Cash Flow Statement: Preparation, Presentation and Use

• Chapter 0 - Overview
  • Course Objectives
  • Introduction
  • Course Organization
  • The FASB Accounting Standards Codification™
    • Key Items Regarding the FASB ASC
    • Population of FASB ASC
    • Essential and Nonessential Content
    • Topical Structure
    • Referencing the FASB ASC
    • A Helpful Tool
• Chapter 1 - Statement of Cash Flows: Summary of Presentation Requirements
  • Learning Objectives
  • Introduction
  • What Is a Statement of Cash Flows?
  • Fundamentals of Cash Flow Presentation
  • Cash Flow Reporting Guidance
    • A Required Statement of Cash Flows
    • Cash and Cash Equivalents
    • Gross and Net Cash Flows
    • Classification - Financing and Investing
    • Operating Cash Flows
    • Reporting Noncash Transactions
    • Direct and Indirect
  • Preparation of a Statement of Cash Flows
    • Illustration
    • The Indirect/Direct Method
  • Exercises
    • Exercise 1-1
    • Exercise 1-2
    • Exercise 1-3
• Chapter 2 - Scope and General Use of the Statement of Cash Flows
  • Learning Objectives
  • Introduction
  • Development of the Statement of Cash Flows
    • Key Historical Points for the Statement of Cash Flows
  • The Cash Concept Advantages and Disadvantages
  • General Uses of the Statement of Cash Flows
  • Developments Related to Cash Flow Reporting
  • Liquidity and Financial Flexibility
    • Liquidity
    • Financial Flexibility
  • Scope of the Cash Flow Standard
    • Exceptions for Defined Benefit Pension Plans
    • Exceptions for Investment Companies
    • For Profit Entity Audit Report Presentation and Examples
    • Non-GAAP Statements, Reviews, and Compilations
  • Exercise
    • Exercise 2-1
• Chapter 3 - Cash Equivalents and Gross versus Net Presentation Issues and Examples
  • Learning Objectives
  • Introduction
  • Purpose of the Statement of Cash Flows
  • Activity Method Presentation
    • Presentation Approaches
  • Cash Equivalents
    • Selection and Presentation
    • Disclosure Examples
    • Acceptable Presentations for Defining Cash and Cash Equivalents
    • Restricted Cash and Cash Equivalents
    • Strict Cash Concept of Funds
  • Gross versus Net Cash Flow Reporting
    • Presentation Examples - Gross versus Net
    • Possible Presentation Problems
    • Data Collection Problem - Obtaining Gross Amounts
    • Technical Problem - When Is Netting Allowed?
    • Net and Gross Presentation Example
  • Exercises
    • Exercise 3-1
    • Exercise 3-2
• Chapter 4 - Presentation Issues: Investing, Financing, and Noncash Activities
  • Learning Objectives
  • Introduction
  • Problems of Classification
  • Classification Issues
    • Is It Investing, Financing, or Operating?
  • Interest and Dividends
    • Special Reporting Rules for Debt and Equity Investments
  • Installment Sales and Purchases
    • Purchase of Productive Asset
    • Disclosure of Installment Note Payable
    • Installment Sale of Inventory
    • Disclosure Examples
  • Hedging Activities
  • Business Combinations, Segment Dispositions, and Extraordinary Items
  • Reporting Noncash Transactions
    • Issues Related to Noncash Transactions
    • Illustrative Disclosures Related to Noncash Transactions
  • Exercises
    • Exercise 4-1
    • Exercise 4-2
    • Exercise 4-3
    • Exercise 4-4
• Chapter 5 - Operating Section Presentation Direct or Indirect?
  • Learning Objectives
  • Introduction
  • Issues of Operating Section Presentation
  • Direct versus Indirect Methods
    • Direct Method and Reconciliation
    • Direct Method Advantages
    • Indirect Method
    • Alternative Reconciliations
    • Indirect Method Advantages
  • Illustrative Indirect Method Statements
  • Illustrative Direct Method Statements
  • Exercises
    • Exercise 5-1
    • Exercise 5-2
• Chapter 6 - Operating Section Issues
  • Learning Objectives
  • Introduction
  • Operations - Miscellaneous Items
    • Interest and Taxes Paid
    • Receivables and Bad Debts
    • Transfers and Servicing of Financial Assets
    • Extraordinary Items
  • Lack of Line Item Reconciliation
    • No Disclosure of the Lack of Reconciliation
    • Why Non-Reconciliation May Be a Problem
  • Business Combinations and Segment Dispositions
    • Illustrative Statement
    • Segment Dispositions
    • Supplemental Disclosures Examples
  • Cash from Operations: Is It Useful?
