USCPA (FAR) – (27) Statement of Cash Flows

I would like to record about the key points of the US CPA exam content.

<Create and note the points based on mainly Becker’s workbook>

Cash flow adjustment of indirect method

• The cash flows related to the increase in available-for-sale securities is included in cash flows from investing activities. The gain on the sale of trading securities does not need to be subtracted from net income because the cash flow from the sale of the trading security should be included in operating cash flows.
• In the indirect method, an increase in nontrade notes payable is not treated as a change in working capital, but rather as part of financing activities in the cash flow statement. This approach clearly demonstrates the impact of financing activities on the company’s cash flow.
• The dividend paid is included in cash flows from financing activities. The dividend received is included in net income, so a separate adjustment is not needed.
• Overdraft-induced short-term borrowings are considered an increase in current liabilities in the calculation of working capital, indicating a decrease in operating capital. This provides important information for assessing a company’s liquidity and short-term financial situation. In the cash flow statement, these borrowings are treated as a factor in the fluctuations of cash flow from operating activities.
• Notes payable fall under financing activities in the statement of cash flows.
• The dividend received is included in net income, so a separate adjustment is not needed. 
• Collection of proceeds from a note payable is finance cash flow.
• Collection of a note receivable from a related party is investment cash flow.

Supplemental disclosure of with the indirect method

• cash paid for interest and income taxes is required.
• Interest Payments: The income statement includes the interest expense incurred during the period, but the actual amount of interest paid may differ. In the statement of cash flows, the accrued interest expense is adjusted for changes in accrued interest payable (unpaid interest) and prepaid interest (already paid interest). A supplemental disclosure shows the actual amount of interest paid.
• Income Tax Payments: The income statement includes the income tax expense incurred during the period, but the actual amount of income taxes paid may differ. In the statement of cash flows, the accrued income tax expense is adjusted for changes in taxes payable (unpaid taxes) and prepaid taxes (already paid taxes). A supplemental disclosure shows the actual amount of income taxes paid.

The U.S. Treasury bill

• The U.S. Treasury bill is considered to be a cash equivalent item so purchasing the T-bill merely changes the form of cash held, it does not change the cash position of the entity. Thus, the purchase is not reported on the statement of cash flows.

Note Receivable

• “Note Receivable” can generally refer to both “notes receivable” and “loan receivable,” depending on the context.
• Notes Receivable: These are notes issued for receiving payment for goods or services sold. They are typically classified as operating cash flows.
• Loan Receivable: These are amounts lent by the company to other entities or individuals. They are usually classified as investing cash flows.

Dividend received

• Under U.S. GAAP, all dividends received by a company are typically reported as operating cash flows. Therefore, dividends from subsidiary stock, affiliated company stock, and general external company stock are all included in operating cash flows.
• No adjustment to net income is necessary as the transaction presents a cash receipt amount and the proper revenue is assumed to be in net income.

Operating lease vs Finance lease

<Operating lease>

• Lease Payments: Payments for operating leases are classified as cash outflows from operating activities.
• Lease Receipts: If the company is receiving lease payments, these are also classified as cash inflows from operating activities.

<Finance lease>

• Principal Repayment of Lease Liability: The portion of the lease payment that goes towards repaying the principal of the lease liability is classified as a cash outflow from financing activities.
• Interest Payments: The interest portion of the lease payment is classified as a cash outflow from operating activities.

The accounting treatment of stock options granted to employee

• Recording at Fair Value: Stock options granted to employees are valued at fair value by the issuing entity and recorded as an expense in the accounting records.
• Amortization of Expense Over the Period: This expense is amortized evenly over the vesting period of three years.
• Grant Date Specification: The options are granted, and it will vest equally over the next three years.
• Impact on Cash Flow: This is recorded as compensation expense in Year 2, reducing net income, but it is not a cash event. Therefore, it will be added back to net income to determine cash flow from operations.

The purchase with issuing the company stock

• Even though there is no cash involved in the company stock component, it is a material noncash event that should be disclosed.

Finance Cash flow

• To calculate the total change in long-term debt using the balance sheet, the long-term debt less current maturities must be combined with the current portion of long-term debt.