F5 M5 Statement of Cash Flows

operating cash flows

is the net cash provided (cash receipts) by or used (cash disbursements) in a company’s primary day-to-day business operations; some examples include cash collected from customer, cash paid to employees, interest & income taxes paid, collecting dividends an on investment, etc.

investing cash flows

are cash inflows and outflows from acquiring or selling long-term assets or investments (non-current assets); some examples include buying equipment (outflow), selling land (inflow), buying long-term investments (outflow), etc.

financing cash flows

are cash inflows and outflows resulting from transactions with a company’s owners and creditors (equity and debt) and are interest-bearing transactions; show how a company raises capital and returns capital to its owners and creditors; some examples include issuing common stock (inflow), buying treasury stock (outflow), repaying bond principal (outflow), etc.

statement of cash flows

purpose is to provide information about the sources of cash and cash equivalents (ex: cash receipts) and the uses of cash and cash equivalents (ex: cash disbursements); is a required part of a full set of financial statements for all business enterprises; explains the change in cash during a period by grouping cash flows into sections; also presents information about material noncash events; cash flow amounts per share are not disclosed per GAAP

purpose of statement of cash flows

it reconciles the cash and cash equivalents amounts presented on the beginning balance sheet to the ending balance sheet (the change in cash for the period); is used because investors, creditors, and other interest parties, need information about the entity’s available cash and cash needs (ex: ability to pay obligations, etc.)

cash

is defined as actual cash and the company can use it immediately; some examples include currency, demand deposits, petty cash, checking accounts, etc.

cash and cash equivalents

are short-term, liquid investments that are quickly convertible into specific amounts of cash and have original maturity of 90 days or less from purchase date; some examples include certain treasury bills, money market funds, etc. (when a maturity date with 90 days or less, ONLY applicable with this these maturity date guidelines)

summarized statement of cash flows format

*± net cash from operating activities
± net cash from investing activities
± net cash from financing activities
———————————————————————
= net increase (decrease) in cash
± cash and cash equivalents beg. of year
———————————————————————
= cash and cash equivalents end. of year

direct method (operating)

reports actual cash receipts and cash disbursements (payments) from operating activities; calculation for this is not tested on the CPA exam

indirect method (operating)

calculates cash flow from operating activities by starting with net income and converting it from accrual-basis to cash-basis operating cash flow

*net income + depreciation, amortization, credit loss, or noncash (impairment to goodwill) expenses + other losses - other gains or noncash revenues - bond premium amortization ± change in operating assets ± change in operating liabilities

crypto asset in statement of cash flows

if received as a noncash consideration in the ordinary course of business and converted nearly immediately (within a few days) into cash are classified as operating activities; if purchased and held as an investment then it is generally an investing activity; is used to pay a supplier or employee it is generally a noncash transactions and should be separately disclosed rather than reported as a cash outflow

indirect method disclosures

a supplemental disclosure of cash paid for interest and income taxes is required

adjustments to operating liabilities & contra-asset accounts

if there is an increase in a liability & contra-asset, then add it to net income; if there is a decrease in a liability & contra-asset, then subtract is from net income

adjustments to operating assets & contra-liability accounts

if there is an increase in an asset & contra-liability, then subtract it from net income; if there is a decrease in an asset & contra-liability, then add it to net income

adjustments to gains and losses

gains are adjusted out of operating activities and into the investing activities by subtracting from net income; losses are adjusted out of operating activities and into investing activities by adding to net income

operating assets

are generally current assets excluding cash and cash equivalents & noncurrent assets; some examples include AR, prepaid expenses, inventory, etc.

operating liabilities

are generally current liabilities related to normal business operations, excluded interest-bearing debt and principal (ex: bonds payable); some examples include AP, interest payable, unearned (deferred) revenue, etc.

investing activities

are cash flows from buying (outflow) or selling (inflow) noncurrent assets and investments; the related gain or loss is adjusted in operating activities under indirect method; a large positive amount means the company likely sold noncurrent assets to downsize and a large negative amount means the company is buying noncurrent assts to grow the company; examples include purchasing noncurrent investment (outflow), selling land (inflow), etc.

financing activities

include cash flows that are interest-bearing and are from non-current liabilities (creditor-oriented) and equity (owner-oriented) activities; some creditor activities include issuing bonds (inflow), payments of principal ONLY, not interest (outflow), etc.; some owner activities include issuing stock (inflow), paying cash dividends (outflow), etc.

noncash investing and financing activities

information about these items should be provided separately in a supplemental disclosure; some examples include buying equipment by issuing stock (material transaction), converting bonds into common stock, acquiring assets by signing a capital lease, and exchanging one noncash asset for another noncash asset

does not effect statement of cash flows

recording depreciation, amortization, or depletion; recording investment income of equity method affiliates

unrestricted and restricted cash

are included in the reconciliation of beginning and ending cash; an entity should disclose the nature of any restrictions; transfer between these are not cash flow from activities because total cash has not changed, just changed form