Which of the following should not be disclosed in the statement of cash flows using indirect method

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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 flows

Figure 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
Sample consolidated statement of cash flows

FSP Corp
Consolidated Statement of Cash Flows
For the years ended 20X3, 20X2, and 20X1

20X3

20X2

20X1

Section reference

in millions $

in millions $

in millions $

Cash flows from operating activities:

Net income

$xxx

$xxx

$xxx

FSP 6.4.2

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Accretion (amortization) of discount (premium) on issued debt securities

xxx

xxx

xxx

FSP 6.9.8

(Gain) loss on extinguishment of debt

xxx

xxx

xxx

FSP 6.9.9 / FSP 6.9.10

Depreciation and amortization

xxx

xxx

xxx

FSP 6.7.3

Amortization of debt issue costs

xxx

xxx

xxx

FSP 6.7.3

Share-based incentive compensation

xxx

xxx

xxx

FSP 6.7.3

Impairment of assets

xxx

xxx

xxx

FSP 6.7.3

Provision for bad debt expense

xxx

xxx

xxx

FSP 6.7.3

Inventory obsolescence impairment

xxx

xxx

xxx

FSP 6.7.3

Deferred taxes

xxx

xxx

xxx

FSP 6.7.3

Noncash provisions for exit costs

xxx

xxx

xxx

FSP 6.7.3

Loss (gain) on disposal of property and equipment

xxx

xxx

xxx

FSP 6.7.3

(Income) loss from equity-method investments, net of dividends received

xxx

xxx

xxx

FSP 6.9.4

Foreign currency transactions

xxx

xxx

xxx

FSP 6.11

Changes in operating assets and liabilities, net of effects of businesses acquired:

Decrease (increase) in trade receivables

xxx

xxx

xxx

FSP 6.4.2

Cash received on sale of accounts receivable

xxx

xxx

xxx

FSP 6.4.2

Decrease (increase) in inventories

xxx

xxx

xxx

FSP 6.4.2

Decrease (increase) in other assets, net

xxx

xxx

xxx

FSP 6.4.2

Increase (decrease) in operating accounts payable

xxx

xxx

xxx

FSP 6.4.2

Increase (decrease) in accrued liabilities

xxx

xxx

xxx

FSP 6.4.2

Increase (decrease) in income taxes payable

xxx

xxx

xxx

FSP 6.4.2

Increase (decrease) in other liabilities, net

xxx

xxx

xxx

FSP 6.4.2

Net cash provided by (used in) operating activities

xxx

xxx

xxx

FSP 6.7.3

Cash flows from investing activities:

Acquisition [sale] of equity securities*

xxx

xxx

xxx

FSP 6.7.1

Acquisition [proceeds from sale] of property, plant, and equipment*

xxx

xxx

xxx

FSP 6.9.15

Acquisition [sale] of a business, net of cash and cash equivalents acquired [or sold]*

xxx

xxx

xxx

FSP 6.9.21

Impact to cash resulting from initial consolidation [deconsolidation]*

xxx

xxx

xxx

FSP 6.7.1

Contributions and advances to joint ventures

xxx

xxx

xxx

FSP 6.9.5

Subsequent collections of receivables sold, and of receivables reacquired

xxx

xxx

xxx

FSP 6.9.14

Net cash provided by (used in) investing activities

xxx

xxx

xxx

FSP 6.7.1

Cash flows from financing activities:

Bank overdrafts

xxx

xxx

xxx

FSP 6.5.1.1

Payment of contingent consideration

xxx

xxx

xxx

FSP 6.9.21

Proceeds from debt

xxx

xxx

xxx

FSP 6.7.2

Repayments of debt

xxx

xxx

xxx

FSP 6.7.2

Payments of debt issue costs

xxx

xxx

xxx

FSP 6.7.2

Dividends paid

xxx

xxx

xxx

FSP 6.7.2

Net payments of short-term borrowings

xxx

xxx

xxx

FSP 6.7.2

Repurchases of equity securities

xxx

xxx

xxx

FSP 6.7.2

Acquisition of common stock for tax withholding obligations

xxx

xxx

xxx

FSP 6.9.19

Distributions to noncontrolling interests

xxx

xxx

xxx

FSP 6.9.20

Principal payments under capital lease obligations

xxx

xxx

xxx

FSP 6.7.2

Net activity from derivatives with an other-than-insignificant financing element

xxx

xxx

xxx

FSP 6.9.7

Net cash provided by (used in) financing activities

xxx

xxx

xxx

FSP 6.7.2

Effect of exchange rate changes on cash, cash equivalents and restricted cash

xxx

xxx

xxx

FSP 6.11

Cash, cash equivalents, and restricted cash:

Net change during the period

xxx

xxx

xxx

FSP 6.5

Balance, beginning of period

xxx

xxx

xxx

FSP 6.5

Balance, end of period

$xxx

$xxx

$xxx

FSP 6.5

Supplemental cash flow information:

Cash paid for interest, net of amounts capitalized

$xxx

$xxx

$xxx

FSP 6.4.2

Cash paid for income taxes

xxx

xxx

xxx

FSP 6.4.2

Noncash investing and financing activity*

xxx

xxx

xxx

FSP 6.8

Reconciliation of cash, cash equivalents, and restricted cash reported in the statement of financial position

