A Study of Cash Flows Statement

I. Introduction The purpose of this paper is to present and inform the rehearsal of money passs by incorporating the program lines no. 95, 102 and 104 that induce standards for capital flows inform issued by FASBi. FASB didactics No. 95 (FAS 95) Statement of specie Flows supersedes APB reliance No. 9, reporting Changes in fiscal Position, and anticipates a contestation of nones flows as spell of a full set of fiscal narrations for completely business effortsii in place of a statement of changes in pecuniary position and categoriseify hard bills improvement and payments according to whether they stem from operating(a), commit, or support activities and provides interpretations of each class. FASB Statement No. 102 (FAS 102) amends FAS 95, to exempt from the exigency to provide a statement of property flows (a) defined benefit award plans covered by FASB Statement No. 5, score and Reporting by Defined Benefit Pension Plansiii , and true different em ployee benefit plans and (b) super facile investiture companies that seemly specified conditions. This Statement likewise requires that coin good and immediate payment payments runing from acquisitions and take in sales of (a) securities and opposite additions that be vexd specific solelyy for resale and carried at commercialize value in a trading handbill and (b) loans that argon obtaind specific everyy for resale and carried at market value or the deject of woo or market value be categorise as operating coin flows in a statement of hard currency flows.FASB Statement No. 104 (FAS 104) amends FAS 95 to rent banks, savings institutions, and credit unions to report in a statement of interchange flows true gain interchange pass on and gold payments for (a) deposits placed with separate(a) financial institutions and passals of deposits, (b) clipping deposits judge and repayments of deposits, and (c) loans make to guests and principal collections o f loans.This Statement also amends FAS 95 to permit coin flows resulting from futures contracts, former contracts, selection contracts, or swap contracts that are accounted for as turn offs of classifiable minutes or events to be classified in the same crime syndicate as the capital flows from the items organism misrepresentd provided that accounting system policy is cave ind. II. intention of a Statement of currency Flows The purpose of a statement of bullion flows is 1. To provide relevant learning active the bullion value and immediate payment payments of an enterprisingness during a period 2.To help investors, creditors, and former(a)s to assess 2. 1. The enterprises powerfulness to recall positive future interlock gold flows 2. 2. The enterprises ability to insure its obligations, its ability to pay dividends, and its needs for external financing 2. 3. The reasons for differences between interlocking income and associated gold responses and payments 2. 4. The set up on an enterprises financial position of some(prenominal) its exchange in and non capital investiture and financing transactions during the period.So the objectives of standards of financial accounting and describe is to require the introduction of entropy close the historical changes in coin and nones equivalents of an enterprise by means of the statement of gold flows which classifies hard currency flows during the period according to operating, drop and financing activities. III. Focus on specie and silver Equivalents A statement of change flows explains the changes in currencyiv ( capital on present and demand deposits) and currency equivalents during a period. change equivalents comprise the short-term, highly limpid investments that are (i) right away convertible to a known sum up of coin and (ii) that are subject to an insignificant risk of changes in value. Generally an investment usually meets the definition of a cash equivalent when i t has a adulthood of three months or less from the date of acquisition. Equity investments are normally excluded, unless they are in substance a cash equivalent (e. g. favored shares acquired within three months of their specified redemption date).Bank overdrafts which are re collectable on demand and which form an integral part of an enterprises cash circumspection are also intromitd as a component of cash and cash equivalents. Examples of items commonly considered to be cash equivalents are treasury bills, commercialised paper, money market parentages, and federal funds sold (for an enterprise with banking operations). interchange leveragings and sales of those investments largely are part of the enterprises cash management activities quite than part of its operating, investing, and financing activities, and details of those transactions need non be reported in a statement of cash flows.An enterprise shall establish a policy concerning which short-term, highly liquid i nvestments that satisfy the said definition of cash equivalents. For example, an enterprise having banking operations cogency decide that all investments that shift except for those purchased for its trading account leave alone be treated as cash equivalents, while an enterprise whose operations consist largely of investing in short-term, highly liquid investments might decide that all those items will be treated as investments rather than cash equivalents.An enterprise shall disclose its policy for determining which items are treated as cash