,500
0
Change in Cash Balance
4,500
0
Add: Cash Balance BOY
5,300
Cash Balance EOY
9,800
Non-Cash Investing and
Financing Acivities:
Conversion of B/P to C/S:
Purchase of Assets for
N/P:
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Dr. M. D. Chase
Accounting 400 605-84B
Statement of Cash Flows Review
Long Beach State University
Page 8
Reconciliation of Net Income to Net Cash Flows from Operating Activities:
Net Income:
$
9,700
Adjustments:
Add: Decrease in Inventory............
$
1,500
Increase in Accounts Payable.....
1,800
Depreciation Expense.............
9,100
Increase in Interest Payable.....
200
$
12,600
Less: Increase in Accounts Receivable.. $
Salaries Payable.................
Gain on Sale of LT Investments..
$
(1,300)
( 300)
( 800)
(2,400)
Net Cash Flows from Operating Activities:
$
10,200
19,900
Disclosure of Accounting Policy:
Cash in excess of daily requirements is invested in marketable equity securities consisting of T-Bills with maturities of three months or less.
Such investments are deemed cash equivalents for purposes of the statement of cash flows.
Special Issues for Consolidated Firms:
A.
Cash Acquisition of Subsidiary
1. Investing Activity: Use of Cash
a. It is important to remember that the payment is reduced by the cash acquired from S in the transaction
b. Supplemental Disclosures:
1. Full cost of assets acquired
2. Adjustment to FMV and NCA accounts (per the analysis of the investment)
3. Assumed liabilities must be disclosed separately
4. MI must be disclosed
Example 1: Assume that P purchases 80% of S for $540,000 cash. S has the following account balances at acquisition.
BV
FMV
Diff
Cash & Cash
Equivalents
50,000
50,000
0
Inventory
60,000
60,000
Equipment (net) 5yr
190,000
250,000
Building (net) 10yr
400,000
425,000
25,000
0
0
60,000
700,000
Lt Liabilities
(150,000)
(150,000)
CS ($10)
(200,000)
(200,000)
RE
(350,000)
(700,000)
Analyze the investment:
Cost
Purchased BV:
CS (.8)200,000
RE (,8) 350,000
Excess of Cost>BV
Attributable to:
Equipment (.8)(60,000)
Building (.8)(25,000)
Balance to GW
$
$
160,000
280,000
48,000
20,000
32,000
100,000
540,000
440,000
100,000
0
Dr. M. D. Chase
Accounting 400 605-84B
Long Beach State University
Page 9
Statement of Cash Flows Review
Impact on the statement of Cash Flows:
Investing Activities:
Uses of Cash: Purchase of 80% of net assets of S ($540,000 cash paid less $50,000 cash received)
$
490,000
Supplemental Disclosure:
Full cost must be disclosed; that was dealt with under investing activities if presented as above
Each asset affected by the purchase would be adjusted IAW the analysis as presented above
o
In this case adjustments to Equipment, Building and GW.
Liabilities assumed of $150,000 would be disclosed in the worksheet
MI (NCI) of $110,000 [(.2)(200,000 CS + 350,000 RE)] must be disclosed (this is a credit i.e. use)
Noncash Acquisition of a Controlling Interest in S
Noncash acquisitions usually involve the use of P CS or P Debt (bonds). The same rules apply but we now have a situation that is both and
Investing Activity (acquisition of S) and a Financing Activity (issuance of P CS and/or P Debt)
Example 2:
Assume the same facts outlined above except that P issues 10,000 shares of $10par/FMV $54 common stock for the 80%
interest is S.
This would produce the following changes to account for in the trial balance that would
Cash
Inventory
Equipment
190,000 + 48,000
Building
400,000 + 20,000
GW
LT Debt
MI (.2)(S CS 200,000 + S RE 350,000)
P CS (10,000)(10)
P PIC (10,000)($44)
If you use the TB and worksheet approach
promulgated in this handout, all these factors are
automatically accounted for as are the
amortizations of the excess of cost > bv…
50,000
60,000
238,000
420,000
32,000
(150,000)
(110,000)
(100,000)
(440,000)
Note that the amortization of cost>Bv are
noncash transactions that adjust net income when
using the indirect method…in this case the
adjustments would be to reverse the depreciation
entries made in the “D” entry
Other Impacts on the Statement of Cash Flows caused by the Consolidation Process
Purchase of Additional Intercompany shares
o
CS purchased for cash directly from S is a wash under Operating Activities (+S cash –P cash) but the change in P % must
be reflected.
o
Shares purchased from the market are a use of cash and a purchase ofTS and a financing activity; Change in P% is reflected
Intercompany Dividends
o
Dividends to P wash as a source and use in Operating Activities (wash)
o
If a MI exists, the dividends to MI are a use of cash under Financing Activities
Intercompany Bonds
o
Recall that purchases of bonds directly between affiliates is simply eliminated; therefore no effect
o
Purchases of affiliate bonds (up or downstream) are treated as constructive retirements and both intercompany
receivables/payables and amortizations of premiums and discounts are eliminated (this means no effect on cash flows)
o
Intercompany payments to the MI will be reflected as uses of Cash under Operating Activities
Unconsolidated Subsidiaries
o
No special treatment (this means that the transactions are fully reflected in the statement of cash flows)