    • Cash Flow per Share Information Prohibited
    • Use of Operating Cash Flow Information
  • Cost of Preparation and the Indirect/Direct Method
  • Comprehensive Example
    • Notes to Consolidated Financial Statements
  • Summary of Statement of Cash Flows Requirements
  • Exercises
    • Exercise 6-1
    • Exercise 6-2
• Chapter 7 - Cash Flow Reporting for Governmental Entities
  • Learning Objectives
  • Introduction
  • Governmental Entities
    • The Standards
    • Consistent Reporting Rules
    • Classification Differences
    • Operating Category
    • Noncapital Financing Activities
    • Capital and Related Financing
    • Investing Activities
    • Other Features
    • Modifications for State and Local Governments under GASB No. 34
    • Presentation Example
  • Exercise
    • Exercise 7-1
• Chapter 8 - Cash Flow Reporting Issues: Not-for-Profits, Financial Institutions, and Foreign Operations
  • Learning Objectives
  • Introduction
  • Industry Specific Reporting Standards
  • Not-for-Profit Financial Statements
    • A Required Statement of Cash Flows
    • Change in Financing Classification
    • Presentation Example
  • Financial Institutions
    • Exemption or More Netting
    • Additional Netting
    • Additional Accounting Guidance
    • Additional Arguments Related to Netting
    • Change in Trading Account Classification
  • Foreign Currency Cash Flows
    • Change in Asset or Liability Option or Local Currency Cash Flow Option - Which Method?
    • Problems of Implementation
    • Foreign Currency Cash Flow Examples
  • Exercise
    • Exercise 8-1
• Chapter 9
  • Statement of Cash Flows: External and Internal Uses
  • Learning Objectives
  • Introduction
  • External Users
    • General Usefulness of the Statement of Cash Flows
    • Key External Uses
    • Analysts' Uses
    • What Do Analysts Want from the Statement of Cash Flows?
    • Rating Agencies' Uses
    • Lenders' Uses
    • What Type of Cash Flow Presentation Do Bankers and Other Lenders Desire?
    • Questions on Which a Lender May Focus
    • Cash Flow Related Ratios
    • Ratios and Bankruptcy
  • Internal Users
    • Internal Uses of Cash Flow Information
    • Value of Cash Flow Information
    • Cash Management
    • Short-Term Forecasting
    • Budgeting and Cash Budgeting
    • Capital Expenditure Evaluation
    • Top Management Reporting
    • Business Unit Reporting
    • Miscellaneous Uses of Cash Flow Data
    • An Illustrative Use - Not-for-Profit Hospitals
• Chapter 10 - Ongoing Developments in the Statement of Cash Flows Reporting
  • Learning Objectives
  • Introduction
  • IAS 7 - Statement of Cash Flows
  • Proposals for Revisions to the Statement of Cash Flows and Reconciliation Schedule
  • General Financial Statement Objectives
  • Classification Decisions
    • Nature of Proposed Classifications
    • Business Section of the Statement of Cash Flows
    • Financing Section of Statement of Cash Flows
    • Income Taxes, Discontinued Operations, and Equity Sections of the Statement of Cash Flows
  • Statement of Cash Flows - Other Tentative Decisions
    • Category and Classification Changes
    • Cash Only
    • Direct Method Required
    • Other
  • Reconciliation of the Statement of Cash Flows to the Statement of Comprehensive Income
    • Preparing the Reconciliation Schedule
    • Statement of Cash Flows - Proposed Format Example
• Chapter 11 - Latest Developments
• Appendix A - Statement of Cash Flows Worksheets
  • Learning Objectives
  • Introduction
  • Data Accumulation
  • Worksheets
    • Basic Worksheets
  • WS-I Illustration
    • Example
    • WS-I Initial Worksheet
    • Analytical Process
    • WS-I Partial Worksheet
    • WS-I Partial Worksheet
    • Preparation of Statement
  • WS-II Illustration
    • Example
    • WS-II Initial Worksheet
    • Analytical Process
    • WS-II Completed Worksheet
  • Description of Electronic Spreadsheets
    • CFBASIC - Electronic Worksheet
    • CFBASIC
    • CFADV - Electronic Worksheet
    • Completed CFADV Worksheet with Data
• Appendix B - Supplemental Problems
  • Exercise B-1-1
  • Exercise B-1-2
  • Exercise B-1-3
  • Exercise B-3-1
  • Exercise B-3-2
  • Exercise B-3-3
  • Exercise B-4-1
  • Exercise B-4-2
  • Exercise B-4-3
  • Exercise B-4-4
  • Exercise B-4-5
  • Exercise B-5-1
  • Exercise B-5-2
  • Exercise B-6-1
  • Exercise B-6-2
  • Exercise B-6-3
  • Exercise B-6-4

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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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