Preparing and presenting statements of cash flows.

Author:Alderman, C. Wayne


Financial Accounting Standards Board Statement no. 95, Statement of Cash Flows, specifies what cash flow information companies must report and reduces diversity in reporting. Although the standard has made cash flow statements much more understandable to financial statement users, it doesn't address some of the problems CPAs may encounter in practice. This article discusses four possible problems and solutions.



Statement no. 95 says information about gross amounts of cash receipts and payments during a period generally is more relevant than information about net amounts. In practice, some netting of cash flows occurs in preparing cash flow statements. This may or may not be appropriate, depending on the circumstances. For example, if cash proceeds from an incurred liability are used to pay off another liability, should this be treated as a refunding and thus omitted from the statement? The answer is yes if no cash is exchanged. In a pure refunding, one liability merely replaces another. If there are two separate liabilities to two separate parties, incurrence of the second liability generally should be treated as a financing inflow and payoff of the first liability considered a financing outflow. This is consistent with the FASB's stated emphasis in the standard on gross rather than net cash flows within the statement of cash flows. The operating, financing or investing activities will be obscured if inflows and outflows are not reported separately.

The netting of inflows and outflows is appropriate only in three circumstances. The first is when there are exchanges between cash and cash equivalents. The second is for items characterized by quick turnover, large amounts and short maturity (paragraph 13 says items that qualify for net reporting are cash receipts and payments pertaining to (1) investments other than cash equivalents, (2) loans receivable and (3) debt, providing that the original maturity of the asset or liability is three months or less). The third is when there is an exception involving financial institutions.

FASB Statement no. 104, Statement of Cash Flows - Net Reporting of Certain Cash Receipts and Cash Payments and Classification of Cash Flows from Hedging Transactions, permits banks, savings institutions and credit unions to report in a cash flow statement net cash receipts and payments for deposits placed and withdrawn...

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