equivalents. some(prenominal) change to that policy is a change in accounting article of belief that shall be affected by restating financial statements for earlier years presented for comparative degree purposes. IV. Gross and kale cash flows Generally, information about the rough substances of cash receipts and cash payments during a period is more relevant than information about the net amounts of cash receipts and payments.However, the net amount of link receipts and payments provides sufficient information not only for cash equivalents as noted in slit III, only also for certain opposite classes of cash flows that pick out quick disorder, large amounts and short maturities. For certain separate items such as demand deposits of a bank and customer accounts payable of a broker-dealer, the enterprise is substantively keeping or disbursing cash on behalf of its customers. only the net changes during the period in assets and liabilities with those characteristics need be reported because noesis of the rough-cut cash receipts and payments link up to them may not be necessary to understand the enterprises operating, investing, and financing activitiesv. Items that qualify for net reporting because their swage is quick, their amounts are large, and their maturities are short are cash receipts and payments pertaining to (a) investments (other than cash equivalents), (b) loans receivable, and (c) debt, prov iding that the original maturity of the asset or liability is three months or lessvi.Banks, savings institutions, and credit unions are not necessary to report bring in amounts of cash receipts and cash payments for (a) deposits placed with other financial institutions and withdrawals of deposits, (b) clip deposits accepted and repayments of deposits, and (c) loans made to customers and principal collections of loans.When those enterprises constitute part of a merge enterprise, net amounts of cash receipts and cash payments for deposit or lend activities of those enterprises shall be reported separate from rude amounts of cash receipts and cash payments for other investing and financing activities of the coalesced enterprise, including those of a subsidiary of a bank, savings institution, or credit union that is not itself a bank, savings institution, or credit union. V. Classification of bullion Receipts and interchange PaymentsA statement of cash flows shall classify cash receipts and cash payments as resulting from investing, financing, or operating activitiesvii. Cash Flows from commit Activitiesviii Cash inflows from receipts including Cash outflows for disbursements / payments including 1. ollections of loans made by the enterprise 1. making loans by the enterprise 2. sales of other entities debt instruments (other than cash 2. acquire debt instruments of other entities (other than cash equivalents and certain debt instruments that are acquired equivalents and certain debt instruments that are acquired specifically for resale) that were purchased by the enterprise specifically 3. ales of justness instruments of other enterprises (other than for resale) certain integrity instruments carried in a trading account) 3. acquire reliable play instruments of other enterprises (other than and from returns of investment in those instruments certain rightfulness instruments carried in a trading account) 4. sales of property, plant, and equipment and other productive 4. t the m of purchase or soon before or after purchaseix to assets. acquire property, plant, and equipment and other productive assetsx. Cash Flows from Financing Activities Cash inflows from Cash outflows for 1. egress from issuing equity instruments 1. Payments of dividends or other distri stillions to owners, including 2.Proceeds from issuing bonds, mortgages, notes, and from outlays to reacquire the enterprises equity instruments other short- or long-term borrowing. 2. Repayments of amounts borrowed 3. Other principal payments to creditors who have broaden long-term creditxi. Cash Flows from Operating Activitiesxii Cash inflows intromits Cash outflows includes 1. Cash receipts from sales of goodsxiii or services, 1.Cash payments to acquire materials for manufacture or goodsxiv including receipts from collection or sale of accounts and both for resale, including principal short- and long-term notes receivab le from customers arising payments on accounts and both short- and long-term notes payable to from those sales suppliers for those materials or goods 2. Cash receipts from returns on loans, other debt instruments 2.Cash payments to other suppliers and employees for other goods or of other entities, and equity securities touch and dividends services 3. either other cash receipts that do not stem from transactions c. Cash payments to governments for taxes, duties, fines, and other defined as investing or financing activities, such as amounts fees or penalties received to settle lawsuits upshot of nsurance settlements 3. Cash payments to lenders and other creditors for affair except for those that are directly associate to investing or 4. All other cash payments that do not stem from transactions defined financing activities, such as from destruction of a building as investing or financing activities, such as payments to settle and refunds from suppliers. lawsuits, cash c ontributions to charities, and cash refunds to customers. It is notable that certain cash receipts and