Advanced Accounting-84B Statement of Cash Flows Page 1 SFAS-95 STATEMENT OF CASH FLOWS

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1 Advanced Accounting-84B Statement of Cash Flows Page 1 SFAS-95 STATEMENT OF CASH FLOWS I. PURPOSE: Provide information about the entities cash receipts and disbursements classified by major category (operating, financing and investing activities) so that investors and creditors can compare the cash flows of different firms in a uniform manner; provide a methodology to eliminate the inconsistencies and ambiguities common with the statement of changes in financial position (APBO-19). II. REQUIREMENTS: A. Statement of Cash Flows is required as part of a full set of financial statements for all business enterprises in place of a statement of changes in financial position. B. The statement of cash flows shall explain the change in cash and cash equivalents that took place during the accounting period. 1.Cash equivalents: short-term, highly liquid investments that are both a. readily convertible into known amounts of cash and b. so near maturity value that they present insignificant risk of changes in value because of changes in interest rates (generally considered to be original maturity to buyer within three months). i. Not all investments that qualify are required to be treated as cash equivalents. (i) Management will establish and disclose its policy of classification. Any change to that policy is a change in accounting principle under APBO-20 and as such will require retroactive restatement of all prior periods presented for comparative purposes. For example, cash purchases and sales of investments as part of a company's cash management activities (as distinct from its operating, investing or financing activities) need not be reported. 2.The gross amounts of cash flows is more relevant than net amounts and should be utilized for reporting purposes; a. Exceptions: net cash flows may be use for: i. cash equivalents; ii. items where turnover is quick, large dollar value and maturities are short and the company is substantively holding or disbursing cash on behalf of its customers (demand deposits and similar accounts) iii. items where turnover is quick, large dollar value and maturities are short and pertain to (i) investments (other than cash equivalents) (ii) loans receivable (iii) debt with original maturity less than three months iv. companies that elect to use the indirect method and reconcile net income to net cash flows from operating activities by removing (from net income) the effects of (i) deferrals of past operating cash receipts and payments (i.e. changes in inventory and deferred income etc.) and accruals of future operating cash receipts and payments (i.e. receivables and payables) and (ii) all items affecting investing or financing cash flows (i.e. depreciation, gains and losses on sales of PP&E, early extinguishment of debt etc.) III. CONTENT AND FORM OF THE STATEMENT A. Direct Method of determining cash flows from operating activities is encouraged; 1.a positive cash flows from revenues are reduced by negative cash flows from expenses 2.enterprises using the direct method are encouraged to report all breakdowns of operating cash receipts and payments that they feel meaningful and feasible; at a minimum, companies must separately report the following classes of cash payments: a. Cash collected from customers, including lessees, licensees, and the like; b. Interest and dividends received; c. Other operating cash receipts, if any; d. Cash paid to employees and other suppliers of goods or services, including suppliers of insurance, advertising and the like; e. Interest paid; f. Income taxes paid; g. Other operating cash payments if any; 3.Supplemental disclosure: if the direct method is used, a separate schedule of reconciliation of net income to net cash flow from operating activities must be provided. Direct Method: Credit Sales + decreases in receivables (- increases in receivables) = cash collections B. Indirect Method: of determining cash flows from operating activities; 1.Net income is adjusted for non-cash items included in its determination to yield net cash flows from operations 2.Supplemental disclosure: no separate schedule of reconciliation is required under the indirect method because the format is essentially that of the supplemental disclosure required under the direct method;

2 Advanced Accounting-84B Statement of Cash Flows Page 2 Indirect Method (reconciliation method): Net income is reconciled to cash flow by adjusting for changes in receivables, payables, accruals, deferrals and prepayments. Gains are deducted from accounting income; losses and non-cash expenses such as depreciation are added back to income to determine net cash flows. C. For either Method: 1.The reconciliation of net income to the net cash flow from operating activities shall be presented. a. The reconciliation will separately present all major classes of activity considered meaningful and feasible and at a minimum such items as described above in the discussion of direct method. 2.Both investing and financing activities shall be reported separately in the statement of cash flows. 3.Information about all investing and financing activities of an enterprise that affect recognized assets or liabilities but do not result in cash receipts or payments in the period shall be reported in related disclosures. 4.Financial statements will not report cash flow per share. D. Disclosure Requirements: Cash flows will be classified as resulting from operating, investing, or financing activities. 1.Operating Activities: Transactions that are included in the determination of net income; a. Any transactions not defined as investing or financing activities and involved in the production or delivery of goods and/or services. Cash flows from operating activities are generally those that enter into the determination of net income. Cash provided by: --sale of goods or services; --interest from any source; --Dividends received from investments; --all other income not directly related to operations such as other income; rental income etc. Cash used to: --purchase inventory; --meet payroll expenses; --pay direct and indirect operating costs of business: taxes, utilities, insurance etc;, --pay interest on debt; Note: Gains and losses and losses from the disposal of property plant and equipment are excluded from cash flows operating activities. These items are reported with investing activities. Only items that produce revenue in accordance with the purposes for which the business is operated may be included as cash flows from operations. 2.Investing Activities: Transactions that are involved in the acquisition or disposition of noncurrent assets 1. making and collecting loans 2. acquisition and disposal of debt and equity instruments 3. acquisition and disposal of long lived productive assets Cash provided by: --Sale of PP&E --Collection of loans --Sale of securities that are not cash equivalents such as stock and bonds of other companies; Cash used to: --Purchase PP&E --Loan money to other companies (affiliated firms) --Purchase securities that are not case equivalents such as stock and bonds of other companies; 3.Financing Activities:Transactions (other than payment of interest) involving borrowing from creditors; a. Transactions (other than stock dividends and splits) involving owners of the company; b. obtaining resources from owners (equity instruments) and providing owners a return on and of their investment c. borrowing and repaying amounts borrowed d. obtaining and paying for long-term credit to finance productive resources

