Braunschweig Technical University

Seminar

International Accounting

Statement of Cash Flows

SS 2002

by

Dirk Maßing

Contents

1 Introduction ... 1

2 Statement of Cash Flows in US-GAAP ... 1
2.1 Historical evolution  ... 1
2.2 Purposes   ... 2
2.3 Definition of cash funds   ... 3
2.4 Form and content   ...  4
2.4.1 Operating activities  ...  5
2.4.2 Investing activities  ...   6
2.4.3 Financing activities  ...   6
2.5 Notes   7
2.6 Preparing a statement of cash flows  ...   9
2.6.1 Determine the positions of the statement  ...  9
2.6.2 Formulas  ... 11

3 Example   12
3.1 Given information  ... 12
3.2 Preparing the statement  ... 12
3.2.1 Operating activities  ... 13
3.2.2 Investing activities  ...  13
3.2.3 Financing activities  ...  15

4 Conclusion  ...  16

List of Figures
1 Classification of statement of cash flows  ...  4

List of Tables
1 Format of statement of cash flows  ...  5
2 Operating, investing and financing activities  ... 7
3 Indirect method: Additions and deductions  10
4 Comparative balance sheet of McCoy Tyner Company  ...  12
5 Income statement of McCoy Tyner Company  ...  13
6 Statement of Cash Flows of McCoy Tyner Company  ... 14

List of Abbreviations
APB   Accounting Principles Board
ARB   Accounting Research Bulletin
CPA   Certified Public Accountant
GAAP   Generally Accepted Accounting Principles (here US-GAAP)
GAS   German Accounting Standards
GASC   German Accounting Standards Committee
FASB   Financial Accounting Standards Board
HGB   ”Handelsgesetzbuch”: German Commercial Code
IAS   International Accounting Standards
KonTraG   ”Gesetz zur Kontrolle und Transparenz im Unternehmensbereich”:
law for supervision and transparency in enterprises
SEC   Security and Exchange Commission
SFAC   Statements of Financial Accounting Concepts
SFAS   Statement of Financial Accounting Standards
US-GAAP   United States Generally Accepted Accounting Principles

1 Introduction

This seminar paper will give an introduction to the statement of cash flows which is required as part of the financial statements of the US-GAAP. The statement facilitates the analysis of the liquidity, solvency, and financial flexibility of the firm. In german law a statement of cash flows was first introduced in 1998 by the KonTraG ¹.² In accordance with this law (resp. additions to existent law) german companies must publish such a statement when they are listed at the stock market.³ The mission and content of the statement in german law is not defined in German Commercial Code (HGB) but provided by the German Accounting Standards Committee (GASC) with German Accounting Standards No. 2 (GAS 2). It is drawn near IAS 7 of the International Accounting Standards and Statement of Financial Accounting Standards (SFAS) No. 95 of US-GAAP. The Security and Exchange Commission (SEC) sees cash flow statements of IAS 7 and SFAS No. 95 equally and excepts both.⁴ Because there are not many dierences between SFAS No. 95 and IAS 7 this paper just focuses on the US-GAAP.⁵ 

The statement of cash flows is structured in three sections. To set up the first section – called operating activities – you can choose either a direct or and indirect method. Both methods show the same investing and financing cash flows, and both show the reconciliation of net income and net operating cash flows. The main difference is that only the direct method shows the actual operating cash flows such as collections from customers and payments to suppliers. The indirect method uses the reconciliation as its operating activities section, that is why it is also called reconciliation method. When describing the content or giving examples of the statement the indirect method is used always in this paper. In spite of the fact that after SFAS No. 95 the Financial Accounting Standards Board (FASB) is preferring the direct method most companies are using the indirect method. This is because in most cases companies do not store all relevant data in their information system to use the direct method. In the other two sections – investing and financing activities – the direct method must be used.⁶

In the second part this work will give an overview and is showing details of form and content of the statement of cash flows according to the SFAS No 95, as well as it is presenting information about how to prepare the statement. In the third section an example is given followed by an evaluation of the statement of cash flows.

2 Statement of Cash Flows in US-GAAP 

2.1 Historical evolution

A statement of cash flow was first recommend 1963 in Accounting Principles Bulletin (APB) 3 Statement of Source and Application of Funds. The recommendations of APB 3 quickly gained strong support from all parts of the financial reporting community. In 1971, the APB issued APB 19, which required that a statement of changes in financial position is presented as a primary financial statement and is covered by the auditor’s opinion on the financial statements. By the 1980s, this title was used almost exclusively by all reporting entities in compliance with the opinion. The statements of changes in financial position that were presented invariably showed the change in working capital rather than cash flows. During the 1970s and 1980s, many advocated the use of a cash flow approach. In 1984, with the issuance of Concepts Statement 5, the FASB advocated that a statement of cash flows should be included in the entity’s primary financial statements. According to that statement, the statement of cash flows should reflect the entity’s cash receipts classified by major sources and its cash payments classified by major uses.⁷

Now the Statement of Financial Accounting Standard (SFAS) No. 95 Statement of Cash flows is effective. It establishes standards for cash flow reporting and is effective since July 15, 1988. Replacing the APB Opinion No. 19 it is part of the full set of financial statements in place of a statement of changes in financial position.8 It is broaden by other statements the last SFAS No. 115 which extends the duty to set up a cash flow statement to non profit organisations ⁹. SFAS No. 95 requires that a statement of cash flows classify cash receipts and payments according to whether they stem from operating, investing, or financing activities and provides definitions of each category.

[...]

1 ”Gesetz zur Kontrolle und Transparenz im Unternehmensbereich”

2 See Coenenberg(2001), p. 677.

3 See 297 (1) no. 2 HGB.

4 See KPMG(1999), p. 158.

5 See Schildbach(2000), p. 281; Amen(1998), preface.

6 See Coenenberg(2001), p. 749.

7 See CPA Journal Online(1990).

8 See FASB, summary of SFAS No. 95.

9 See Niehus/Thyll(1998), p. 105.