Improve your understanding of existing cash flow statement preparation and presentation options, with an emphasis on statement classification and disclosure issues. Evaluate the usefulness of cash flow statement data for internal and external purposes. Consider how the classification and presentation of cash flow information may change as reporting requirements are further modified.
Objectives:
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Chapter 1 - Statement of Cash Flows: Summary of Presentation Requirements
Learning Objectives
As a result of this chapter you should be able to
• Illustrate how to present the changes and balances in cash and cash equivalent amounts.
• Specify when you may net cash inflows and outflows.
• Provide a summary list of conventional financing, investing, and operating inflows and outflows.
• Illustrate how to report significant transactions that do not result in cash inflows or outflows.
• Differentiate between the direct and indirect methods of presenting cash from operations.
• Show how to estimate direct method operating cash inflows and outflows.
• Prepare a statement of cash flows using the direct method given selected financial information.
• Prepare a statement of cash flows using the indirect method given selected financial information.
Introduction
This chapter summarizes the general requirements of the statement of cash flows reporting guidance. This review covers the primary reporting rules. You will apply these rules while preparing a statement of cash flows. We also identify several technical problem areas in cash flow reporting, but delay detailed consideration of these issues until later chapters.
Requirements for the statement of cash flows discussed throughout the manual rely on guidance found in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 230, Statement of Cash Flows (SFAS No. 95).
What Is a Statement of Cash Flows?
The statement of cash flows is a classified listing of the cash inflows and outflows of a reporting entity during a period.
The statement of cash flows remains misunderstood. While cash flow reporting guidance has been in place for thirty years, precisely what cash flow information entities should present and what level of detail should be provided remain arguable questions. How individuals use the statement remains uncertain. This uncertainty leaves the purpose and function of the statement subject to dispute. These and many other issues are addressed throughout this course as we examine the preparation, presentation, and use of cash flow information.
The measurement of resource inflows and outflows is a critical part of the accounting process. There are two general flow statements prepared by accountants for external reporting purposes: the income statement and the statement of cash flows.
1. The income statement is the primary measure of the periodic performance of the entity.
2. The statement of cash flows is a presentation of the inflows and outflows (during a period) of an individual asset, cash, or of a group of assets, cash and cash equivalents. The focus of the statement is on cash inflows and outflows.
How to reconcile the differences between these two flow statements and also the balance sheet is an issue of growing importance to standard-setting bodies.
The statement of cash flows:
• Provides information on cash inflows and outflows during a period.
• Provides users with a second flow statement. This statement of cash flows complements the income statement.
• Does not replace the income statement.
• Provides information not available on other financial reports.
• Provides information on an entity's liquidity and financial flexibility.
Fundamentals of Cash Flow Presentation
Examples throughout the text illustrate many of the possible presentation formats of a statement of cash flows. The presentation suggestions we make typically emphasize the value of statements that are easy for users to understand. The skeletal statement on the next page is an example of a display and disclosure possibility that may make the statement of cash flows more usable.
Without considering the numerical details of the statement on the next page, note the following features:
• The title is the Statement of Cash Flows.
• The statement is comparative.
• There are three major sections of the statement: operating, investing, and financing. (This is the activity method format.)
• There are cash inflows and cash outflows presented in each section.
• The use of the change in cash to reconcile the beginning and ending balance sheet cash amounts.
Some general reporting ideas, which are considered in detail later in the text, about the statement of cash flows include the following:
• Cash flow information should be presented whenever a balance sheet and an income statement are presented. • The use of the activity method format rather than the sources and uses format.
• The presentation order in the statement is operating, investing, and then financing.
• There are inflows and outflows in each section of the statement. The example presentation eliminates the use of brackets to show negatives and may make the statement easier to understand.
• That the operating section in the example statement uses the direct method. You may currently also use the indirect method, or reconciliation technique. The indirect approach does not have inflows and outflows in the operating section.
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