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 balances Recommended, but not required for inclusion in the annual report until 1971 Objectives Disclosure of changes in financial position Summarize financing and investing activity Report funds flow from operations

Statement of Changes in Financial Position Sources of resources Transaction credits Arise from increases in liabilities and owners’ equity and decreases in assets Uses of resources Transaction 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 income b.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 losses b.From other sources 2.Other uses of resources 3.Increase, if any, in the fund balance for the period Sources of ResourcesUses 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

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 section Interest expense Interest revenue Dividend 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 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

Chapter 12: Statement of Cash Flows Pre-Statement of Cash Flows (before 1987) Statement of Cash Flows (1987) Research