300127 Flashcards
Mend Co. purchased a 3-month U.S. Treasury bill. Mend’s policy is to treat as cash equivalents all highly liquid investments with an original maturity of three months or less when purchased. How should this purchase be reported in Mend’s statement of cash flows?
As an outflow from investing activities
As an outflow from financing activities
Not reported
As an outflow from operating activities
Not reported
FASB ASC 230-10-45-1 states: “A statement of cash flows shall report the cash effect during a period of an entity’s operations, its investing transactions, and its financing transactions.”
It is further noted that these are the “same amounts as similarly titled line-items or subtotals shown in the statements of financial position as of those dates.” Since Mend’s policy is to treat these investments as cash equivalents, the purchase would not be reported in the statement of cash flows.
Cash Equivalents
Cash equivalents are short-term, highly liquid investments that have both of the following characteristics: they are readily convertible to known amounts of cash AND are so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Generally, only investments with original maturities of three months or less qualify under that definition. Original maturity means original maturity to the entity holding the investment. For example, both a three-month U.S. Treasury bill and a three-year U.S. Treasury note purchased three months from maturity qualify as cash equivalents. However, a Treasury note purchased three years ago does not become a cash equivalent when its remaining maturity is three months.
Examples of items commonly considered to be cash equivalents are Treasury bills, commercial paper, money market funds, and federal funds sold (for an entity with banking operations).
FASB ASC Glossary
Financing Activities
Financing activities is one of the three categories of cash flows on the statement of cash flows. It includes all transactions related to obtaining resources from owners and providing them with a return on, and a return of, their investment and to obtaining and repaying debt, including short-term and long-term debt, mortgages, finance lease obligations, seller-financed debt, and debt incurred to acquire treasury stock. (FASB ASC 230-10-20)
In governmental accounting, there are two categories of financing activities reported on the cash flow statement of proprietary funds or governments engaged in business-type activities: “noncapital financing activities” and “capital and related financing activities.” (GASB 2450.117–.122)
Investing Activities
Investing activities is one of the three categories of cash flows in the statement of cash flows. The category includes all transactions related to the making or collecting of loans and the acquiring and disposing of debt; equity instruments (of other entities); property, plant, and equipment; or a business unit.
FASB ASC 230-10-20
Operating Activities
Operating activities is one of the three categories of cash flows in the statement of cash flows. Operating activities are all transactions and other events that are not investing or financing activities. Operating activities generally include transactions that enter into the determination of net income and include production and delivery of goods and services, interest and dividends received, and payment of interest.
FASB ASC 230-10-20
Statement of Cash Flows
The statement of cash flows is one of the required financial statements. Cash receipts and cash payments are classified into three categories:
Operating activities—all transactions and other events that are not investing or financing; generally include transactions that enter into the determination of net income. These include production and delivery of goods and services, interest and dividends received, and payment of interest.
Investing activities—all transactions related to the making or collecting of loans and the acquiring and disposing of debt, equity instruments, or property, plant, and equipment.
Financing activities—all transactions related to obtaining resources from owners and providing them with a return on, and a return of, their investment, and to obtaining and repaying debt.
Separate disclosure of noncash investing and financing activities is also required. Examples of such activities include obtaining an asset by entering into a finance lease, by exchange for another asset, or by the issuance of stock or debt.
The statement of cash flows can be prepared using either the direct or the indirect method.
FASB ASC 230-10-45 and 10-55
In governmental accounting, cash flow statements are presented for proprietary funds and governmental entities engaged in business-type activities. The direct method must be used and there are four headings in the statement: cash flows from operating activities, from noncapital financing activities, from capital and related financing activities, and from investing activities. (GASB 2450)
