The Cash Flow Statement, written by Hugo Nurnberg, CPA, Ph.D. of Baruch College, City University of New York, examines the document of the same name required by Financial Accounting Standards Board (FASB) Statement No. 95. 

In addition to explaining the rules for preparing cash flow statements, this Portfolio describes in practical terms how to apply FAS 95 to various types of business enterprises. It illustrates cash flow statements of a merchandising or manufacturing company under the direct method and the indirect method, discusses how to prepare them, and explains how to prepare worksheets to facilitate their preparation.   This Portfolio also discusses the advantages and disadvantages of each method and examines how the classification of certain cash flows under FAS 95 is consistent or inconsistent with the trichotomy. 

In addition, The Cash Flow Statement includes worksheets that illustrate and explain the calculation of the foreign currency exchange rate effect on cash in two separate situations: when the foreign currency is the functional currency, and when the U.S. dollar is the functional currency. Additionally, this Portfolio includes illustrative cash flow statements of a railroad, a utility, a financial company, an insurance company, and a health care entity. 

This Portfolio examines the historical context in which the requirements of FAS 95 were developed as a means to better understand their purpose, strengths, and weaknesses. It identifies and analyzes the inconsistencies and ambiguities of the various requirements, especially the classification rules, and illustrates some of these inconsistencies and ambiguities with examples from published cash flow statements. It also addresses, in passing, some of the major criticisms of FAS 95 and some of the proposals to amend it to make it more internally consistent and more useful to report users.  

Finally, this Portfolio explains how financial analysts adjust cash flow statement numbers for analytical purposes.

The Cash Flow Statement allows you to benefit from: 

• Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area.
• Invaluable practice documents including tables, charts and lists.
• Guidance from world-class experts.
• Real-world and in-depth analysis that lets you explore various options.
• Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more.
• Alternative approaches to both common and unique tax scenarios. 

This Portfolio is included in the Accounting Policy & Practice Series, a comprehensive series of titles which explain, explicate, and offer commentary on a wide range of accounting and financial management topics, including revenue recognition, income taxes, leasing, business combinations, debt instruments, risk management, internal controls and more. 

Detailed Analysis

I. Introduction and Scope of Portfolio

A. Pertinent Pronouncements

B. Nature of Cash Flow Statement

C. Historical Perspective

D. Scope of Portfolio

II. Objectives of Cash Flow Statement

III. Importance of Cash Flow Statement Classifications

IV. Net Cash Flow From Operating Activities Versus Free Cash Flow

V. Direct Versus Indirect Method of Reporting NCFO

Introductory Material

A. Mechanics of Direct and Indirect Method

1. Steps to Prepare Direct Method Cash Flow Statement

a. Compute Change in Cash for Period

b. Compute Operating Cash Inflows by Adjusting Operating Revenues Less Bad Debt Expense for Change in Net Accounts Receivables

c. Compute Operating Cash Outflows by Adjusting Operating Expenses for Changes in Inventories, Prepayments, and Payables

(1) Compute Payments to Inventory Suppliers

(2) Compute Payments to Employees and Other Suppliers

(3) Compute Interest Payments

(4) Compute Income Tax Payments

d. Compute Net Cash Flow From Operating Activities as the Difference Between Total Operating Inflows and Total Operating Outflows

e. Identify All Other Cash Inflows and Outflows, and Classify as Relating to Either Investing or Financing Activities

(1) Identify Investing Activities

(2) Identify Financing Activities-Issuance and Retirement of Bonded Debt

(3) Identify Financing Activities-Issuance and Retirement of Common Stock

(4) Identify Financing Activities-Dividend Payments

f. Sum All Investing Cash Inflows and Outflows to Determine Net Cash Flow From Investing Activities (NCFI)

g. Sum All Financing Cash Inflows and Outflows to Determine Net Cash Flow From Financing Activities (NCFF)

h. Sum Net Cash Flow From Operating Activities (NCFO), Net Cash Flow From Investing Activities (NCFI), and Net Cash Flow From Financing Activities (NCFF)

i. Compare Sum In Step h to Amount in Step a

2. Steps to Prepare Indirect Method Cash Flow Statement

a. Compute Change in Cash for Period

b. Compute Net Cash Flow From Operating Activities by Adjusting Net Income for Noncash Revenues and Expenses and Nonoperating Gains and Losses

c. Identify All Other Cash Inflows and Outflows, and Classify as Relating to Either Investing or Financing Activities

