7 ASC 230 STATEMENT OF CASH FLOWS
Classification of Cash Receipts and Disbursements
Operating Activities Presentation
Extraordinary items and discontinued operations
Entities Exempt from Providing a Statement of Cash Flows
Net Reporting by Financial Institutions
Reporting Hedging Transactions
Reporting Foreign Currency Cash Flows
Example of preparing a statement of cash flows
Statement of Cash Flows for Consolidated Entities
PERSPECTIVE AND ISSUES
Subtopic
ASC 230, Statement of Cash Flows, contains one subtopic:
- ASC 230-10 Overall, that establishes standards for cash flow reporting in general purpose financial statements.
Scope and Scope Exceptions
A statement of cash flows is a required part of a complete set of financial statements for business enterprises and not-for-profit organizations. Only defined benefit plans, certain other employee benefit plans, and highly liquid investment companies that meet specified conditions are not required to present the statement. (ASC 230-10-15)
Overview
The primary purpose of the statement of cash flows is to provide information about cash receipts and cash payments of an entity during a period. A secondary purpose is to provide information about the entity's investing and financing activities during the period.
Specifically, the statement of cash flows helps investors and creditors assess
- Ability to generate future positive cash flows
- Ability to meet obligations and pay dividends
- Reasons for differences between net income and net cash receipts and payments
- The cash and noncash aspects of investing and financing transactions on an entity's financial position.
The ultimate objective of investment and credit decisions is the maximization of net cash inflows, so information for assessing the amounts, timing, and uncertainty of prospective cash flows is needed.
Cash flows involving trading securities must be classified based on the nature of, and purpose for which, the financial assets or liabilities are acquired or incurred.
Technical Alert – ASU 2012-05
In October 2012, FASB issued ASU 2012-05, Statement of Cash Flows (Topic 230): Not-for-Profit Entities: Classification of the Sale Proceeds of Donated Financial Assets in the Statement of Cash Flows. This update clarifies how to classify receipts from donated financial assets, such as securities, in statements of cash flow. It is not uncommon for not-for-profit entities to receive donations in the form of financial assets and then nearly immediately sell those assets for cash. Some entities classified cash receipts from such transaction in the investing section, while others classified them in the financing or operating sections.
The ASU 2012-05 amendments to ASU 230 make clear classification of cash receipts from the sale of the donated financial assets are to be consistent with the treatment of cash donations. The amendments require that the cash inflows from the sales of the financial assets are to be classified as:
- Operating activities unless donors have restricted the use of contributions for long-term purposes
- Financing activities if the donation has been restricted for long-term use
- Investing activities if the sale of the financial assets do not meet the criteria for operating or financing activities.
The FASB did not define “nearly immediately,” but conclude that the transactions covered in ASU 2012-05 should occur within days.
The amendments are “effective prospectively in fiscal years and interim periods within those years beginning after June 15, 2013. Retrospective application to all prior periods presented upon the date of adoption is permitted. Early adoption from the beginning of the fiscal year of adoption is permitted. For fiscal years beginning before October 22, 2012, early adoption is permitted only if an NFP's financial statements for those fiscal years and interim periods within those years have not yet been made available for issuance.” (ASU 2012-05)
DEFINITIONS OF TERMS
Definitions are from ASC 230-10-20 Glossary, except for “direct method” and “indirect method.”
Cash. Consistent with common usage, cash includes not only currency on hand but demand deposits with banks or other financial institutions. Cash also includes other kinds of accounts that have the general characteristics of demand deposits, in that the customer may deposit additional funds at any time and also effectively may withdraw funds at any time without prior notice or penalty. All charges and credits to those accounts are cash receipts or payments to both the entity owning the account and the bank holding it. For example, a bank's granting of a loan by crediting the proceeds to a customer's demand deposit account is a cash payment by the bank and a cash receipt of the customer when the entry is made.
Cash equivalents. Short-term, highly liquid investments that have both of the following characteristics
- Readily convertible to known amounts of cash and
- 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 US Treasury bill and a three-year US 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).
Direct method. A method that derives the net cash provided by operating activities from the components of operating cash receipts and payments as opposed to adjusting net income for items not affecting cash.
Fair Value. The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Financial Asset. Cash, evidence of an ownership interest in an entity, or a contract that conveys to one entity a right to do either of the following:
- Receive cash or another financial instrument from a second entity
- Exchange other financial instruments on potentially favorable terms with the second entity.
