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Interest Capitalization Worksheet document sample
Document Sample
Linda Dufresne, CPA
Dufresne & Associates, CPA, PA
GNP Services, CPA, PA
linda@dufresnecpas.com
Steps to Understanding SOCF
What entities must provide the SOCF?
What guidance is applicable?
Where to get information?
How to adjust from accrual to cash basis?
Which way do the signs go?
Where are items reported on the SOCF?
What additional information is required to
be presented?
How to analyze the SOCF – what it reveals
and what it does not
Things to keep in mind
Ten laws of Accounting
1.Trial balances don’t
2.Working Capital does not
3.Liquidity tends to run out
4.Return on investments never will
5. Bottom line is only the tip of the iceberg.
6. If you need accounting to prove it, it was probably not true
in the first place
7. There is nothing more permanent than a temporary account
8. An accountant is a man hired to explain that you did not
make the money you did
9. Cash flow doesn’t
10. Obviously accounting pays, otherwise there would be no
accountants.
Statement of Cash Flows (SOCF)
GASB Statement 34, ¶ 105 says:
Governments should present a statement of
cash flows
• for proprietary funds
• based on the provisions of GASB Statement 9, as
amended by this Statement.
• The direct method of presenting cash flows from
operating activities (including a reconciliation of
operating cash flows to operating income) should
be used.
Proprietary funds CANNOT use FAS-95 for
guidance
Statement of Cash Flows (SOCF)
Who must prepare the statement?
• Proprietary funds are required to
present the statement
What is our guidance?
• GASB 9 as amended by GASB 34
What is the form of presentation?
• Direct method should be used
Statement of Cash Flows (SOCF)
The focus is on cash:
• Cash in and out easy for users to grasp;
• Removing effect of accruals also removes
some of the harder to understand
components;
• Similarly, removing effect of accruals does not
present the financial position picture; so
• The intent of the SOCF is to provide an
additional financial analysis tool as an
alternative to the accrual basis financials
Statement of Cash Flows (SOCF)
What is included as “cash”:
• Cash on hand;
• Cash on deposit;
• Cash in restricted accounts; and
• A position in a cash and investment pool
that has the same characteristics as a
demand deposit (resources can be
deposited or withdrawn without notice
or penalty)
Statement of Cash Flows (SOCF)
Inclusion of cash equivalents is optional:
• Short-term, highly liquid investment that is
readily convertible to known amounts of cash
• Matures within three months of the date it is
acquired
• Note that instruments initially purchased
having a maturity greater than three months
DO NOT become a cash equivalent when
entering the last three months
• The determination as to whether an asset is a
cash equivalent is made only once, when the
asset is acquired
Statement of Cash Flows (SOCF)
Definition of cash equivalents may be
determined by a government so long as
the definition is more restrictive than the
GAAP definition
Cash definition enjoys no such flexibility
For example, a government may define
cash equivalents to exclude resources held
in restricted accounts; however, cash in
restricted accounts must be included as
part of the balance on the cash flow
statement
Statement of Cash Flows (SOCF)
SOCF only reports transactions that affect an
entity’s cash accounts
Transactions that would not be reflected:
• Receipts of proceeds of refunding bonds if the refunded
debt qualifies for defeasance and the cash is placed
directly in escrow;
• Receipt of bond proceeds related to financing authorities
if the proceeds are delivered directly to the intended
recipients rather than to the financing authority
• Commodities and similar noncash items (for example,
federal surplus food used in school lunch programs)
even though they may be reported as
revenues/expenses in the statement of revenues,
expenses and changes in fund net assets/equity; and
• Rollovers of certificates of deposit
Statement of Cash Flows (SOCF)
Exceptions to the basic rule that only cash
(and cash equivalents) are reported on
the SOCF:
• Checks and warrants are considered cash flows
when issued rather than when presented for
payment
• Cash balance cannot be less than zero
A negative position in cash is tatamount to a
borrowing and reported as a cash flow
Changes in fair value of investments subject to fair
value reporting and classified as cash equivalents
should be recognized as cash flows from investing
activities when they occur
Statement of Cash Flows (SOCF)
Gross vs net presentation
• In most instances, gross presentation is
required
• Exceptions
Items whose turnover is quick, amounts are large
and maturities are short provided the original
maturity of the asset or liability is three months or
less (Investments, loans receivable, debt)
Governmental enterprises whose assets for the most
part are highly liquid investments and that have little
or no debt outstanding during the period
Comic relief?