(1) Identify Investing Activities

(2) Identify Financing Activities-Issuance and Retirement of Bonded Debt

(3) Identify Financing Activities-Issuance and Retirement of Common Stock

(4) Identify Financing Activities-Dividend Payments

d. Sum All Investing Cash Inflows and Outflows to Determine Net Cash Flow From Investing Activities (NCFI)

e. Sum All Financing Cash Inflows and Outflows to Determine Net Cash Flow From Financing Activities (NCFF)

f. Sum Net Cash Flow From Operating Activities, Net Cash Flow From Investing Activities, and Net Cash Flow From Financing Activities

g. Compare Sum in Step f to Amount in Step a

B. Advantages of Indirect Method

C. Disadvantages of Indirect Method

D. Disadvantages of Direct Method

E. Advantages of Direct Method

F. Genesis of GAAP Compromise

G. Evaluation

VI. Classification Trichotomy Under FAS 95

Introductory Material

A. Operating Activities

B. Investing Activities

C. Financing Activities

VII. Implications of FAS 95 Trichotomy

Introductory Material

A. Classification by Nature

B. Arbitrariness of Three-Way Classification

1. Operating Versus Investing Activities

2. Operating Versus Financing Activities

3. Investing Versus Financing Activities

VIII. Classification Ambiguities and Inconsistencies Under FAS 95

Introductory Material

A. Interest Payments

1. GAAP Classification Rules

2. Materiality of Interest Payments

3. Historical Perspective

4. Evaluation of FASB Rationale

5. Bonded Debt

6. Debt Issuance Costs

7. Capitalized Interest

B. Interest and Dividend Collections

C. Income Taxes

1. Example

a. FAS 95 Presentation (No Tax Allocation)

b. Alternative Presentation (Tax Allocation)

