Ch. 22 Statement of Cash Flows Revisited

Cash Flow Info

• Helps financial stmt users assess financial performance and condition

• Indicates whether a borrower will produce sufficient cash to pay its debts

• Indicator of a company’s financial flexibility or ability to use cash for unexpected needs and opportunities

• Classified as operating, investing and financing cash flows

  • Classification helps financial stmt users distinguish between ongoing activity and long-term strategic changes

Operating activities

generally involve producing and delivering goods and providing services

• cash flows are generally the cash effects of transaction and other events that enter into determination of net income

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

• 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

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 door 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 obtaining and paying for other resources obtained from creditors on long-term credit

Cash Flows from Operating Activities

• a S-T or L-T TRADE note receivable (payable) is considered an operating asset (liability)

• if notes are issued for reasons other than operating activities such as for a fixed asset, the cash flows are not classified as operating

*picture is the INDIRECT METHOD

(1) Operating Activities→ Indirect method
Examples of noncash revenue/gain adjustments

• gain on disposition of fixed asset or intangible asset

• gain on settlement of non-operating liability

• unrealized gain— income

(1) Operating Activities→ Indirect method
Examples of noncash expense/loss adjustments

• loss on disposition of fixed asset or intangible asset

• depreciation expense or amortization expense

• stock compensation expense

• unrealized loss— income

• loss on settlement of nonoperating liability

(2) Operating Activities→ Indirect method
Examples of operating assets

• accounts receivable

• supplies

• income tax receivable

• miscellaneous prepaid expenses

• inventory

• prepaid insurance

ADD decrease in operating asset

DEDUCT increase in operating asset

(2) Operating Activities→ Indirect method
Examples of operating liabilities

• account payable

• income tax payable

• deferred revenue

• salaries payable

• interest payable

• accrued liabilities

ADD increase in operating liability

DEDUCT decrease in operating liability

(3) Operating Activities→ Indirect method
Cash flows not included in NI

• selling and purchasing investments acquired specifically for resale by banks, brokers, and dealers

• notes issued for an operating activity

Cash Inflows from Operating Activities

• sale of goods or services

• refunds from suppliers

• dividends from investments

• interest on receivables

• settlements of lawsuit

• proceeds from sale of investments held for resale in a trading account

• collection on a L-T note receivable from a customer related to sale of goods

Cash Outflows from Operating Activities

• purchase of goods for resale

• salaries and other operating expenses

• income taxes, duties, and fines

• interest on liabilities

• settlement of lawsuit

• purchases of investments held for resale in a trading account

• principal payment a note issued to acquire goods for resale

Operating Activities→ Compensation Expense

• compensation for share-based plans increases compensation expense and capital accounts

• no impact on cash

• on the cash flow stmt: ADD amount back to NI

Operating Activities→ Unrealized Gain/Loss— Income

• unrealized holding gains (losses) are recorded to adjust certain debt and equity securities to fair value

• unrealized holding gains (losses) affect NI and the investment account

• NO impact on cash

• on the cash flow stmt:

  • ADD losses (SUBTRACT gains) to (from) NI

  • but NO adjustments are required for unrealized gains/losses impacting OCI

Operating Activities→ Pension Expense

• pension expense recognized for defined benefit plans may differ from cash funding payments to the plan

On the cash flow statement:
- pension expense > contributions; ADD difference to NI

- pension expense < contributions; SUBTRACT difference from NI

Operating Activities→ Equity Method Noncash Adjustment

• for equity investments, companies record:

  • investment income for a proportionate share of the investee’s income (noncash item)

  • cash dividends declared and received as an increase to cash and a decrease to the investment account (no NI impact)

• on the cash flow stmt:

- investment income > dividends; SUBTRACT difference from NI

- investment income > dividends; ADD difference to NI

Operating Activities→ Changes in DTA and DTL

• changes in DTA and DTL may affect tax expense

On the cash flow stmt:
- adjust NI for increases (decreases) in deferred tax accounts

Cash Inflows from Investing Activities

• sale of property, plant, and equipment

• sale of debt and equity investments in other companies (cash flows from investments held specifically for resale are classified as operating activities)

• collection of a loan (excluding interest, which is an operating activity)

• sale of patents or other intangible assets

Cash Outflows from Investing Activities

• purchase of property, plant, and equipment

• investments in debt and equity investments in other companies

• loans to other entities

• purchase of patents or other intangible assets

Cash Flows from Investing Activities

• investing activities presented as gross cash inflows and outflows

  • ex: a sale is reported separately from a purchase

• generally includes cash flows related to changes in fixed assets, intangible assets, investments in other companies (excluding trading accounts), and nontrade loans to other companies

  • cash paid for the acquisition of fixed assets includes cash paid for interest that is capitalized

Cash Flows from Financing Activities

• financing activities presented as gross cash inflows and outflows

  • ex: a cash receipt is reported separately from a cash payment

  • generally includes cash flows related to equity financing, debt financing (excluding trade debt), and dividend payments

    • dividends are adjusted for a change in dividends payable

  • also includes cash flows related to:

    • principal payments for sale-type leases

    • principal payments on installment notes

Cash Inflows from Financing Activities

• issuance of a company’s own stock

• sale of treasury stock

• issuance of bonds or other debt (S-T and L-T nontrade debt)

Cash Outflows from Financing Activities

• dividends and other cash distributions to owners

• reacquiring previously issued capital stock

• principal payments on loans, payments to retire bonds or other debt, debt issue costs, and principal payments on finance leases

Cash Flow Statement

Demo 22-1

Answer:

Cash Flow Disclosures: Reporting Requirements

• reconciliation of NI to operating cash flow

• report investing and financing inflows and outflows

• disclose interest and income taxes paid

• disclose noncash investing and financing transactions

• disclose nature and amounts of restricted cash or cash equivalents

Noncash Investing and Financing Transactions

• noncash transactions involve no exchange of cash

• omit noncash exchanges from the cash flow stmt but disclose if material

Examples of noncash exchanges:

• conversion of debt securities to equity securities

• acquisition of assets by assuming liabilities

• securing a right-of-use asset in exchange for a lease liability

• refinancing a long-term note payable