Cash and cash equivalents

xxx

xxx

xxx

FSP 6.5

Restricted cash

xxx

xxx

xxx

FSP 6.5.3

Restricted cash included in other long-term assets

xxx

xxx

xxx

FSP 6.5.3

Total cash, cash equivalents, and restricted cash shown in the statement of cash flows

xxx

xxx

xxx

* 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 method

As 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:

  • Cash collected from customers, including lessees, licensees, etc.
  • Interest and dividends received (except for return of capital)
  • Other operating cash receipts, if any
  • Cash paid to employees and other suppliers of goods or services, including suppliers of insurance, advertising, etc.
  • Interest paid
  • Income taxes paid
  • Other operating cash payments, if any

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:

  • All deferrals of past operating cash receipts and payments, and all accruals of expected future operating cash receipts and payments (for example, changes during the period in receivables and payables pertaining to operating activities)
  • All items included in net income that do not affect operating cash receipts and payments (for example, all items for which cash effects are related to investing or financing activities (e.g., depreciation, amortization, gains or losses on dispositions of long-lived assets, and foreign currency gains and losses from the retirement of foreign denominated debt))
  • As discussed in ASC 230-10-45-25 and ASC 230-10-45-28, when the indirect method is used, a reporting entity does not report the gross cash receipts and gross payments required by the direct method. Instead, only the reconciliation of net income to net operating activities, as described above, is reported. In addition, as discussed in ASC 230-10-50-2, when the indirect method is used, amounts of interest paid (net of amounts capitalized) and income taxes paid during the period must be disclosed, either on the face of the statement of cash flow or in the footnotes.
  • Adjustments for noncash items in the reconciliation of net income to net cash flows from operating activities may include items such as:
    • Depreciation and amortization relating to fixed assets, definite-lived intangible assets, capital leases, premiums, or discounts on debt (including debt issuance costs)
    • Lessee’s amortization of right-of-use assets (see FSP 6.9.18)
    • Provisions for bad debts and inventory
    • Share-based incentive compensation
    • Deferred income taxes
    • Impairment losses
    • Unrealized foreign currency transaction gains or losses
  • Adjustments for cash flows from investing and financing activities recognized in net income adjusted to arrive at cash flows from operating activities may include items such as:
    • Gains or losses from the sale of long-lived assets or businesses
    • Gains or losses from the settlement of asset retirement obligations
    • Gains or losses from the extinguishment of debt
    • Realized foreign currency transaction gains or losses related to investing or financing activities

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
Foreign currency cash flows in operating and financing cash flows

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.

Journal Entry #1

Dr. Accounts payable

$1,200

Cr. Foreign exchange gains and losses

$50

Cr. Cash

$1,150

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).

Journal Entry #2

Dr. Note payable

$48,000

Cr. Foreign exchange gains and losses

$2,000

Cr. Cash

$46,000

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).

Journal Entry #3

Dr. Note payable

$6,000

Cr. Foreign exchange gains and losses

$6,000

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:

Direct method

Cash flows from operations

Settlement of accounts payable

$( 1,150)

_______

Net cash flows from operating activities

$( 1,150)

Cash flows from investing activities

None

_______

Net cash flows from investing activities

$ 0

Cash flows from financing activities

Repayment of notes payable

$(46,000)

_______

Net cash flows from financing activities

$(46,000)

Total change in cash for the quarter

$(47,150)

Cash, cash equivalents, and restricted cash at beginning of quarter

50,000

_______

Cash, cash equivalents, and restricted cash at end of quarter

$ 2,850


Indirect method

Cash flows from operations

Net income

$ 8,050

Adjustment for non-cash activities:

Unrealized foreign exchange gains

(6,000)

Adjustment for investing and financing activities recognized in net income:

Foreign exchange gain on retirement of long term debt

(2,000)

Change in operating assets and liabilities:

Change accounts payable

(1,200)

_______

Net cash flows from operating activities

$(1,150)


Cash flows from investing activities

None

_______

Net cash flows from investing activities

$ 0


Cash flows from financing activities

Repayment of notes payable

$(46,000)

_______

Net cash flows from financing activities

$(46,000)

Total change in cash for the quarter

$(47,150)

Cash, cash equivalents, and restricted cash at beginning of quarter

50,000

_______

Cash, cash equivalents, and restricted cash at end of quarter

$ 2,850

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 prohibited

Whether 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.

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Which item would be not be shown in a statement of cash flows using the indirect method?

Which of the following items would NOT be shown on a statement of cash flows created using the indirect method? This is the correct answer! Retained earnings is never shown on the statement of cash flows.

Which of the following is not disclosed on the statement of cash flows?

The correct option is d. (A reconciliation of ending retained earnings to net cash flow from operations.)

What should not be included in statement of cash flows?

The cash flow statement does not account for liabilities and assets, which are recorded on the balance sheet. Furthermore, accounts receivable and accounts payable, each of which can be sizeable, are also not reflected in the cash flow statement.

What is included in indirect method of cash flow statement?

The indirect method presents the statement of cash flows beginning with net income or loss, with subsequent additions to or deductions from that amount for non-cash revenue and expense items, resulting in cash flow from operating activities.