2. Materiality Issues

3. Disadvantages of Income Tax Allocation

4. Advantages of Income Tax Allocation

5. Palliatives Acceptable Under GAAP

6. Palliatives Not Acceptable Under GAAP

7. Income Tax Refunds

D. Installment Sales and Purchases of Inventory

E. Sales-Type Lease Receivables

F. Installment Purchases and Sales of Plant Assets

G. Purchase and Sale of Rental Assets

1. Example

2. Evaluation

H. Casualty Insurance Settlements

I. Purchase and Sale of Debt and Equity Investments

1. Classification Issues Under Existing GAAP

2. Evaluation

J. Capitalized Software Development Cost

K. Capitalized Film Development Costs

L. Company-Owned Life Insurance

1. Classification of Annual Premiums

2. Classification of Death Benefits

3. COLI Materiality Issues

4. Evaluation of COLI Flows Under FAS 95 Trichotomy

M. Acquisitions and Dispositions of Businesses

1. Effect on Reported NCFO

2. Effect on FCF

3. Estimating Impact

N. Overdrafts

O. Notes Payable

P. Sale or Transfer of Receivables

Q. Payments to Settle Pension Liabilities

R. Sale-Leaseback Transactions

S. Repurchase Agreements and Reverse Repurchase Agreements

1. Income Statement Reporting

2. Cash Flow Statement Reporting Under Extant GAAP

3. Evaluation

T. Hedging Transactions

IX. Lack of Comparability and Transparency

X. Other Issues

A. Enterprises Exempt From FAS 95

B. Cash and Cash Equivalents

C. Gross Versus Net Presentation of Cash Flows

D. Foreign Currency Translation

E. Noncash Investing and Financing Transactions

1. Examples

2. Background of Current Disclosure Requirement

3. Current Disclosure Requirement

4. Ambiguities in Current Disclosure Requirements

5. Illustrations of Disclosures of Noncash Transactions in Published Reports

F. Third-Party Financing Transactions

G. Depreciation of Manufacturing Equipment

1. Issue

2. Practical Considerations

H. Cash Flow Per Share

I. Discontinued Operations

XI. Analytical Adjustment of Cash Flow Statement

Introductory Material

A. Prospective (Pro Forma) Cash Flows

B. Noncash Transactions

C. Prospective Income Tax Effects

D. Free Cash Flow for Valuation Purposes

E. Classification Adjustments

XII. Summary and Conclusions

Working Papers

TABLE OF WORKSHEETS

Worksheet 1 Underlying Facts for Comparing Direct and Indirect Method Cash Flow Statements

Worksheet 2 Illustrative Direct Method Cash Flow Statement

Worksheet 3 Illustrative Indirect Method Cash Flow Statement

Worksheet 4 Working Paper For Direct Method Cash Flow Statement

Worksheet 5 Working Paper for Indirect Method Cash Flow Statement

Worksheet 6 Tax Allocation Versus No Tax Allocation In Cash Flow Statement

Worksheet 7 Foreign Currency Exchange Rate Effect on Cash Balance-Current Rate Method

Worksheet 8 Foreign Currency Exchange Rate Effect on Cash Balance Temporal Method

Worksheet 9 Illustrative Indirect Method Cash Flow Statement-Retail Enterprise (J.C. Penney)

Worksheet 10 Illustrative Indirect Method Cash Flow Statement-Manufacturing Enterprise (General Motors Corp.)

Worksheet 11 Illustrative Direct Method Cash Flow Statement-Manufacturing Enterprise (Northrop Grumman Corp.)

Worksheet 12 llustrative Direct Method Cash Flow Statement-Manufacturing & Retail Enterprise (The Rowe Companies)

Worksheet 13 Illustrative Indirect Method Cash Flow Statement-Fast Food Enterprise (Wendy's International Inc.)

Worksheet 14 Illustrative Indirect Method Cash Flow Statement-Franchisor Enterprise (Emerging Vision Inc.)

Worksheet 15 Illustrative Indirect Method Cash Flow Statement-Service Enterprise (Accenture SCA)

Worksheet 16 Illustrative Indirect Method Cash Flow Statement-Software Enterprise (Microsoft Corp.)

Worksheet 17 llustrative Indirect Method Cash Flow Statement-Railroad Enterprise (Norfolk Southern)

Worksheet 18 Illustrative Indirect Method Cash Flow Statement-Electric Utility Enterprise (Delmarva Power & Light Co.)

Worksheet 19 llustrative Direct Method Cash Flow Statement-Financial Enterprise (Bank of Granite Corp.)

Worksheet 20 llustrative Indirect Method Cash Flow Statement-Financial Enterprise (Citigroup Inc.)

Worksheet 21 Illustrative Indirect Method Cash Flow Statement-Insurance Enterprise (MetLife Inc.)

Worksheet 22 Illustrative Indirect Method Cash Flow Statement-Healthcare Enterprise (HCA Inc.)

Worksheet 23 List of Significant Accounting Pronouncements Principally Discussed

Bibliography

OFFICIAL

AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS (AICPA)

Accounting Principles Board Opinions

AICPA Statements of Positions

AICPA Audit and Accounting Guides

AICPA Statements on Auditing Standards

EMERGING ISSUES TASK FORCE (EITF)

EITF Issues

FINANCIAL ACCOUNTING STANDARDS BOARD (FASB)

FASB Concepts Statements

FASB Statements of Financial Accounting Standards

Misc. FASB Materials

GOVERNMENT ACCOUNTING STANDARDS BOARD

GASB Statements

SECURITIES AND EXCHANGE COMMISSION (SEC)

Accounting Series Releases

Misc. SEC Materials

Miscellaneous

UNOFFICIAL

Articles and Books