An accountant was walking along a beach and stumbled across an old lamp.
He picked it up, rubbed it and out popped a genie. The genie said "You
released me from the lamp, blah blah blah. This is the fourth time this
month and I'm getting a little sick of these wishes so you can forget about
three. You only get one wish!"
The accountant sat and thought about it for a while and said, "I've always
wanted to go to Hawaii but I'm scared to fly and I get very seasick. "Could
you build me a bridge to Hawaii so I can drive over there to visit?"
The genie laughed and said, "That's impossible! Think of the logistics of that!
How would the supports ever reach the bottom of the Pacific? Think of
how much concrete! How much steel! You're going to have to think of
another wish."
The Accountant agreed, and tried to think of a really good wish. Finally, he
said, "I don't understand how banks have managed to package crap
mortgages and sell them to other, supposedly astute, banks, can you
explain it to me please."
The genie paused for a while and said, "How many lanes do you want on that
bridge?"
SOCF Layout
Cash flows from operating activities
Cash flows from noncapital financing
activities
Cash flows from capital and related
financing activities
Cash flows from investing activities
Reconciliation of net operating revenues
(expenses) to net cash provided (used)
by operating activities
Supplemental schedule of noncash
transactions
CASH FLOWS from Operating
Activities
GASB Statement 9, ¶ 16
Operating activities generally result from
providing services and producing and
delivering goods, and include
• all transactions and other events that are not
defined as capital and related financing,
noncapital financing, or investing activities
• Cash flows from operating activities generally
are the cash effects of transactions and other
events that enter into the determination of
operating income.
CASH FLOWS from Operating
Activities
Generally include all cash flows related to
transactions and events reported as components
of operating income in the statement of
revenues, expenses and changes in fund net
assets/equity
Also category is used for any cash inflow or
outflow that cannot properly be classified in one
of the other three categories
Must be reported by major categories of receipts
and payments
• At a minimum, receipts from customers, receipts from
interfund services, payments to suppliers, payments to
employees, payments related to interfund services
CASH FLOWS from Operating
Activities
Interest receipts
• Rarely qualify for inclusion as part of cash
flows from operating activities
• Exception:
Loans made to fulfill government social programs
rather than for income or profit; and
Directly benefit individual constituents of the
government (low income housing and student loans)
Program loans typically refer to loans that meet both
of these criteria
Making and collection of program loans also are
classified as cash flows from operating activities
Statement of Cash Flows
Common Cash Flows from Operating Activities
- Items to Consider
Statement of Cash Flows
Common Cash Flows from Operating Activities
- Items to Consider
Statement of Cash Flows
Common Cash Flows from Operating Activities
- Items to Consider
Statement of Cash Flows
Common Cash Flows from Operating Activities
- Items to Consider
CASH FLOWS from Noncapital
financing Activities
GASB Statement 9, ¶ 20
Noncapital financing activities include
borrowing money for purposes other than
to acquire, construct, or improve capital
assets and repaying those amounts
borrowed, including interest
• This category includes proceeds from all
borrowings (such as revenue anticipation notes)
not clearly attributable to acquisition,
construction, or improvement of capital assets,
regardless of the form of the borrowing
• Also included are certain other interfund and
intergovernmental receipts and payments.
CASH FLOWS from Noncapital
financing Activities
Borrowings to finance program loans would
properly be reported in this category even
though the loans themselves would be
treated as part of cash flows from operating
activities
Grant proceeds not specifically restricted to
capital purposes
Grant payments to other entities
Includes transfers to and from other funds
(except when capital related)
Tax receipts not attributable to capital
purposes
Interest paid on noncapital-related vendor
payables
Statement of Cash Flows
Common Cash Flows from Noncapital
Financing Activities - Items to Consider
CASH FLOWS from CAPITAL AND
RELATED FINANCING Activities
GASB Statement 9, ¶ 23
Capital and related financing activities
include
(a)acquiring and disposing of capital assets used
in providing services or producing goods,
(b)borrowing money for acquiring, constructing,
or improving capital assets and repaying the
amounts borrowed, including interest, and
(c)paying for capital assets obtained from
vendors on credit.