payments may have aspects of more than one class of cash flows. For example, the acquisition and sale of equipment to be use by the enterprise or rented to others widely distributedly are investing activities. However, equipment sometimes is acquired or produced to be used by the enterprise or rented to others for a short period and then sold. In those circumstances, the acquisition or production and subsequent sale of those assets shall be considered operating activities.Cash flows relating to extraordinary(p) items should be classified as operating, investing or financing as appropriate and should be respectively disclosed. The give-and-take rate used for rendition of transactions denominated in a foreign currency and the cash flows of a foreign subsidiary should be the rate in effect at the date of the cash flows. xv Cash flows of foreign subsidiaries should be readd at the exchange rates prevailing when the cash flows took place.As regards the cash flows of associates and joint ventures, where the equity method acting is used, the cash flow statement should report only cash flows between the investor and the investee where proportionate consolidation is used, the cash flow statement should include the venturers share of the cash flows of the investee. pecuniary statements shall not report an amount of cash flow per share. Neither cash flow nor whatsoever component of it is an pick to net income as an indicator of an enterprises performance, as reporting per share amounts might imply.VI. Content and Form of the Statement of Cash Flows A statement of cash flows for a period shall report net cash provided or used by operating, investing, and financing activitiesxvi and the net effect of those flows on cash and cash equivalents during the period in a manner that reconciles beginning and ending cash and cash equivalents. In reporting cash flows from operating activities, enterprises are further to use Direct Method to shows each major class of gross cash receipts and gross cash paymentsxvii.The operating cash flows section of the cash flow statement under the direct method would face something deal this Cash receipts from customers xx,xxx Cash paying to suppliers xx,xxx Cash gainful to employees xx,xxx Cash stipendiary for other operating expenses xx,xxx saki paying(a) xx,xxx Income taxes paying(a) xx,xxx sort out cash from operating activities xx,xxx Enterprises that do so should, at a minimum, independently report the following classes of operating cash receipts and payments Enterprises that hold not to provide information about major classes of operating receipts and payments by the direct method shall determine and report the same amount for net cash flow from operating activities indirectly by adjusting net income to reconcile it to net cash flow from operating activities (the indirect or rapprochement met hod). The Indirect Method adjusts accrual basis net meshwork or loss for the effects of non-cash transactions.The operating cash flows section of the cash flow statement under the indirect method would appear something like this Profit before evoke and income taxes xx,xxx make sense back depreciation xx,xxx Add back amortization of goodwill xx,xxx Increase in receivables xx,xxx Decrease in inventories xx,xxx Increase in trade payables xx,xxx Interest expense xx,xxx Less Interest accrued but not yet paid xx,xxx Interest paid xx,xxx Income taxes paid xx,xxx Net cash from operating activities xx,xxx That requires adjusting net income to remove (a) the effects of all deferrals of past operating cash receipts and payments, such as changes during the period in inventory, deferred income, and the like, and all accruals of expected future operating cash receipts and payments, such as changes during the period in receivables and payablesxviii, and (b) the effects of all items whose cash effects are investing or financing cash flows, such as depreciation, amortization of goodwill, and gains or losses on sales of property, plant, and equipment and discontinue operations (which subsume to investing activities), and gains or losses on extinguishment of debt (which is a financing military action). If the direct method of reporting net cash flow from operating activities is used, the reconciliation of net income to net cash flow from operating activities shall be provided in a separate schedule. If the indirect method is used, the reconciliation may be either reported within the statement of cash flows or provided in a separate schedule, with the statement of cash flows reporting only the net cash flow from operating activities.If the reconciliation is presented in the statement of cash flows, all adjustments to net income to determine net cash flow from operating activities shall be clearly identified as reconciling items. Except for items describe in secti on IV paragraphs 2 and 3, both investing/financing cash inflows and outflows shall be reported separately in a statement of cash flowsfor example, outlays for acquisitions of property, plant, and equipment shall be reported separately from proceeds from sales of property, plant, and equipment proceeds of borrowings shall be reported separately from repayments of debt and proceeds from issuing stock shall be reported separately from outlays to reacquire the enterprises stock. VII. schooling about Noncash Investing and Financing Activities Information about all investing and financing