chapter 12: statement of cash flows

Chapter 12: Statement of Cash Flows

Pre-Statement of Cash Flows (before 1987)

Statement of Cash Flows (1987)

Research

Statement of Changes in Financial Position

Reported on changes in assets, liabilities, and owners’ equities account balancesRecommended, but not required for inclusion in the annual report until 1971Objectives

Disclosure of changes in financial positionSummarize financing and investing activityReport funds flow from operations

Statement of Changes in Financial Position

Sources of resourcesTransaction credits

Arise from increases in liabilities and owners’ equity and decreases in assets

Uses of resourcesTransaction debits

Arise from decreases in liabilities and owners’ equity and increases in assets

Standard Format of the Statement of Changes in Financial Position

1. Increases to fund balance accounts

a. From net incomeb. From other sources

2. Other sources of resources

3. Decrease, if any, in the fund balance for the period

1. Decreases to the fund balance accounts

a. From net lossesb. From other sources

2. Other uses of resources

3. Increase, if any, in the fund balance for the period

Sources of Resources Uses of Resources

Early FASB Discussion Memo

1. Provide feedback on actual cash flows

2. Help to identify the relationship between accounting income and cash flows

3. Provide information about the quality of income

4. Improve comparability of information in financial reports

5. Aid in assessing flexibility and liquidity

6. Assist in predicting future cash flows

Statement of Cash Flows

Cash & Cash Equivalents at Beginning of Year

Cash & Cash Equivalents at End of Year

Cash Flows from Operating Activities

Net Change in Cash & Cash Equivalents

Cash Flows from Investing Activities

Cash Flows from Financing Activities

Definition: Cash

Literal cash on hand or on demand deposit plus cash equivalents

Cash equivalents are highly liquid assets that are convertible to known amounts of cash and have short-term maturities

Statement of Cash Flows

Cash & Cash Equivalents at Beginning of Year

Cash & Cash Equivalents at End of Year

Cash Flows from Operating Activities

Net Change in Cash & Cash Equivalents

Cash Flows from Investing Activities

Cash Flows from Financing Activities

Operating Activities Section

Direct method reports literal cash flows related to income statement classifications

FASB appears to favor

Cost to prepare > than with indirect method

Indirect or reconciliation method starts with accrual income and adjusts it for the noncash items in it

In 1996, 98% of American firms use

Nonarticulation problems

Direct vs. Indirect Method

Operating activities section is the only section that differs

The investing and financing activities sections are the same under both methods

Indirect Method: Nonarticulation

Working capital account changes on balance sheet do not equal working capital adjustments in the operating activities section of SCF (75% of the time in sample)

CausesWrite-up/down of working capital items

Depreciation allocations within inventories

Reclassifications of accounts between current and non current categories

Statement of Cash Flows

Cash & Cash Equivalents at Beginning of Year

Cash & Cash Equivalents at End of Year

Cash Flows from Operating Activities

Net Change in Cash & Cash Equivalents

Cash Flows from Investing Activities

Cash Flows from Financing Activities

Investing Activities Section: Examples

Proceeds from sale of facility

Payment received on note for sale of plant

Capital expenditures

Payment for purchase of company X, net of cash acquired

Statement of Cash Flows

Cash & Cash Equivalents at Beginning of Year

Cash & Cash Equivalents at End of Year

Cash Flows from Operating Activities

Net Change in Cash & Cash Equivalents

Cash Flows from Investing Activities

Cash Flows from Financing Activities

Financing Activities Section: Examples

Net borrowings under line-of-credit agreement

Principal payments under capital lease obligation

Proceeds from issuance of long-term debt

Proceeds from issuance of common stock

Dividends paid

SFAS No. 95 Classification Issues

Appearing in operating activities sectionInterest expenseInterest revenueDividend revenue

Related balance sheet items (bonds payable, stock investments, and long-term notes receivable) are either financing or investing elements

Ingram and Lee (1997)

1,000 firms over the period 1974-1992

Use the income statement and the cash flow statement together

Over time growing firms will have higher income and lower cash flows

Reverse occurs for shrinking firms

Improving Accounting Standards

Require the direct method for the Statement of Cash Flows

If the Indirect Method is retainedRequire a schedule showing noncash flow transactions affecting working capital accounts

Segregate current liability accounts into those that do and do not affect net income

Chapter 12: Statement of Cash Flows

Pre-Statement of Cash Flows (before 1987)

Statement of Cash Flows (1987)

Research