3 Advanced Accounting-84B Statement of Cash Flows Page 3 Cash provided by: --short and long-term borrowing (notes, bonds, mortgages etc.) --sales of capital stock Cash used to: --pay off principal of short and long-term borrowing (excludes interest); --pay cash dividends (excludes stock dividends and splits); --purchase treasury stock; E. If foreign currency is a significant reporting factor, the statement must disclose: 1.the US$ equivalent of foreign currency cash flows, using the historical exchange rate in effect at the time of the cash receipt or payment or an appropriately weighted average if the result is substantially the same as the specific rate; 2.the effect of exchange rate changes on cash held in foreign currencies (must be reported as a separate line item in the reconciliation of the beginning and ending balances of cash and cash equivalents); F. Partial Cash Investing and Financing Activities: 1.Information about investing and financing activities not resulting in cash receipts or payments in the period must be reported separately. a. Investing and financing activities that do not affect cash may be disclosed at the bottom of the Statement in a separate "schedule" or within the body of the statement. b. For example, a company acquires an asset for $25,000 by paying $15,000 down and signing a note of $10,000 for the balance. The following alternates would be appropriate: Alternative a: Separate Schedule Reported within the Statement of Cash Flows: Cash Flows From Investing Activities: Payment for purchase of asset...$(15,000) Reported in a Seperate Schedule: Investing and Financing Activities not Affecting Cash Issuance of note to acquire asset...$ 10,000 Purchase of land by issuance of note... (10,000) Alternative b: within the body of the statement Reported within the Statement of Cash Flows: Cash Flows From Investing Activities: Purchase of Asset by issuance of note and cash...$(25,000) Less: Issuance of note... 10,000 Cash payment for purchase of asset...$ 15,000 NOTE: Alternative "b" details the entire transaction in one location but is showing the financing activity (issuance of the note) in the investing section. The accountant should weight the relative importance of the financing/investing aspect of the transaction and select the most appropriate reporting alternative. G. Cash dividends declared but not paid in the reporting period require special consideration. 1.Dividents are not related to operating activities but are a return of capital to owners. This means that the decrease in the current liability (dividends payable) in the year of payment is not treated as an adjustment to net income. 2.In the year of declaration: account for the change in retained earnings and dividends payable. 3.In the year of payment: account for the change in dividends payable and cash without adjusting net income.

4 Advanced Accounting-84B Statement of Cash Flows Page 4 IV. PREPARING THE STATEMENT OF CASH FLOWS (all inclusive worksheet approach) A. Compute the change in balance for each account in the trial balance from year 1 to year 2. 1.Debits are represented as positive numbers, credits as negative (bracketed) B. Using accounting paper of sufficient width to accommodate all trial balance accounts in separate columns and allowing four (4) additional columns for the Statement of Cash Flows, list the components of the Statement of Cash Flows down the left side of the spreadsheet. List the account names and changes in balance across the top of the spreadsheet starting column five (5) with Cash. Be certain to include: 1.The name of the company; 2.The title "Statement of Cash Flows" 3.Three sections labeled a. "Cash flows from operating activities:" b. Cash flows from investing activities:" c. Cash flows from financing activities:" 4.those items that must always be included if present: (recall that companies must separately report the following classes of cash payments at a minimum: a. Cash collected from customers, including lessees, licensees, and the like; b. Interest and dividends received; c. Other operating cash receipts, if any; d. Cash paid to employees and other suppliers of goods or services, including suppliers of insurance, advertising and the like; e. Interest paid; f. Income taxes paid; g. Other operating cash payments if any; C. The amount of change in each column must be reconciled to zero (footed to 0 balance); the total amount in each row must be cross footed to zero (note that the cross footing will include only those rows reconciling trial balance accounts). This procedure is illustrated in the following examples.