activities of an enterprise during a period that affect recognized assets or liabilities but that do not result in cash receipts or cash payments in the period shall be reported in related revelations. Examples of noncash investing and financing transactions are converting debt to equity acquiring assets by assuming directly related liabilities, such as purchasing a building by incurring a mortgage to t he marketer obtaining an asset by entering into a capital lease and exchanging noncash assets or liabilities for other noncash assets or liabilities. Some transactions are part cash and part noncash only the cash portion shall be reported in the statement of cash flows. VIII.Exemptions from the Requirement to Provide a Statement of Cash Flows A statement of cash flows is not required to be provided by a defined benefit gift plan that presents financial information in accord with the provisions of Statement 35. Other employee benefit plans that present financial information mistakable to that required by Statement 35 (including the presentation of plan investments at fair value) also are not required to provide a statement of cash flows. Employee benefit plans are back up to include a statement of cash flows with their yearly financial statements when that statement would provide relevant information about the ability of the plan to meet future obligations (for example, when the plan invests in assets that are not highly liquid or obtains financing for investments).For an investment enterprise (an investment comp each, an investment enterprise, a common trust fund, variable annuity account, or similar fund maintained by a bank, insurance company, or other enterprise in its capacity as a trustee, administrator, or guardian for the embodied investment and reinvestment of moneys) to be exempt from the requirement to provide a statement of cash flows, all of the following conditions must be met a. During the period, substantially all of the enterprises investments were highly liquid (for example, marketable securities, and other assets for which a market is readily available). b. Substantially all of the enterprises investments are carried at market valuexix. c. The enterprise had microscopic or no debt, based on the average debt outstandingxx during the period, in affinity to average total assets. d. The enterprise provides a statement of changes in net ass ets. IX.Classification of Cash Flows from Acquisitions and Sales of trustworthy Securities and Other Assets Banks, brokers and dealers in securities, and other enterprises may carry securities and other assets in a trading accountxxi. Cash receipts and cash payments resulting from purchases and sales of securities and other assets shall be classified as operating cash flows if those assets are acquired specifically for resale and are carried at market value in a trading account. Some loans are similar to securities in a trading account in that they are originated or purchased specifically for resale and are held for short periods of time. Cash receipts and cash payments resulting from acquisitions and sales of loans lso shall be classified as operating cash flows if those loans are acquired specifically for resale and are carried at market value or at the lower of cost or market valuexxii. Cash receipts resulting from sales of loans that were not specifically acquired for resale sh all be classified as investing cash inflows. That is, if loans were acquired as investments, cash receipts from sales of those loans shall be classified as investing cash inflows regardless of a change in the purpose for holding those loans. X. Net Reporting of Certain Cash Receipts and Cash Payments concord to FAS No. 95, information about the gross amounts of cash receipts and cash payments during a period mainly is more relevant than information about the net amounts of cash receipts and cash payments.However, for certain items, the net amount of cash receipts and cash payments may provide sufficient information. For example, gross cash flows need not be reported for demand deposits of a bank or for investments, loans receivable, and debt of any enterprise if the original maturity of the asset or liability is three months or less. As a result banks, savings institutions, and credit unions are not required to report gross amounts of cash receipts and cash payments for (a) deposi ts placed with other financial institutions and withdrawals of deposits, (b) time deposits accepted and repayments of deposits, and (c) loans made to customers and principal collections of loans.When those enterprises constitute part of a consolidated enterprise, net amounts of cash receipts and cash payments for deposit or lend activities of those enterprises shall be reported separate from gross amounts of cash receipts and cash payments for other investing and financing activities of the consolidated enterprise. XI. Classification of Cash Flows from hedgerow Transactions The Board received requests from various enterprises to reconsider the classification of cash flows from an item that is intended as a hedge of other item. Those requests generally focused on cash flows from a futures contract or forward contract that is accounted for as a hedge of an inventory transaction.FAS 104 modifies FAS 95 to permit cash flows resulting from futures contracts, forward contracts, option contracts, or swap contracts that are accounted for