Timedora

7 Cash and the Statement of Cash Flows

Understand what counts as cash and cash equivalents, how cash flows are classified, and how the statement reconciles beginning and ending balances.

and

includes currency on hand and funds available on demand, such as checking-account deposits. are short-term, highly liquid investments that can be converted readily into known amounts of and carry insignificant risk of changes in value.

Under U.S. GAAP, investments generally qualify as only when their original maturity to the entity is three months or less. A three-month Treasury bill purchased at issuance may qualify, but a longer-term note does not qualify merely because only three months remain before it matures. are grouped with because they are readily available to meet near-term needs; not all short-term investments qualify.

Purpose and classification

The reports inflows and outflows over an accounting period. It helps explain how a company generated and used , complementing the income statement, which reports revenues and expenses under accrual accounting.

The statement groups flows into , , and , then reconciles the period’s net change to the -and--equivalents balance at the beginning and end of the period. To classify a flow, ask what its underlying purpose was. Classify the actual receipt or payment, not simply the income-statement or balance-sheet account associated with it.

Operating, investing, and

cover the effects of principal revenue-producing activities and other activities not classified as investing or financing. Examples include collected from customers; paid to suppliers and employees; interest paid or received; and income taxes paid.

include used to acquire, or received from disposing of, long-term assets and investments, as well as lent to or collected from borrowers. Examples include buying or selling equipment, buildings, or investment securities, and making or collecting a loan to another party.

cover transactions that change borrowings or contributed equity. Examples include borrowing money, repaying loan principal, issuing or repurchasing shares, and paying dividends. These are typical U.S. GAAP classifications: interest paid and received are generally operating flows, while dividends paid are financing flows.

Classifying a set of flows

Suppose a company receives $12,000\$12{,}000 from customers, pays $7,000\$7{,}000 to suppliers and employees, buys equipment for $3,000\$3{,}000, and borrows $2,000\$2{,}000. The customer receipts and payments to suppliers and employees are ; the equipment purchase is investing; and the borrowing is financing.

The resulting change is a $5,000\$5{,}000 increase from , less $3,000\$3{,}000 from , plus $2,000\$2{,}000 from , for a net increase of $4,000\$4{,}000.

Reconciling beginning and ending

The three activity sections explain the net change in and during the period:

Beginning cash and cash equivalents+net change during the period=ending cash and cash equivalents\text{Beginning cash and cash equivalents} + \text{net change during the period} = \text{ending cash and cash equivalents}

A positive net change means the reported balance increased; a negative net change means it decreased. A profitable company can still have a net decrease, and a company can report positive flow while recording a net loss, because accrual-basis income and receipts and payments do not always occur in the same period.

The operating section may use the , which presents major types of receipts and payments, or the , which reconciles net income to operating flow.

Noncash transactions and restricted

Transactions that do not involve , such as acquiring equipment by issuing a note, do not appear as inflows or outflows in the statement’s main sections. Significant are disclosed separately.

Under U.S. GAAP, the beginning and ending reconciliation includes , , and amounts generally described as restricted or restricted .