CASH FLOWS from CAPITAL AND
RELATED FINANCING Activities
Borrowing and repayment (principal and interest) of debt
clearly attributable to capital purposes
Proceeds of capital grants and contributions
Transfers from other funds for capital purposes
Payments related to acquisition, construction or
improvement of capital assets
Sale or involuntary conversion of capital assets such as
insurance proceeds
Capital type special assessments
Taxes levied for capital purposes or related debt service
Tap fees in excess of actual cost of connection
Interest capitalization is reported as interest payments
rather than capital acquisition even though the payments
may be capitalized in the statement of position and not
reported as interest expense in the statement of revenues,
expenses and changes in fund net assets/equity
Statement of Cash Flows
Common Cash Flows from Capital and Related
Activities - Items to Consider
CASH FLOWS from INVESTING
Activities
GASB Statement 9, ¶ 26
Investing activities include
• making and collecting loans (except program
loans, as discussed in paragraph 19) and
• acquiring and disposing of debt or equity
instruments.
Statement of Cash Flows (INVESTING
Activities Section)
Interest receipts (except program loans)
Loan collections (except program loans)
Proceeds from sale of investments
Receipt of interest on customer deposits
Changes in the fair value of investments
subject to fair value reporting and
classified as cash equivalents
Loans made to others (except program
loans)
Purchases of investments
Statement of Cash Flows
Common Cash Flows from Investing Activities -
Items to Consider
Reconciliation of Net Operating Revenues
(Expenses) to Net Cash Provided (Used) by
Operating Activities
Begin with Operating Income (Loss)
Add back noncash expenses included in the
determination of operating income (loss)
Plus or minus changes in assets and liabilities
pertaining to operating activities (GASB 9, ¶ 33)
Reconciliation of Net Operating Revenues
(Expenses) to Net Cash Provided (Used) by
Operating Activities
Purpose is to draw users’ attention to the
important difference between cash from
operations and operating income/loss
Present either on the face of the SOCF or
as a schedule accompanying the SOCF
Supplemental Schedule of
Noncash Transactions
GASB Statement 9 ¶ 37 states that a
disclosure is required for all investing,
capital and financing activities during the
year that “affect recognized assets or
liabilities but do not result in cash receipts
or cash payments in the period”.
Supplemental Schedule of
Noncash Transactions
Financial statement users need information on certain noncash
activities that otherwise would fail to be reported
Two specific criteria
• Transaction affects recognized assets or liabilities; and
• Had it involved cash, the transaction would not properly have
been classified as cash flows from operating activities
Presentation either narrative or tabular form on a separate
schedule accompanying the SOCF
When a transaction involves both cash and noncash components
(for example, initiation of a capital lease involving a down
payment), clear description of cash and noncash aspects is required
Example of easily overlooked noncash transaction that would
require disclosure on this schedule is net appreciation/depreciation
in the value of investments reported at fair value but not classified
as cash equivalents
Examples of noncash
transactions include:
Assets acquired by capital leasing
Gifts in kind
Capital contributions (including
transfers of assets between the
special districts and local
governments)
All comedy has a grain of truth!
Late one night in Washington, a mugger wearing a
ski mask jumped into the path of a well-dressed
man and stuck a gun in his ribs.
"Give me your money!" he demanded.
Indignant, the well-dressed man bellowed, "Hrm!
Do you realize that you are attempting to rob a
United States Congressman!"
"In that case," replied the robber, "give me my
money!"
Survival Tips for Preparing the
Statement of Cash Flows
1. Analyze net asset line items by
statement of cash flow categories during
preparation of audit workpapers and lead
schedules.
2. Prepare Statement of Net Asset (SONA)
Variance worksheet.
3. Compile the Additional Cash Flow Data
worksheet and Statement of Revenues,
Expenses and Changes in Fund Net
Assets (SRENA).
Survival Tips for Preparing the
Statement of Cash Flows, continued
4. Using the “Cash Flow Stmt Worksheet”
template, transfer/link amounts from,
SNA Variance, SRENA and Additional
Cash Flow Data Worksheet.