as hedges of identifiable transactions or events (for example, a cash payment from a futures contract that hedges a purchase or sale of inventory), including anticipatory hedges, to be classified in the same category as the cash flows from the items being hedged provided that accounting policy is disclosed. If for any reason hedge accounting for an instrument that hedges an identifiable transaction or event is discontinued, then any cash flows subsequent to the date of discontinuance shall be classified concordant with the personality of the instrument. Endnotes i- Portions of various FASB Statements, copyright by the pecuniary Accounting Standards Board, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116, USA, are reproduced with permission. Complete copies of these documents are available from the FASB. ii- A statement of cash flows is not required for defined benefit pension plans and certain other employee benefit plans o r for certain investment companies as provided by FAS 102, Statement of Cash FlowsExemption of Certain Enterprises and Classification of Cash Flows from Certain Securities Acquired for Resale. iii- The financial reporting requirements of defined benefit pension plans are addressed in Statement 35.Paragraph 6 of that Statement specifies that the annual financial statements of a plan shall include (a) A statement that includes information regarding the net assets available for benefits as of the end of the plan year (b) A statement that includes information regarding the changes during the year in the net assets available for benefits (c) Information regarding the actuarial present value of salt away plan benefits as of either the beginning or end of the plan year (d) Information regarding the effects, if significant, of certain factors affecting the year-to-year change in the actuarial present value of accumulated plan benefits. Statement 35 also states that existing generally accep ted accounting principles other than those discussed in that Statement may apply to the financial statements of defined benefit pension plans. iv- Consistent with common usage, cash includes not only currency on hand but demand deposits with banks or other financial institutions. Cash also includes other kinds of accounts that have the general characteristics of demand deposits in that the customer may deposit additional funds at any time and also effectively may withdraw funds at any time without prior notice or penalty. All charges and credits to those accounts are cash receipts or payments to both the entity owning the account and the bank holding it. For example, a banks granting of a loan by crediting the proceeds to a customers demand deposit account is a cash payment by the bank and a cash receipt of the customer when the entry is made. v- cash flows from investing and financing activities should be reported gross by major class of cash receipts and major class of cash paymen ts except for the following cases, which may be reported on a net basis Cash receipts and payments on behalf of customers (for example, receipt and repayment of demand deposits by banks, and receipts accumulate on behalf of and paid over to the owner of a property). Cash receipts and payments for items in which the turnover is quick, the amounts are large, and the maturities are short, generally less than three months (for example, charges and collections from credit beak customers, and purchase and sale of investments). cash receipts and payments relating to fixed maturity deposits. Cash hands and loans made to customers and repayments thereof. Investing and financing transactions which do not require the use of cash should be excluded from the cash flow statement, but they should be separately disclosed elsewhere in the financial statements. vi- For this purpose, amounts due on demand are considered to have maturities of three months or less. For convenience, credit greenback receivables of financial services operationsgenerally, receivables resulting from cardholder charges that may, at the cardholders option, be paid in full when first billed, usually within one month, without incurring engagement charges and that do not stem from the enterprises sale of goods or servicesalso are considered to be loans with original maturities of three months or less. vii- Generally, each cash receipt or payment is to be classified according to its nature without regard to whether it stems from an item intended as a hedge of another item.For example, the proceeds of a borrowing are a financing cash inflow even though the debt is intended as a hedge of an investment, and the purchase or sale of a futures contract is an investing activity even though the contract is intended as a hedge of a firm commitment to purchase inventory. However, cash flows from futures contracts, forward contracts, option contracts, or swap contracts that are accounted for as hedges of identifi able transactions or events (for example, a cash payment from a futures contract same category as the cash flows from the items being hedged provided that accounting policy is that hedges a purchase or sale of inventory), including anticipatory hedges, may be classified in the disclosed.If for any reason hedge accounting for an instrument that hedges an identifiable transaction or event is discontinued, then any cash flows subsequent to the date of discontinuance shall be classified consistent with