Financing activities. Financing activities include obtaining resources from owners and providing them with a return on, and a return of, their investment; receiving restricted resources that by donor stipulation must be used for long-term purposes; borrowing money and repaying amounts borrowed, or otherwise settling the obligation; and obtaining and paying for other resources obtained from creditors on long-term credit.
Indirect (reconciliation) method. A method that derives the net cash provided by operating activities by adjusting net income for revenue and expense items not resulting from cash transactions.
Investing activities. Investing activities include making and collecting loans and acquiring and disposing of debt or equity instruments and property, plant, and equipment and other productive assets, that is, assets held for or used in the production of goods or services by the entity (other than materials that are part of the entity's inventory). Investing activities exclude acquiring and disposing of certain loans or other debt or equity instruments that are acquired specifically for resale, as discussed in paragraphs ASC 230-10-45-12 and 230-10-45-21.
Operating activities. Operating activities include all transactions and other events that are not defined as investing or financing activities (see paragraphs 230-10-45-12 through 45-15). Operating activities generally involve producing and delivering goods and providing services. Cash flows from operating activities are generally the cash effects of transactions and other events that enter into the determination of net income.
CONCEPTS, RULES, AND EXAMPLES
Cash Focus
The statement of cash flows includes only inflows and outflows of cash and cash equivalents. Cash equivalents include any short-term highly liquid investments (see definition for criteria) used as a temporary investment of idle cash. The effects of investing and financing activities that do not result in receipts or payments of cash are to be reported in a separate schedule immediately following the statement or in the notes to the financial statements. The reasoning for not including noncash items in the statement of cash flows and placing them in a separate schedule is that it preserves the statement's primary focus on cash flows from operating, investing, and financing activities. Thus, if a transaction is part cash and part noncash, only the cash portion is reported in the body of the statement of cash flows.
Classification of Cash Receipts and Disbursements
ASC 230-10-45-10 through 17 discusses classification of cash receipts and disbursements. The statement of cash flows requires classification of cash receipts and cash disbursements into three categories.
- Investing activities
- Financing activities
- Operating activities.
See the Definitions of Terms section above for more information on these categories. The following are examples of the classification of cash inflows and outflows within the statement of cash flows:
Other Classification Items. ASC 230-10-45-18 through 21A provides additional guidance on specific acquisitions and sales of certain securities and loans:
- Topics 255 and 940 offer guidance on securities and other assets held in trading accounts carried by banks, brokers, and dealer in securities
- Cash receipts and payments from purchases and sales of securities and other assets classified as trading securities (Topic 320) are classified as cash flows based on the nature and purpose for which the securities were acquired.
- When a cash receipt or payment has aspects of more than one cash flow category, it should be in the category that is likely to be the predominant source of cash flows.
Disclosure of the following noncash investing and financing activities may be appended to the statement or reported in the accompanying notes:
- Acquiring an asset through a capital lease or by incurring long-term debt
- Conversion of debt to equity
- Exchange of noncash assets or liabilities for other noncash assets or liabilities
- Issuance of ownership shares to acquire assets
- Obtaining an investment asset or a building by receiving a contribution.
The following example reveals the classification of cash receipts and disbursements into the investing and financing activities of a statement of cash flows (though without detail of the required operating activities section):
Liquid Corporation
Statement of Cash Flows
For the Year Ended December 31, 20X1
Operating Activities Presentation
Direct vs. indirect.
The operating activities section of the statement of cash flows can be presented under the direct or indirect method. However, the FASB has long expressed a preference for the direct method of presenting net cash from operating. Conversely, the indirect method has always been vastly preferred by preparers.
The direct method shows the items that affected cash flow. Cash received and cash paid are presented, as opposed to converting accrual-basis income to cash flow information. At a minimum, entities using the direct method are required to report the following classes of operating cash receipts and payments:
- Cash collected from customers
- Interest and dividends received
- Other operating cash receipts
- Cash paid to employees and other suppliers
- Interest paid
- Income taxes paid including separate identification of the cash that would have been paid if the reporting entity had not received an income tax benefit resulting from increases in the fair value of its shares associated with share-based compensation arrangements.
- Other operating cash payments.