5. Prepare Operating Activities section first.
Then prepare reconciliation section. It is
important to keep these two sections in
balance.
6. Most common pitfall is transposing the
sign (+/-) on amounts.
Survival Tips for Preparing the
Statement of Cash Flows
1. Analyze net asset line items by
statement of cash flow categories.
See previous slides
Survival Tips for Preparing the
Statement of Cash Flows
2. Prepare Statement of Net Asset
(SONA) Variance worksheet.
See sample on following slides
Comparative SONA for
Preparing the SOCF
CITY
CASH FLOW WORKPAPER
PROPRIETARY FUND
9/30/2008
9/30/2008 Change 9/30/2007
ASSETS:
Cash 10,000 (6,000) 16,000
Accounts receivable 2,800 200 2,600
Interest receivable 10 10 -
Unamortized bond issue costs 700 (60) 760
TOTAL CURRENT ASSETS 13,510 19,360
Buildings 32,000 - 32,000
Improvements other than blds 54,000 1,000 53,000
Equipment 16,000 1,500 14,500
Construction in progress 65,000 33,000 32,000
167,000 35,500 131,500
Accumulated depreciation (70,000) (5,000) (65,000)
TOTAL PROPERTY AND EQUIPMENT 97,000 66,500
TOTAL ASSETS 110,510 85,860
Comparative SONA for
Preparing the SOCF
LIABILITIES AND NET ASSETS:
Accounts payable (2,210) (1,550) (660)
Interest payable (200) (200) -
Compensated absences (720) (110) (610)
Deposits (960) (60) (900)
Deferred revenue (40) (10) (30)
Loan Payable (43,700) (23,100) (20,600)
Bonds Payable (33,400) 1,900 (35,300)
TOTAL LIABILITIES (81,230) (58,100)
TOTAL NET ASSETS (29,280) (1,520) (27,760)
TOTAL LIABILITIES AND NET ASSETS (110,510) (24,650) (85,860)
In balance if -0- - -
9/30/2008 Change 9/30/2007
Accounts Payable (1,630) (1,380) (250)
Personnel Services Payable (580) (170) (410)
(2,210) (1,550) (660)
Survival Tips for Preparing the
Statement of Cash Flows
3. Compile the Statement of
Revenues, Expenses and Changes
in Fund Net Assets (SRENA) and
Additional Cash Flow Data
worksheet.
Additional Cash Flow Data
HELPFUL INFORMATION
Non-Personnel Services
Utilities (840)
Supplies & materials (1,240)
Consulting engineers and contract srvcs (1,100)
Repairs & Maint (1,460)
Insurance (400)
Other (1,200)
Total cash paid to suppliers (6,240)
Employee-related payable change
Personnel services 170
Accounts payable change detail
Utilities 780
Supplies & materials (200)
Consulting engineers and contract srvcs (150)
Repairs & Maint 800
Insurance -
Other 150
Non-employee related accounts payable changes 1,380
Employee related accounts payable 170
Total accounts payable change 1,550
Additional Cash Flow Data
1,380 Non-Personnel Services Accounts Payable change
1,550 Total Accounts Payable change
170 Personnel Services portion of Accounts Payable change - 1099 contractors, for example
280 Total Personnel Services change
110 Total Personnel Services change not included in Accounts Payable change
--Equal to change in compensated absences
--Separated for purposes of calculating cash paid to employees vs cash paid to suppliers
SRENA
CITY
STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS
PROPRIETARY FUND
FOR THE YEAR ENDED SEPTEMBER 30, 2008
Operating revenues:
Charges for services $ 25,000
Total operating revenues 25,000
Operating expenses:
Personnel services 8,910
Utilities 1,620
Supplies and materials 1,040
Consulting engineers and contractual
services 950
Depreciation and amortization 5,060
Repairs and maintenance 2,260
Insurance 400
Other 1,350
Total operating expenses 21,590
SRENA, continued
Operating income (loss) 3,410
Non-operating revenues (expenses):
Interest income 90
Interest/amortization expense (1,570)
Total non-operating revenues (expenses) (1,480)
Loss before operating transfers 1,930
SRENA, concluded
Transfers in 20,000
Transfer out (20,410)
Change in net assets 1,520
Total net assets - beginning of year 27,760
Total net assets - end of year $ 29,280
Survival Tips for Preparing the
Statement of Cash Flows, continued
4. Using the “Cash Flow Stmt
Worksheet” template, transfer/link
amounts from SONA Variance,
SRENA and Additional Cash Flow
Data Worksheet.