5 Advanced Accounting-84B Statement of Cash Flows Page 5 Example 1: Unconsolidated Firm, Direct Method --Assume the following trial balance data is available. --Present the statement of cash flows and accompanying worksheets in the "all inclusive spreadsheet format" 12/31/75 12/31/76 Trial Balance Input Screen Post Closing Adjusted Difference Account: Trial Balance Trial Balance Dr (Cr) Cash $5,300 $9,800 $4,500 A/R 9,600 10,900 1,300 Inventory 12,500 11,000 (1,500) L/T Inv 22,000 20,000 (2,000) PP&E 82, ,300 24,700 A/D-PP&E (32,800) (41,900) (9,100) A/P (10,300) (12,100) (1,800) Sal Pay (1,100) (800) 300 Int Pay (300) (500) (200) C/S (64,000) (74,000) (10,000) RE (23,500) (20,000) 3,500 Sales (98,700) (98,700) Int Rev (2,500) (2,500) Gain:LTI (800) (800) COGS 51,000 51,000 Sal Exp 23,000 23,000 Depr Exp 9,100 9,100 Int Exp 4,000 4,000 Other Exp 1,900 1,900 Tax Exp 3,300 3,300 Total $0 $0 $0

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7 Advanced Accounting-84B Statement of Cash Flows Page 7 Statement of Cash Flows Cash A/R Inventory L/T Inv PP&E A/D PP&E A/P Sal Pay Int Pay C/S RE Sales Int Inc Gain on COGS Sal Exp Deprec Int Exp Other Tax Bal Dallas, Inc. L/T Inv Exp Exp Exp For Year Ended, 12/31/x2 4,500 1,300 (1,500) (2,000) 24,700 (9,100) (1,800) 300 (200) (10,000) 3,500 (98,700) (2,500) (800) 51,000 23,000 9,100 4,000 1,900 3,300 0 Operating Activities: 9,100 (9,100) 0 Increases in A/R (1,300) 1,300 (1,300) 0 Sales 98,700 (98,700) 98,700 0 Cash Collections 97, Interest & Div Rev: Change in Interest Rec. 2,500 (2,500) Amort Prem/Disc Bond Invest. Interest & Div Collected Other Revenues: Change in Unearned Revenues: 2,500 0 Cash In from Ops 99, Owtflows: 0 0 Change in Inventory 1,500 (1,500) 1,500 0 Change in A/P 1,800 (1,800) 1,800 0 COGS (51,000) 51,000 (51,000) 0 Payments to Suppliers (47,700) 0 0 Change in Salary Pay (300) 300 (300) 0 Salary Exp (23,000) 23,000 (23,000) 0 Payments to Employees (23,300) 0 0 Change in Int Payable 200 (200) Amort Prem/Disc Bonds Pay: Int Expense (4,000) 4,000 (4,000) 0 Interest Paid (3,800) 0 0 Change in Prepaid Exp: Prepaid Taxes (3,300) 3,300 Payment of other Exp (1,900) Change in Tax Payable Deferred Taxes (3,300) 0 1,900 (1,900) 0

8 Advanced Accounting-84B Statement of Cash Flows Page 8 Income Tax Expense Payments of Inc Tax: Cash Out from Ops (80,000) 0 0 Net Cash from Ops 19, Investing Activities: 0 0 Sale of Investments 2,800 (2,800) 2, Purchase of Investments Sale of PP&E Purchases of PP&E (24,700) 24,700 (24,700) 0 Net Cash: Inv. Activ. (21,900) 0 0 Financing Activities: Sales of C/S 10,000 (10,000) 10,000 0 Payment of Dividends (3,500) 3,500 Change in Short-term Debt Change in Long-term Debt Change in InterCo Debt Treasury Stock (3,500) 0 Net Cash: Fin. Activ. 6,500 0 Change in Cash Balance 4,500 0 Add: Cash Balance BOY 5,300 Cash Balance EOY 9,800 Non-Cash Investing and Financing Acivities: Conversion of B/P to C/S: Purchase of Assets for N/P:

9 Advanced Accounting-84B Statement of Cash Flows Page 9 Reconciliation of Net Income to Net Cash Flows from Operating Activities: Net Income: $ 9,700 Adjustments: Add: Decrease in Inventory... $ 1,500 Increase in Accounts Payable... 1,800 Depreciation Expense... 9,100 Increase in Interest Payable $ 12,600 Less: Increase in Accounts Recievable.. $ 1,300 Salaries Payable Gain on Sale of LT Investments $ 2,400 10,200 Net Cash Flows from Operating Activities: $ 19,900 Disclosure of Accounting Policy: Cash in excess of daily requirements is invested in marketable equity securities consisting of T-Bills with maturities of three months or less. Such investments are deemed cash equivalents for purposes of the statement of cash flows.