A statement of cash flows and its related disclosure note typically do not report:
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Publication date: 29 Nov 2020 us Financial statement presentation guide 6.4 ASC 230 allows a reporting entity to prepare and present its statement of cash flows using either the direct or indirect method (see FSP 6.4.2), though ASC 230-10-45-25 encourages using the direct method. 6.4.1 Sample statement of cash flowsFigure FSP 6-1 is an illustrative cash flow statement prepared using the indirect method. It reflects certain captions required by ASC 230 (bolded), and other common captions. Not all captions are applicable to all reporting entities. In addition, some captions may be reflected in other classification categories depending on facts and circumstances. Presentation and disclosure requirements are addressed in the relevant sections of this chapter and cross referenced in the last column of the figure. Not all items discussed within this chapter are presented in the figure. Figure FSP 6-1
* These line items generally should be presented gross; however, for ease of reference in Figure FSP 6-1, the inflows and outflows are reflected in the sample statement on one line. 6.4.2 Direct versus indirect methodAs discussed in ASC 230-10-45-28, cash flows related to operating activities may be presented in one of two ways — the direct method or the indirect method. The presentation of investing and financing activities are identical under the direct and indirect methods. Although the presentation of operating cash flows differs between the two methods, both methods result in the same amount of net cash flows from operations. While ASC 230-10-45-25 encourages the use of the direct method, the large majority of reporting entities elect to use the indirect method. The concepts underlying classification within ASC 230 were conceived and explained solely from the perspective of the direct method. While the indirect method represents an alternative presentation model, it is not an alternative classification methodology. Accordingly, even when a reporting entity is using the indirect method, it should consider the direct method framework when evaluating the proper classification of a cash flow. As discussed in ASC 230-10-45-25, the direct method requires the presentation of major types of gross cash receipts and gross cash payments and their arithmetic sum, which represents the net cash flow from operating activities. At a minimum, the following types of operating receipts and disbursements are required in a direct method presentation:
To illustrate how operating cash flows (prepared on the cash basis of accounting) relate to net income (prepared on the accrual method of accounting), as discussed in ASC 230-10-45-28, the direct method also requires a reconciliation of net income to net cash flows from operating activities. Net income, including earnings attributable to the controlling and noncontrolling interests, is the starting point to reconcile cash flows from operating activities. The reconciliation removes the effects of the following:
Reporting entities have latitude in how they present an indirect method reconciliation, as there is no prescribed format. As with most forms of practical expediency, the indirect method yields information that is less useful than the direct method. For example, because the individual line items within a reconciliation of net income to net operating cash flows do not represent cash flows, they by themselves provide no incremental information about a reporting entity's cash flows. Although ASC 230 encourages the use of the direct method, a reporting entity can change from the indirect to direct method (or vice versa) retrospectively. This retrospective change in the presentation of the statement of cash flows would not be considered a discretionary accounting change and would not require an assessment of preferability. Even when a reporting entity is using the indirect method, the direct method may be helpful in evaluating the proper classification of cash flows. Example FSP 6-1 illustrates how a reporting entity can use the direct method to isolate cash flows from operations to ensure that the presentation under the indirect method of cash flows from operations is the same. EXAMPLE FSP 6-1 FSP Corp is a US dollar functional currency entity with two Euro denominated liabilities: a €1,000 account payable due in 30 days and a €100,000 long-term note due in 3 years that may be repaid at any time, in any increment. At the beginning of the quarter, the spot rate for Euros was $1.20 per €1. The account payable was remeasured at the beginning of the quarter at $1,200 and the long term note at $120,000. FSP Corp has $50,000 of cash and cash equivalents on the balance sheet at the beginning of the quarter. A week later, when the spot rate for Euros is $1.15 per €1, FSP Corp pays the €1,000 account payable and settles €40,000 of the note payable. When preparing its financial statements at the end of the quarter, the exchange rate for remeasurement of the remaining €60,000 of long-term note payable is $1.10 per €1. FSP Corp records the following journal entries.
To settle the outstanding account payable (foreign exchange gains of $50 (€1,000 x ($1.20-$1.15)) and cash of $1,150 (€1,000 x $1.15).
To partially repay the long term note payable (foreign exchange gains of $2,000 (€40,000 x ($1.20-$1.15)) and cash of $46,000 (€40,000 x $1.15).
To record the foreign exchange gain on the remeasurement of the outstanding debt of $6,000 (€60,000*($1.20-$1.10)). Ignoring interest and taxes, what is the treatment in the cash flow statement for these three journal entries under the direct and indirect methods? Analysis Treatment on the cash flow statement:
A common error when preparing the cash flow statement is to present the repayment of €40,000 of the note payable as an outflow of $48,000 (the amount of the debt repayment remeasured to US dollars at the beginning of the period). This results the foreign exchange gain on the retirement of debt being included in cash flows from operations. In this example, reporting the foreign exchange gain in operations (rather than financing) would have resulted in $850 of net cash inflows from operations, rather than the $1,150 net outflow from operating activities. See FSP 6.11 for further discussion of foreign currency cash flows. 6.4.3 Cash flow performance measures prohibitedWhether a reporting entity uses the direct or indirect method to present its operating cash flows, ASC 230-10-45-3 prohibits disclosure of cash flow per share or any component of cash flow per share. PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
Please ensure What does the statement of cash flows not report?The cash flow statement does not tell us the profit earned or lost during a particular period: profitability is composed of cash earned but also of non-cash items. This is true even for items on the cash flow statement such as "cash increase from sales minus expenses." This item is not an indicator of profit.
What information does the statement of cash flows report that is not reported on the other required financial statements?This statement reports the issues with converting accounts receivable to cash, conversion of inventory to sales, etc. This effect of conversions and the cash flows are not reflected in the financial statements except in the cash flow statement.
What are the disclosure requirements in reporting cash flows?The required disclosures fall into three broad areas: A reconciliation of operating cash if the direct method is used when preparing the cash flow statement, which typically means adding the indirect cash flow method for the operating section as a supplemental disclosure.
What is disclosed about the statement of cash flows in the notes to the financial statements?A cash flow statement provides data regarding all cash inflows a company receives from its ongoing operations and external investment sources. The cash flow statement includes cash made by the business through operations, investment, and financing—the sum of which is called net cash flow.
Which activities does not include in cash flow statement?Investing and financing transactions that do not require the use of cash or cash equivalents should be excluded from a cash flow statement. Such transactions should be disclosed elsewhere in the financial statements in a way that provides all the relevant information about these investing and financing activities.
Which of the following is not reported on the statement of cash flows cash flows from operating activities?Since interest and dividend receipts are not related to operating activities, they are not shown as part of the net cash flow from operating activities on the statement of cash flows. 6.
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