Statement of Cash Flows
(Operating Activities Section)
Cash received from customers $ 24,870
Cash paid to suppliers (6,240)
Cash paid to employees (8,630)
Net cash provided by operating activities 10,000
Worksheet SRENA Trial Balance SONA
$ 24,870 x
(6,240) x
(8,630) x
Cash Flow Statement Worksheet
ADJUSTMENTS TO
ACCRUAL CONVERT TO CASH CASH
REVENUES/RECEIPTS:
Charges for services 25,000 (200) 70 24,870
Interest Income 90 (10) 80
EXPENSES/DISBURSEMENTS:
Personnel services (8,910) 280 (8,630)
Non-Personnel Services
Utilities (1,620) 780 (840)
Supplies & materials (1,040) (200) (1,240)
Consulting engineers and contract srvcs (950) (150) (1,100)
Repairs & Maint (2,260) 800 (1,460)
Insurance (400) - (400)
Other (1,350) 150 (1,200)
Interest Expense (1,570) 200 (1,370)
From SRENA and SONA to
Statement of Cash Flows (How to
adjust accrual balances to cash)
CITY
EXPLANATION OF ADJUSTMENTS FROM ACCRUAL BASIS TO CASH BASIS BALANCES
PROPRIETARY FUND
9/30/2008
The process for items affected by balance sheet changes is to adjust the accrual basis item for the change in order to
arrive at the cash basis for the item.
Example: Cash received from customers is calculated as follows:
From income statement
Charges for services 25,000
From comparative balance sheet
Increase in accounts receivable (-) (200)
Increase in deposits (+) 60
Increase in deferred revenue (+) 10
Cash received from customers 24,870
From SRENA and SONA to
Statement of Cash Flows (How to
adjust accrual balances to cash)
Cash paid for utilities (840)
Cash paid for supplies and materials (1,240)
Cash paid for consulting and contract services (1,100)
Cash paid for insurance (400)
Cash paid for repairs and maintenance (1,460)
Cash paid for other expenses (1,200)
Total cash paid to suppliers (6,240)
From SRENA and SONA to
Statement of Cash Flows (How to
adjust accrual balances to cash)
Example: Cash paid for utilities is calculated as follows:
From income statement
Utilities (1,620)
From comparative balance sheet
Increase in utilities accounts payable (+) 780
Cash paid for utilities (840)
From SRENA and SONA to
Statement of Cash Flows (How to
adjust accrual balances to cash)
Example: Cash paid for supplies and materials is calculated as follows:
From income statement
Supplies & materials (1,040)
From comparative balance sheet
Decrease in supplies and materials accounts payable (-) (200)
Cash paid for supplies and materials (1,240)
From SRENA and SONA to
Statement of Cash Flows (How to
adjust accrual balances to cash)
Example: Cash paid for consulting and contract services is calculated as follows:
From income statement
Consulting engineers and contract srvcs (950)
From comparative balance sheet
Decrease in consulting and contract services accounts payable (-) (150)
Cash paid for consulting and contract services (1,100)
From SRENA and SONA to
Statement of Cash Flows (How to
adjust accrual balances to cash)
Example: Cash paid for insurance is calculated as follows:
From income statement
Insurance (400)
From comparative balance sheet
No activity related to insurance on balance sheet -
Cash paid for insurance (400)
From SRENA and SONA to
Statement of Cash Flows (How to
adjust accrual balances to cash)
Example: Cash paid for repairs and maintenance is calculated as follows:
From income statement
Repairs and maintenance (2,260)
From comparative balance sheet
Increase in other accounts payable (+) 800
Cash paid for repairs and maintenance (1,460)
From SRENA and SONA to
Statement of Cash Flows (How to
adjust accrual balances to cash)
Example: Cash paid for other expenses is calculated as follows:
From income statement
Other (1,350)
From comparative balance sheet
Increase in other accounts payable (+) 150
Cash paid for other expenses (1,200)
From SRENA and SONA to
Statement of Cash Flows (How to
adjust accrual balances to cash)
Example: Cash paid for personnel services is calculated as follows:
From income statement
Personnel services (8,910)
From comparative balance sheet
Increase in employee-related accounts payable (+) 170
Increase in compensated absences (+) 110
Cash paid to employees (8,630)
CASH FLOWS from Noncapital
financing Activities
GASB Statement 9, ¶ 20
Noncapital financing activities include
borrowing money for purposes other than
to acquire, construct, or improve capital
assets and repaying those amounts
borrowed, including interest, and
• includes proceeds from all borrowings (such as
revenue anticipation notes) not clearly
attributable to acquisition, construction, or
improvement of capital assets, regardless of the
form of the borrowing and
• certain other interfund and intergovernmental
receipts and payments.
