The Cash Flow Statement (Portfolio 5121)


Hugo Nurnberg

Professor of Accountancy

Baruch College

Ruth McEwen

Director, School of Accounting

Florida International University

Thomas L L. Porter

Professor of Accounting and Finance

Hult International Business School

At a glance

I. Introduction and 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
VII. Implications of FAS 95 Trichotomy
IX. Lack of Comparability and Transparency
X. Other Issues
XI. Analytical Adjustment of Cash Flow Statement
XII. Summary and Conclusions


Bloomberg Tax Accounting Portfolio 5121-4th, The Cash Flow Statement (Accounting Policy and Practice Series), examines the cash flow statement required by the FASB Accounting Standards Codification (FASB ASC) 230, which is based in large part on FASB Statement of Financial Accounting Standard No. 95, Statement of Cash Flows (FAS 95). Under ASC 230, as amended, most business enterprises (and not-for-profit organizations) must provide a cash flow statement for each period for which results of operations (or activities) are provided.

The cash flow statement explains the change during the period in cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents, and classifies cash inflows and outflows into operating, investing, or financing activities. Cash flow subtotals are reported for each of three activities: net cash flow from operating activities (NCFO), net cash flow from investing activities (NCFI), and net cash flow from financing activities (NCFF). The net effect of NCFO, NCFI and NCFF represent the change in cash during the period.

ASC 230 permits several alternatives in preparing cash flow statements. Each reporting entity must decide whether to use the direct method or the indirect (reconciliation) method to report NCFO, and establish a classification policy with regard to cash equivalents. This Portfolio examines the advantages and disadvantages of these alternatives.

In addition to explaining the rules and alternatives, this Portfolio describes in practical terms how to apply ASC 230 to various types of business enterprises. It provides examples of cash flow statements under the direct method and the indirect method and explains how to prepare them, using a facilitating worksheets. The Portfolio also discusses the advantages and disadvantages of each method. It 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 ASC 230 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 addresses in passing some of the major criticisms of ASC 230 and some of the proposals to amend its rules to make the statement of cash flows more internally consistent and more useful to report users.Finally, this Portfolio explains how financial analysts adjust cash flow statement numbers for analytical purposes.

This Portfolio may be cited as Bloomberg Tax Accounting Portfolio 5121-4th, Nurnberg, McEwen and Porter, The Cash Flow Statement (Accounting Policy and Practice Series). Within the Accounting Portfolio Series, however, references to the Portfolios will include only the Portfolio numbers and titles.

This Portfolio may be cited as Bloomberg Tax and Accounting Portfolio 5119-2nd, Schiff, Schiff and Mazza, Segment Reporting (Accounting Policy and Practice Series).

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