The direct method allows the user to clarify the relationship between the company's net income and its cash flows. For example, payments of expenses are shown as cash disbursements and are deducted from cash receipts. In this way, the user is able to recognize the cash receipts and cash payments for the period. The information needed to prepare the operating activities section using the direct method can often be obtained by converting information already appearing in the statement of financial position and income statement. Formulas for conversion of various income statement amounts for the direct method of presentation from the accrual basis to the cash basis are summarized next.
When the direct method is used, a separate schedule reconciling net income to net cash flows from operating activities must also be provided. That schedule reports the same information as the operating activities section prepared using the indirect method. Therefore, a firm must prepare and present both the direct and indirect methods when using the direct method for reporting cash from operating activities.
The indirect method is the most widely used presentation of cash from operating activities, because it is easier to prepare. It focuses on the differences between net income and cash flows. The indirect format begins with net income, which is obtained directly from the income statement. Revenue and expense items not affecting cash are added or deducted to arrive at net cash provided by operating activities. For example, depreciation and amortization would be added back because they reduce net income without affecting cash.
The statement of cash flows prepared using the indirect method emphasizes changes in the components of most current asset and current liability accounts. Changes in inventory, accounts receivable, and other current accounts are used to determine the cash flow from operating activities. Calculate the change in accounts receivable using the balances net of the allowance account in order to ensure that write-offs of uncollectible accounts are treated properly. Other adjustments under the indirect method include changes in the account balances of deferred income taxes and the income (loss) from investments reported using the equity method. However, short-term borrowing used to purchase equipment is classified as a financing activity.
The following diagram shows the adjustments to net income necessary for converting accrual-based net income to cash-basis net income when using the indirect method. The diagram is simply an expanded statement of financial position equation.
For example, using Row 1, a credit sale would increase accounts receivable and accrual-basis income but would not affect cash. Therefore, its effect must be removed from the accrual income in order to convert to cash income. The last column indicates that the increase in a current asset balance must be deducted from income to obtain cash flow. Using Row 2, a decrease in a current asset, such as prepaid rent, indicates that net income was decreased by rent expense, without a cash outflow in the current period. Thus, the decrease in prepaid rent would be added back to convert to cash income.
Similarly, using Row 3, an increase in a current liability must be added to income to obtain cash flows (e.g., accrued wages are on the income statement as an expense, but they do not require cash; the increase in wages payable must be added back to remove this noncash expense from accrual-basis income). Using Row 4, a decrease in a current liability, such as accounts payable, indicates that cash was used but the expense was incurred in an earlier period. Thus, the decrease in accounts payable would be subtracted to include this disbursement in cash income.
If the indirect method is chosen, then the amount of interest and income tax paid must be included in the related disclosures.
The major drawback to the indirect method involves the user's difficulty in comprehending the information presented. This method does not show the sources or uses of cash. Only adjustments to accrual-basis net income are shown. In some cases, the adjustments can be confusing. For instance, the sale of equipment resulting in an accrual-basis loss would require that the loss be added to net income to arrive at net cash from operating activities. (The loss was deducted in the computation of net income, but because the sale will be shown as an investing activity, the loss must be added back to net income.)
The direct method portrays the amounts of cash both provided by and used in the reporting entity's operations, instead of presenting net income and reconciling items. The direct method reports only the items that affect cash flow (inflows/outflows of cash) and ignores items that do not affect cash flow (depreciation, gains, etc.). The general formats of both the direct method and the indirect method are shown below.
Other Requirements
Gross vs. net basis.
The emphasis in the statement of cash flows is on gross cash receipts and payments. For instance, reporting the net change in bonds payable would obscure the financing activities of the entity by not disclosing separately cash inflows from issuing bonds and cash outflows from retiring bonds. In a few circumstances, netting of cash flows is allowed. Items having quick turnovers, large amounts, and short maturities may be presented as net cash flows if the cash receipts and payments pertain to (1) investments (other than cash equivalents), (2) loans receivable, and (3) debts (original maturity of three months or less).
Extraordinary items and discontinued operations.
ASC 230 permits, but does not require, separate disclosure of cash flows related to extraordinary items and to discontinued operations. If an entity chooses to disclose this information, disclosure must be consistent for all periods affected.
Cash flow per share.
This information may not be displayed in the financial statements of a reporting entity, because the FASB does not want the cash flow statement to have equal status with the income statement.