Statement of Cash Flows
(NONCAPITAL FINANCING Activities Section)
Cash flows from non-capital financing activities
Transfers in 20,000
Transfers out (20,410)
Net cash used in non-capital financing activities (410)
SRENA
20,000 x
(20,410) x
SRENA, concluded
Transfers in 20,000
Transfer out (20,410)
Change in net assets 1,520
Total net assets - beginning of year 27,760
Total net assets - end of year $ 29,280
CASH FLOWS from CAPITAL AND
RELATED FINANCING Activities
GASB Statement 9, ¶ 23
Capital and related financing activities
include
• acquiring and disposing of capital assets used
in providing services or producing goods,
• borrowing money for acquiring, constructing,
or improving capital assets and repaying the
amounts borrowed, including interest, and
• paying for capital assets obtained from
vendors on credit.
Statement of Cash Flows (CAPITAL and
related FINANCING Activities Section)
Cash flows from capital and related financing activities
Proceeds from long-term debt 27,000
Payments on loans and bonds (5,800)
Interest paid on bonds (1,370)
Acquisition and construction of capital assets (35,500)
Net cash used in capital and related financing activities (15,670)
Worksheet Trial Balance
27,000 x
(5,800) x
(1,370) x
(35,500) x
Cash Flow Statement Worksheet
ADJUSTMENTS TO
CONVERT TO CASH
ACCRUAL BASIS CASH
REVENUES/RECEIPTS:
Charges for services 25,000 (200) 70 24,870
Interest Income 90 (10) 80
EXPENSES/DISBURSEMENTS:
Personnel services (8,910) 280 (8,630)
Non-Personnel Services
Utilities (1,620) 780 (840)
Supplies & materials (1,040) (200) (1,240)
Consulting engineers and contract srvcs (950) (150) (1,100)
Repairs & Maint (2,260) 800 (1,460)
Insurance (400) - (400)
Other (1,350) 150 (1,200)
Interest Expense (1,570) 200 (1,370)
Comparative SONA for
Preparing the SOCF
CITY
CASH FLOW WORKPAPER
PROPRIETARY FUND
9/30/2008
9/30/2008 Change 9/30/2007
ASSETS:
Cash 10,000 (6,000) 16,000
Accounts receivable 2,800 200 2,600
Interest receivable 10 10 -
Unamortized bond issue costs 700 (60) 760
TOTAL CURRENT ASSETS 13,510 19,360
Buildings 32,000 - 32,000
Improvements other than blds 54,000 1,000 53,000
Equipment 16,000 1,500 14,500
Construction in progress 65,000 33,000 32,000
167,000 35,500 131,500
Accumulated depreciation (70,000) (5,000) (65,000)
TOTAL PROPERTY AND EQUIPMENT 97,000 66,500
TOTAL ASSETS 110,510 85,860
CASH FLOWS from INVESTING
Activities
GASB Statement 9, ¶ 26
Investing activities include
• making and collecting loans (except program
loans, as discussed in paragraph 19) and
• acquiring and disposing of debt or equity
instruments.
