59 STUDY GUIDE Flashcards
2115.01
In this section, the statement of cash flows (SCF) is presented as part of the set of financial statements of Tiger Co. This statement omits some of the disclosures required by generally accepted accounting principles.
An example statement of cash flows for Tiger Co. for 20X1 and 20X2 is presented as follows:
2115.02
The SCF is presented in three sections: cash flows from operating activities, from investing activities, and from financing activities. Each section presents both positive and negative cash flows from a specific aspect of the company’s activities. The change in cash resulting from the total of these three sections reconciles the change in cash for the period.
2115.03-.05 OBJECTIVES AND PURPOSES
The primary purpose of an SCF is to provide information about the cash receipts and cash payments of an enterprise during a period of time.
A business enterprise that provides a set of financial statements intended to report financial position and results of operations must provide an SCF for each period for which results of operations are presented.
Cash flow information is considered useful to investors, creditors, and other financial statement users to assess the following:
a. An enterprise’s ability to generate positive future cash flows
b. An enterprise’s ability to meet obligations and pay dividends and its need for external financing
c. The reasons for differences between net income and associated cash receipts and payments
d. The effect on an enterprise’s financial position of both its cash and noncash investing and financing transactions that took place during the period
2115.06-.08 PRINCIPLES OF CASH FLOW REPORTING
Reference: 2115.07
Cash equivalents are short-term, highly liquid investments that:
are readily convertible to known amounts of cash and
are so near maturity that they represent insignificant risk of changes in value due to changes in interest rates. (Generally, only investments with original maturities of three months or less qualify as cash equivalents, such as Treasury bills, commercial paper, money market funds, and federal funds sold.)
2115.08 A AND B
2115.09
2115.09
The statement of cash flows (SCF) is presented in three primary sections: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities (in that order).
a. Cash flows from operating activities: Cash flows from operating activities include those cash flows resulting from transactions included in the determination of net income, unless specifically classified as financing or investing activities.
(1) Cash inflows from operating activities generally include the following:
(a) Cash receipts from sales of goods or services
(b) Cash receipts from interest and dividends on investments in another enterprise
(c) All other cash receipts that are not classified as either investing or financing activities
(2) Cash outflows classified as operating activities include the following:
(a) Cash payments to acquire materials for manufacture or goods for resale
(b) Cash payments to other suppliers and employees for goods and services
(c) Cash payments to governments for taxes, duties, other fees, or penalties
(d) Cash payments to lenders and other creditors for interest
(e) All other cash payments that are not classified as investing or financing activities
2115.09
Cash flows from investing activities: Cash flows from investing activities involve asset transactions other than cash (and cash equivalents) and those assets related directly to the determination of operating results (e.g., inventories, receivables).
(1) Specifically, the following are types of cash inflows from investing activities:
(a) Cash receipts from collections or sales of loans made by the enterprise and of other debt instruments that are purchased by the enterprise
(b) Cash receipts from sales of equity securities of other enterprises
(c) Cash receipts from the sales of property, plant, and equipment and other productive assets
(2) The following are categories of cash outflows from investing activities:
(a) Cash payments for loans made by the enterprise and payments to acquire debt instruments of other entities
(b) Cash payments to acquire equity instruments of other enterprises
(c) Cash payments to purchase property, plant, as well as equipment and other productive assets
c. Cash flows from financing activities: Cash flows from financing activities involve debt and equity financing.
(1) Cash inflows from financing activities include the following:
(a) Cash proceeds from issuing equity instruments
(b) Cash proceeds from issuing bonds, mortgages, notes, and other short- and long-term debt instruments
(2) Cash outflows classified as financing activities are as follows:
(a) Cash payments of dividends or other distributions to owners, including outlays to reacquire the enterprise’s instruments
(b) Cash repayments of amounts borrowed
(c) Other principal cash payments to creditors who have extended long-term credit
2115.10
Several additional matters of form and content of the statement of cash flows (SCF) are as follows:
a. The SCF presents net cash flows from operating, investing, and financing activities to reconcile the change in cash (and cash equivalents) for the period.
b. In reporting cash flows from operating activities, enterprises are encouraged to use the direct method, with disclosure of at least the following:
(1) Cash collected from customers
(2) Interest and dividends received
(3) Other operating cash receipts
(4) Cash paid to employees and other suppliers of goods and services
(5) Interest paid
(6) Income taxes paid
(7) Other operating cash payments
c. Alternatively, the enterprise may use the indirect method of determining cash flows from operating activities, in which the calculation begins with net income and eliminates noncash amounts included in the determination of that figure as well as any transactions that are classified as investing or financing activities (e.g., gains or losses on sales of assets).
d. Regardless of whether the direct or indirect method is used to determine cash flows from operating activities, the following items are required to be disclosed in the SCF or related notes:
(1) Amount of income taxes paid during the period
(2) Amount of interest paid during the period
(3) Reconciliation of net income and net cash flows from operating activities (If the direct method is used, this is ordinarily done in a related note; if the indirect method is used, this is ordinarily part of the SCF section on operations.)
e. Information about noncash investing and/or financing activities must be disclosed outside the main body of the SCF.
f. Cash-flow-per-share information shall not be presented.
g. FASB ASC 230-10-05-3 contains the following exceptions:
(1) The following organizations are exempt from the requirement to present an SCF: defined benefit pension plans and highly liquid investment companies that meet specified conditions.
(2) Cash receipts and payments of the following types are classified as operating cash flows in the SCF: securities specifically acquired for resale and carried in a trading account, and loans that are acquired specifically for resale and are carried at the lower of cost or market value.
h. FASB ASC 942-230-45-1 and 230-10-45-14 include the following exceptions:
(1) Banks, savings institutions, and credit unions may report certain cash receipts and cash payments as net amounts rather than gross amounts. These receipts and payments include deposits placed with other financial institutions and withdrawals of deposits, time deposits accepted, and repayments of deposits, as well as loans made to customers and principal collections of loans.
(2) Cash flow results from future contracts, forward contracts, option contracts, or swap contracts that are accounted for as hedges of identifiable transactions or events may be classified in the same category as the cash flows from the items being hedged, provided that the accounting policy is disclosed.
2115.10
2115.10
2115.11
In the following sections, we consider a comprehensive example of the preparation of statement of cash flows, applying the direct method of determining cash flows from operating activities. As a basis for this example, we use the following comparative balance sheets for 20X1 and 20X2 for Wallace, Inc. along with the income statement for 20X2 and accompanying explanations.
- Property, plant, and equipment (PPE) of $150,000 was purchased during the year; PPE costing $50,000, on which $10,000 of depreciation had been taken, was sold at a $5,000 loss.
- Intangible assets costing $10,000 were purchased during 20X2.
- Capital stock with a par value of $75,000 was sold for $100,000 during 20X2.
- Dividends of $35,000 were declared and paid during 20X2.
- Bonds of $100,000 were retired at a $10,000 gain, which was subject to income taxes at 40%.
- Bonds of $50,000 were converted to common stock with par value of $40,000 during 20X2.
- Accounts payable relate to inventory purchases; accrued expenses relate to selling and administrative expenses.
2115.12
2115.13
2115.14
2115.15-.16
2115.17