the nature of the instrument. viii- Investing activities exclude acquiring and disposing of certain loans or other debt or equity instruments that are acquired specifically for resale, as discussed in Statement 102. ix- Generally, only advance payments, the down payment, or other amounts paid at the time of purchase or soon before or after purchase of property, plant, and equipment and other productive assets are investing cash outflows. Incurring directly related debt to the seller is a financing transaction, and subsequent payments of principal on that debt so are financing cash outflows. x- Payments to acquire productive assets include interest capitalized as part of the cost of those assets. xi- Refer to footnote 8 which indicates that nigh principal payments on seller-financed debt directly related to a purchase of property, plant, and equipment or other productive assets are financing cash outflows. xii- Operating activities include all transactions and other events that are not defined as investing or financing activities in paragraphs 15-20. Operating activities generally pick out producing and delivering goods and providing services. Cash flows from operating activities are generally the cash effects of transactions and other events that enter into the determination of net income. xiii- The term goods include certain loans and other debt and equity instruments of other enterprises that are acquired specifically for resale, as discussed in Statement 102. xiv- The term goods include certain loans and other debt and equity instruments of other enterprises that are acquired specifically for resale, as discussed in Statement 102. xv- Paragraph 12 of FASB Statement No. 52, Foreign Currency Translation, recognizes the general impracticality of translating revenues, expenses, gains, and losses at the exchange rates on dates they are recognized and permits an appropriately leaden average exchange rate for the period to be used to translate those elements. This Statement applies that provision to cash receipts and cash payments. xvi- Separate disclosure of cash flows pertaining to extraordinary items or discontinued operations reflected in those categories is not required. An enterprise that nevertheless chooses to report separately operating cash flows of discontinued operations shall do so consistently for all periods affected, which may include periods long after sale or liquidation of the operation. xvii- 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. xviii- Adjustments to net income to determine net cash flow from operating activities shall reflect accruals for interest earned but not received and interest incurred but not paid. Those accruals may be reflected in the statement of financial position in changes in assets and liabilities that relate to investing or financing activities, such as loans or deposits. However, interest credited directly to a deposit account that has the general characteristics described footnote 1, is a cash outflow of the payor and a cash inflow of the payee when the entry is made. xix- Securities for which market value is determined using matrix price techniques, which are descr ibed in the AICPA Audit and Accounting Guide, Audits of Investment Companies, would meet this condition.Other securities for which market value is not readily determinable and for which fair value must be determined in good religious belief by the board of directors would not. xx- For the purpose of determining average debt outstanding, obligations resulting from redemptions of shares by the enterprise from unsettled purchases of securities or similar assets, or from covered options written generally may be excluded. However, any extension of credit by the seller that is not in accordance with standard industry practices for redeeming shares or for settling purchases of investments shall be included in average debt outstanding. xxi- Characteristics of trading account activities are described in FASB Statement No. 9, Financial Reporting and Changing Prices, and in the AICPA Industry Audit Guide, Audits of Banks, and Audit and Accounting Guide, Audits of Brokers and Dealers in Securi ties. xxii- Mortgage loans and mortgage-backed securities held for sale are required to be reported at the lower of cost or market value in accordance with FASB Statement No. 65, Accounting for Certain Mortgage Banking Activities. References 1. Statement of Financial Accounting Standards No. 95 Statement of Cash Flows November 1987 Financial Accounting Standards Board of the Financial Accounting Foundation 401 MERRITT 7, P. O. BOX 5116, NORWALK, computerized tomography 06856-5116 2. Statement of Financial Accounting Standards No. 102Statement of Cash FlowsExemption of Certain Enterprises and Classification of Cash Flows from Certain Securities Acquired for Resale an amendment of FASB Statement No. 95 February 1989 Financial Accounting Standards Board of the Financial Accounting Foundation 401 MERRITT 7, P. O. BOX 5116, NORWALK, computerized tomography 06856-5116 3. Statement of Financial Accounting Standards No. 104 Statement of Cash FlowsNet Reporting of Certain Cash Receipts and Cash Payments and Classification of Cash Flows from Hedging Transactions an amendment of FASB Statement No. 95 December 1989 Financial Accounting Standards Board of the Financial Accounting Foundation 401 MERRITT 7, P. O. BOX 5116, NORWALK, CONNECTICUT 06856-511