Entities Exempt from Providing a Statement of Cash Flows
Per ASC 962-205-45-9, a statement of cash flows is not required for a defined benefit pension plan that presents the financial information under the guidelines of ASC 960. Other employee benefit plans are exempted, provided that the financial information presented is similar to the requirements of ASC 960. Investment enterprises or a common trust fund held for the collective investment and reinvestment of moneys are not required to provide a statement of cash flows if the following conditions are met:
- Substantially all of the entity's investments are highly liquid.
- The entity's investments are carried at market value.
- The entity has little or no debt, based on average debt outstanding during the period, in relation to average total assets.
- The entity provides a statement of changes in net assets.
Net Reporting by Financial Institutions
Per ASC 230-10-45, banks, savings institutions, and credit unions are allowed to report net cash receipts and payments for the following:
- Deposits placed with other financial institutions
- Withdrawals of those deposits
- Time deposits accepted
- Repayments of time deposits
- Loans made to customers
- Principal collections of loans made to customers.
Not-for-Profit Organizations
ASC 958-230 requires not-for-profit organizations to include a statement of cash flows in a complete set of financial statements. The statement of cash flows is prepared as it is for business enterprises with the following differences:
- The indirect method of reporting cash flows from operations (or reconciliation of net income to net cash flows from operations required when the direct method is used) is prepared beginning with the change in net assets.
- Investing activities also include receiving contributions that are restricted by the donor to the purchase or improvement of long-lived assets or for long-term investment such as permanent or term endowment.
- Noncash activities include gifts of long-lived assets and gifts of securities held for long-term investment.
See also the Practice Alert section at the beginning of this chapter.
Reporting Hedging Transactions
Per ASC 230-10-45, the cash flows resulting from derivative instruments that are accounted for as fair value hedges or cash flow hedges may be classified as the same type of cash flows as the hedged items provided that the accounting policy is disclosed. However, if the derivative instrument used to hedge includes at inception an other-than-insignificant financing element, all cash inflows and outflows associated with the derivative instrument are reported by the borrower as cash flows from financing activities. A derivative that at inception includes off-market terms, or requires up-front cash payment, or both, often contains a financing element. A derivative instrument is viewed as including a financing element if its contractual terms have been structured to ensure that net payments will be made by one party in the earlier periods of the derivative's term and subsequently returned by the counterparty in the later periods (other than elements that are inherent in at-the-money derivative instruments with no prepayments). If for any reason hedge accounting is discontinued, then any cash flows subsequent to the date of discontinuance are classified consistent with the nature of the instrument.
Reporting Foreign Currency Cash Flows
If an entity has foreign currency transactions or foreign operations, it should translate the foreign currency cash flows using exchange rates in effect at the time of the cash flows. A weighted-average exchange rate for the period can be used for the translation if the result is substantially the same. The effect of changes in exchange rates on any cash balances held in foreign currencies should be shown as a separate part of the reconciliation of the change in cash and cash equivalents during the period. An example of reporting the effect of exchange rate changes is shown in the statement of cash flows in the “Classification of Cash Receipts and Disbursements” section of this chapter.
Noncash exchange gains and losses recognized in net income should be reported as a separate item when reconciling net income and operating activities.
Preparation of the Statement
Under a cash and cash equivalents basis, the changes in the cash account and any cash equivalent account is the “bottom line” figure of the statement of cash flows. Using the 2011 and 2012 statements of financial position shown below, an increase of $25,000 can be computed. This is the difference between the totals for cash and treasury bills between 2011 and 2012 ($41,000 − $16,000).
When preparing the statement of cash flows using the direct method, gross cash inflows from revenues and gross cash outflows to suppliers and for expenses are presented in the operating activities section.
In preparing the reconciliation of net income to net cash flow from operating activities (indirect method), changes in all accounts (other than cash and cash equivalents) that are related to operations are additions to or deductions from net income to arrive at net cash provided by operating activities.
A T-account analysis may be helpful when preparing the statement of cash flows. A T-account is set up for each account, and beginning (2011) and ending (2012) balances are taken from the appropriate statement of financial position. Additionally, a T-account for cash and cash equivalents from operating activities and a master or summary T-account of cash and cash equivalents should be used.
The financial statements below will be used to prepare the statement of cash flows.
