MLR

Dealing with common statement of cash flows issues

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Financial statement preparers and practitioners often find it a challenge to prepare and report on the statement of cash flows.

cash flowing

Issues about the proper presentation of cash flows continue to arise. The authoritative literature on the statement of cash flows is contained in FASB Accounting Standards Codification (FASB ASC) 230, Statement of Cash Flows.

Property, Plant and Equipment Expenditures and Cash Flows

Accountants sometimes struggle with understating how cash flows should be reported related to capital expenditures. For example, not all additions to property, plant and equipment (PP&E) should be reported in the investing section of the statement of cash flows. Since the investing section of the cash flows statement is on the direct method, if additions have not yet been paid for, they should not be reported as an investing activity.

Entities may structure PP&E purchase transactions in a variety of ways. How an entity structures a transaction can change how it is reported in the statement of cash flows.

Seller-Financed PP&E Purchases

“Payments at the time of purchase or soon before or after purchase to acquire PP&E are cash outflows for investing activities,” according to FASB ASC 230-10-45-13(c). However, incurring directly related debt to the seller is a financing transaction, and subsequent payments of principal on that debt are financing cash outflows.

In addition, under FASB ASC 230-10-50-4, acquiring assets by assuming directly related liabilities is an example of a noncash investing and financing transaction. And FASB ASC 230-10-50-3 indicates that information about all investing and financing activities of an entity during a period that affect recognized assets or liabilities but do not result in cash receipts or cash payments in the period should be disclosed.

Accounts Payable and PP&E Purchases

If a PP&E purchase is transacted close to an entity’s fiscal year-end, it may not yet have been paid for at the balance sheet date. If that is the case, the addition to PP&E should not be reported as an investing activity in the entity’s statement of cash flows at the balance sheet date because no cash payment will have been made at that point.

Payments at the time of purchase or soon before or after purchase to acquire PP&E are cash outflows for investing activities under FASB ASC 230-10-45-13(c). This unpaid addition should be disclosed on the statement of cash flows as a noncash investing and financing activity. In the subsequent reporting period, when the PP&E addition is paid for, it should be included in investing activities on the statement of cash flows.

Illustration

The following is an illustration that demonstrates how to record a purchase of equipment at year-end when cash payment has not been made, as well as how that transaction would be recorded on the company’s statement of cash flows.

Company A prepares calendar-year financial statements. On Dec. 20, 20X1, Company A purchases equipment for $10,000 from a vendor and records the following entry:

Dr.

Equipment

10,000

 
  Cr. Accounts Payable

10,000

Company A’s Dec. 31, 20X1, statement of cash flows should not reflect the $10,000 liability as an increase in accounts payable when reconciling net income to cash flows from operating activities. The $10,000 should be disclosed as a noncash investing and financing activity.

On Jan. 19, 20X2, Company A receives an invoice from the vendor and pays the vendor the $10,000, recording the following entry:

Dr.

Accounts Payable

10,000

 
  Cr.

Cash

10,000

Company A’s Dec. 31, 20X2, statement of cash flows should include the $10,000 payment in investing activities.

Practice Note: There is some diversity in practice in the above situation. Some nonauthoritative practice aids and examples would record this payment as a financing activity. However, the payment in the above example is close enough to the time of purchase for it to qualify as an investing activity.