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 [...]
Table of Contents
1 Introduction
2 Statement of Cash Flows in US-GAAP
2.1 Historical evolution
2.2 Purposes
2.3 Definition of cash funds
2.4 Form and content
2.4.1 Operating activities
2.4.2 Investing activities
2.4.3 Financing activities
2.5 Notes
2.6 Preparing a statement of cash flows
2.6.1 Determine the positions of the statement
2.6.2 Formulas
3 Example
3.1 Given information
3.2 Preparing the statement
3.2.1 Operating activities
3.2.2 Investing activities
3.2.3 Financing activities
4 Conclusion
Objectives and Topics
This seminar paper provides an introduction to the Statement of Cash Flows within the framework of US-GAAP, examining its purpose, structure, and practical application. It aims to clarify the methodology for preparing such a statement and how it serves as a critical tool for analyzing a firm's liquidity, solvency, and financial flexibility.
- Historical evolution and regulatory necessity of cash flow statements under US-GAAP
- Distinction between operating, investing, and financing activities
- Technical procedures for preparing a statement using the indirect method
- Analysis of non-cash transactions and their disclosure requirements
- Practical demonstration through a comprehensive case study
Excerpt from the Book
2.4.1 Operating activities
The section operating activities captures everything else that does not belong to the sections financing and investing activities. In general operating activities are revenue-producing activities of the enterprise. In SFAS No. 95 it is said:
"Operating activities include all transactions and other events that are not defined as investing or financing activities. Operating activities generally involve producing and delivering goods and providing services. Cash flows from operating activities are generally the cash effects of transactions and other events that enter into the determination of net income."
There is a minimum content with the following structure:
• cash collected from customers, including lessees, licensees, and the like
• interest and dividends paid
• other operating cash receipts, if any
• cash paid to employees and other suppliers of goods or services, including suppliers of insurance, advertising, and the like
• income taxes paid
• other operating cash payments, if any
Summary of Chapters
1 Introduction: Provides an overview of the role of the cash flow statement in financial reporting and the paper's focus on US-GAAP.
2 Statement of Cash Flows in US-GAAP: Details the history, core purposes, definitions, and technical formatting requirements for cash flow statements.
3 Example: Applies the theoretical concepts by walking through the practical preparation of a statement using comparative balance sheet and income statement data.
4 Conclusion: Summarizes the findings and discusses the preference for the indirect method in practice versus the direct method favored by the FASB.
Keywords
Statement of Cash Flows, US-GAAP, SFAS No. 95, Operating Activities, Investing Activities, Financing Activities, Liquidity, Solvency, Indirect Method, Direct Method, Financial Statements, Cash Equivalents, Reconciliation, Net Income, Accounting Standards
Frequently Asked Questions
What is the primary focus of this seminar paper?
The paper focuses on the Statement of Cash Flows as required by US-GAAP, providing both a theoretical foundation and a practical guide for its preparation.
Which central topics are covered in the text?
The core topics include the historical development of cash flow reporting, the classification of cash flows into three primary categories, and the specific technical steps for creating the statement.
What is the main goal of the research?
The primary goal is to explain how a company's financial condition can be analyzed through its cash flows and to demonstrate the process of preparing an accurate cash flow statement.
Which scientific method is applied?
The paper uses an analytical and descriptive approach, referencing established accounting standards (SFAS No. 95) and demonstrating practical calculations through a simulated corporate case study.
What content is addressed in the main body?
The main body covers the definitions of cash funds, the structure of the three activity categories, additional disclosure requirements like non-cash activities, and a step-by-step example using McCoy Tyner Company data.
Which keywords best characterize this work?
Key terms include US-GAAP, cash flow statement, operating/investing/financing activities, and the indirect method of calculation.
Why is the indirect method more commonly used by companies than the direct method?
While the FASB prefers the direct method, companies often use the indirect method because their existing information systems do not store all the granular data required to easily produce a direct method statement.
How are non-cash transactions handled in the Statement of Cash Flows?
Significant non-cash investing and financing activities, such as acquiring an asset through a capital lease or converting debt into stock, must be disclosed separately from the primary cash flow statement to ensure transparency.
- Citation du texte
- Dirk Maßing (Auteur), 2002, Statement of Cash Flows, Munich, GRIN Verlag, https://www.grin.com/document/10414