Johnson Company
Statements of Financial Position
December 31, 2012 and 2011
Johnson Company
Statement of Earnings and Comprehensive Income
For the Year Ended December 31, 2012
Additional information (all relating to 2012)
- Equipment costing $6,000 with a book value of $2,000 was sold for $5,000.
- The company received a $3,000 dividend from its investment in XYZ, accounted for under the equity method and recorded income from the investment of $5,000 that is included in other income.
- The company issued 200 shares of common stock for $5,000.
- The company signed a note payable for $9,000.
- Equipment was purchased for $8,000.
- The company converted $15,000 bonds payable into 500 shares of common stock. The book value method was used to record the transaction.
- A dividend of $12,000 was declared.
- Equipment was leased on December 31, 2012. The principal portion of the first payment due December 31, 2013, is $700.
- The company sold half of their available-for-sale investments during the year for $8,000. The fair value of the remaining available-for-sale investments was $8,500 on December 31, 2012.
- The income tax rate is 36%.
Explanation of entries
- Cash and Cash Equivalents—Operating Activities is debited for $16,320 (net income) and the credit is to Retained Earnings.
- Depreciation is not a cash flow; however, depreciation expense was deducted to arrive at net income. Therefore, Accumulated Depreciation is credited and Cash and Cash Equivalents—Operating Activities is debited.
- Amortization of patents is another expense not requiring cash; therefore, Cash and Cash Equivalents—Operating Activities is debited and Patent is credited.
- The sale of equipment (additional information, item 1) resulted in a $3,000 gain. The gain is computed by comparing the book value of $2,000 with the sales price of $5,000. Cash proceeds of $5,000 are an inflow of cash. Since the gain was included in net income, it must be deducted from net income to determine cash provided by operating activities. This is necessary to avoid counting the $3,000 gain both in cash provided by operating activities and in investing activities. The following entry would have been made on the date of sale:
Adjust the T-accounts as follows: debit Summary of Cash and Cash Equivalents for $5,000, debit Accumulated Depreciation for $4,000, credit Property, Plant, and Equipment for $6,000, and credit Cash and Cash Equivalents—Operating Activities for $3,000.
- The deferred income tax liability account shows an increase of $4,440. The $3,000 increase that pertains to amounts reported in the income statement must be added to income from operations. Although the $3,000 was deducted as part of income tax expense in determining net income, it did not require an outflow of cash. Therefore, debit Cash and Cash Equivalents—Operating Activities and credit Deferred Taxes. The other two amounts in the deferred tax liability account are covered below, under paragraph “p.”
- Item 2 under the additional information indicates that the investment in XYZ is accounted for under the equity method. The investment in XYZ had a net increase of $2,000, which is the result of the equity in the earnings of XYZ of $5,000 and the receipt of a $3,000 dividend. Dividends received (an inflow of cash) would reduce the investment in XYZ, while the equity in the income of XYZ would increase the investment without affecting cash. The journal entries would have been
The dividend received ($3,000) is an inflow of cash, and the equity earnings are not. Debit Investment in XYZ for $5,000, credit Cash and Cash Equivalents—Operating Activities for $5,000, debit Cash and Cash Equivalents—Operating Activities for $3,000, and credit Investment in XYZ for $3,000.
- The Property, Plant, and Equipment account increased because of the purchase of $8,000 (additional information, item 5). The purchase of assets is an outflow of cash. Debit Property, Plant, and Equipment for $8,000 and credit Summary of Cash and Cash Equivalents.
- The company sold 200 shares of common stock during the year (additional information, item 3). The entry for the sale of stock was:
This transaction resulted in an inflow of cash. Debit Summary of Cash and Cash Equivalents $5,000, credit Common Stock $2,000, and credit Additional Paid-in Capital $3,000.
- Dividends of $12,000 were declared (additional information, item 7). Only $9,000 was actually paid in cash, resulting in an ending balance of $5,000 in the Dividends Payable account. Therefore, the following entries were made during the year:
These transactions result in an outflow of cash. Debit Retained Earnings $12,000 and credit Dividends Payable $12,000. Additionally, debit Dividends Payable $9,000 and credit Summary of Cash and Cash Equivalents $9,000 to indicate the cash dividends paid during the year.
- Accounts Receivable (net) decreased by $2,000. This is added as an adjustment to net income in the computation of cash provided by operating activities. The decrease of $2,000 means that an additional $2,000 cash was collected on account above and beyond the sales reported in the income statement. Debit Cash and Cash Equivalents—Operating Activities and credit Accounts Receivable for $2,000.
- Inventories increased by $5,000. This is subtracted as an adjustment to net income in the computation of cash provided by operating activities. Although $5,000 additional cash was spent to increase inventories, this expenditure is not reflected in accrual-basis cost of goods sold. Debit Inventory and credit Cash and Cash Equivalents—Operating Activities for $5,000.
- Prepaid Expenses decreased by $3,000. This is added back to net income in the computation of cash provided by operating activities. The decrease means that no cash was spent when incurring the related expense. The cash was spent when the prepaid assets were purchased, not when they were expensed on the income statement. Debit Cash and Cash Equivalents—Operating Activities and credit Prepaid Expenses for $3,000.
- Accounts Payable decreased by $10,000. This is subtracted as an adjustment to net income. The decrease of $10,000 means that an additional $10,000 of purchases were paid for in cash; therefore, income was not affected but cash was decreased. Debit Accounts Payable and credit Cash and Cash Equivalents—Operating Activities for $10,000.
- Notes Payable increased by $9,000 (as listed under additional information, item 4). This is an inflow of cash and would be included in the financing activities. Debit Summary of Cash and Cash Equivalents and credit Notes Payable for $9,000.
- Interest Payable increased by $1,000, but interest expense reported on the income statement was $2,000. Therefore, although $2,000 was expensed, only $1,000 cash was paid ($2,000 expense − $1,000 increase in interest payable). Debit Cash and Cash Equivalents—Operating Activities for $1,000 for the noncash portion, debit Interest Payable for $1,000 for the cash portion, and credit Interest Payable for $2,000 for the expense.
- The following entry was made to record the incurrence of the tax liability:
Therefore, $9,180 was deducted in arriving at net income. The $3,000 credit to Deferred Income Taxes was accounted for in entry e. above. The $6,180 credit to Taxes Payable does not, however, indicate that $6,180 cash was paid for taxes. Since Taxes Payable increased $1,180, only $5,000 must have been paid and $1,180 remains unpaid. Debit Cash and Cash Equivalents—Operating Activities for $1,180, debit Income Taxes Payable for $5,000, and credit Income Taxes Payable for $6,180.
- Item 6 under the additional information indicates that $15,000 of bonds payable were converted to common stock. This is a noncash financing activity and should be reported in a separate schedule. The following entry was made to record the transaction:
Adjust the T-accounts with a debit to Bonds Payable, $15,000; a credit to Common Stock, $5,000; and a credit to Additional Paid-in Capital, $10,000.
- Item 8. under the additional information indicates that leased equipment was acquired on the last day of 2012. This is also a noncash financing activity and should be reported in a separate schedule. The following entry was made to record the lease transaction:
- The company sold half of its available-for-sale investments during the year for $8,000 (additional information, item 9). The entry for the sale of the investments was
This transaction resulted in an inflow of cash. Debit Summary of Cash and Cash Equivalents $8,000, credit Investment in Available-for-Sale Securities $7,500, and credit Cash and Cash Equivalents—Operating Activities $500. The following additional journal entries were made:
To adjust the allowance account for the sale, one-half of the amounts provided at the end of 2012 must be taken off the books when the related securities are sold.
The change in fair value of the remaining securities at year-end (as listed under additional information, item 9) must be adjusted. The book value of the securities before the adjustment above is $6,000 ($7,500 − $1,500). The fair value of the securities is $8,500. An adjustment of $2,500 is necessary.
- The cash and cash equivalents from operations ($15,000) is transferred to the Summary of Cash and Cash Equivalents.
All of the changes in the noncash accounts have been accounted for and the balance in the Summary of Cash and Cash Equivalents account of $25,000 is the amount of the year-to-year increase in cash and cash equivalents. The formal statement may now be prepared using the T-account, Summary of Cash and Cash Equivalents. The alphabetic characters in the statement below refer to the entries in that T-account. The following statement of cash flows is prepared under the direct method. The calculations for gross receipts and gross payments needed for the direct method are shown below the statement.
Calculation of amounts for operating activities section
Cash received from customers = Net sales + Beginning A/R − Ending A/R
$100,000 + $11,000 − $9,000 = $102,000
Cash paid to suppliers = Cost of goods sold + Beginning A/P − Ending A/P + Ending inventory − Beginning inventory
$60,000 + $12,000 − $2,000 + $14,000 − $9,000 = $75,000
Cash paid for operating expenses = Operating expenses + Ending prepaid expenses − Beginning prepaid expenses − Depreciation expense (and other noncash operating expenses)
$12,000 + $8,000 + $1,000 + $10,000 − $13,000 − $8,000 − $1,000 = $9,000
Interest paid = Interest expense + Beginning interest payable − Ending interest payable
$2,000 + $2,000 − $3,000 = $1,000
Taxes paid = Income taxes + Beginning income taxes payable − Ending income taxes payable − Change in deferred income taxes—operating portion
$9,180 + $1,000 − $2,180 − $3,000 = $5,000
When a statement of cash flows is prepared using the direct method of reporting operating cash flows, the reconciliation of net income to operating cash flows must also be provided. The T-account, Cash and Cash Equivalents—Operating Activities is used to prepare the reconciliation. The alphabetic characters in the reconciliation below refer to the entries in the T-account.
Statement of Cash Flows for Consolidated Entities
A consolidated statement of cash flows must be presented when a complete set of consolidated financial statements is issued. The consolidated statement of cash flows would be the last statement to be prepared, as the information to prepare it will come from the other consolidated statements (consolidated statement of financial position, income statement, and statement of retained earnings). The preparation of a consolidated statement of cash flows involves the same analysis and procedures as the statement for an individual entity with a few additional items. When the indirect method is used, the additional noncash transactions relating to the business combination, such as the differential amortization, must also be reversed, and all transfers to affiliates must be eliminated, as they do not represent cash inflows or outflows of the consolidated entity.
All unrealized intercompany profits should have been eliminated in preparation of the other statements. Any income or loss allocated to noncontrolling parties would need to be added back, as it would have been eliminated in computing consolidated net income but does not represent a true cash outflow or inflow. Finally, only dividend payments that are not intercompany should be recorded as cash outflows in the financing activities section.
In preparing the operating activities section of the statement by the indirect method following a purchase business combination, the changes in assets and liabilities related to operations since acquisition should be derived by comparing the consolidated statement of financial position as of the date of acquisition with the year-end consolidated statement of financial position. These changes will be combined with those for the acquiring company up to the date of acquisition as adjustments to net income. The effects due to the acquisition of these assets and liabilities are reported under investing activities.
Disclosures
Cash Equivalents Policy. The policy for determining which items are treated as cash equivalents must be disclosed. Any change to that policy is considered a change in accounting principle requiring restating financial statements for earlier years presented in comparative statements.
Interest and Income Taxes Paid. Entities using the indirect method must disclose the amounts of interest paid (net of amounts capitalized) and income taxes paid during the period.
Noncash Investing and Financing Activities. If an entity engages in investing and financing activities during a period that affect recognized assets or liabilities but that do not result in cash receipts or cash payments in the period, information about those activities must be disclosed. Those disclosures may be either narrative or summarized in a schedule, and they must clearly relate the cash and noncash aspects of transactions involving similar items.
Some transactions are part cash and part noncash; only the cash portion is reported in the statement of cash flows. If there are only a few such noncash transactions, it may be convenient to include them on the same page as the statement of cash flows. Otherwise, the transactions may be reported elsewhere in the financial statements, clearly referenced to the statement of cash flows.
Other Sources (ASC 230-10-60)
| See ASC Location – Wiley GAAP Chapter | For information on... |
| ASC 320 | Classification and reporting in the statement of cash flows of cash flows from available-for-sale, held-to-maturity, and trading securities. |
| ASC 325-30-45 | Classification in the statement of cash flows of cash receipts and cash payments related to life settlement contracts. |
| ASC 830 | Reporting and implementation guidance for presenting a statement of cash flows of an entity with foreign currency transactions or foreign currency operations. |
| ASC 915 | the required presentation of and the additional information required in the statement of cash flows of a development stage entity. |
1 ASU 2012-05 excludes donated debt instruments received by not-for-profit entities as discussed in paragraph ASC 230-10-45-21A
2 See information regarding ASU 2012-05 in the Practice Alert section at the beginning of this chapter.