Statement of Cash Flows (INVESTING
Activities Section)
Cash flows from investing activities
Interest received 80
Net cash provided by investing activities 80
Worksheet
80 x
From SRENA and SONA to
Statement of Cash Flows (How to
adjust accrual balances to cash)
Example: Cash received for interest is calculated as follows:
From income statement
Interest Income 90
From comparative balance sheet
Increase in interest receivable (-) (10)
Cash received for interest 80
Reconciliation of Net Operating Revenues
(Expenses) to Net Cash Provided (Used) by
Operating Activities
Begin with Operating Income (Loss)
Add back noncash expenses included in the
determination of operating income (loss)
Plus or minus changes in assets and liabilities
pertaining to operating activities (GASB 9, ¶ 33)
Statement of Cash Flows
(RECONCILIATION to operating activities Section)
Reconciliation of operating income to net cash provided by
operating activities
Operating income $ 3,410
Adjustment to reconcile operating income to net cash
provided by operating activities
Depreciation 5,000
Amortization 60
Change in assets and liabilities:
Accounts receivable (200)
Compensated absences 110
Accounts payable 1,550
Deferred revenue 10
Customer deposits 60
Net cash provided by operating activities $ 10,000
Statement of Cash Flows
(RECONCILIATION to operating activities Section)
Worksheet SRENA
Operating income $ 3,410 x
Adjustment to reconcile operating income to net cash
provided by operating activities
Depreciation 5,000 x
Amortization 60 x
Change in assets and liabilities:
Accounts receivable (200) x
Compensated absences 110 x
Accounts payable 1,550 x
Deferred revenue 10 x
Customer deposits 60 x
Net cash provided by operating activities $ 10,000
Supplemental Schedule of
Noncash Transactions
GASB Statement 9 ¶ 37 states that a
disclosure is required for all investing,
capital and financing activities during the
year that “affect recognized assets or
liabilities but do not result in cash receipts
or cash payments in the period”.
Examples of noncash
transactions include:
Assets acquired by capital leasing
Gifts in kind
Capital contributions (including
transfers of assets between the
special districts and local
governments)
Statement of Cash Flows
(Supplemental schedule of noncash
transactions section)
Supplemental schedule of noncash transactions:
Contributed capital asset $ 50,000
Acquisition of capital asset through capital lease 200,000
$ 250,000
Statement of Cash Flows
Summary of Sections
Cash flows from operating activities
Net cash provided by operating activities 10,000
Cash flows from non-capital financing activities
Net cash used in non-capital financing activities (410)
Cash flows from capital and related financing activities
Net cash used in capital and related financing activities (15,670)
Cash flows from investing activities
Interest received 80
Net cash provided by investing activities 80
Net decrease in cash and cash equivalents (6,000)
Beginning cash and cash equivalents 16,000
Ending cash and cash equivalents $ 10,000
Secret Survival Tips
Lots of chocolate or other appropriate comfort
food
Lots of caffeine – or limit it, depending on its
effect on the preparer…
Provide the Cash Flow Statement preparer a
protected cash flow conducive environment:
• LOTS OF DESK space without ANY interruptions
for as long as he/she needs!
• Warning!!!– NEVER ASK THE PREPARER IF THE
STATEMENT IS IN BALANCE!
Lots of encouragement
How to Analyze the Statement of
Cash Flows (SOCF)
Excellent tool for understanding financial
position
• Statement of net assets and change in net assets are
heavily relied on by management but without a cash
flow statement:
they are limited barometers
may even be misleading without the context of cash
inflows and outflows
• Operating Activities section
tell you where money came from
and how it was used
whether cash was generated or whether need a cash
infusion
• Noncapital Financing Activities section
may indicate a diversion of funds
may indicate inadequate charges for services
How to Analyze the Statement of
Cash Flows (SOCF)
• Capital and Related Financing Activities
see whether or not a surplus in operations is being used to
“grow”
lack of purchases of assets, etc may indicate stagnant
growth or a diversion of funds
• Investing Activities
see whether or not a surplus in operations is being used
generate investment income
lack of investing activities may indicate inappropriate
investing policies
• Comparison between past periods
Good idea of the trend
Positive or negative trends in cash flow may encourage
appropriate action
• Powerful tool for growth and long-term success
How to Analyze the Statement of
Cash Flows (SOCF)
How does it help financial statement users understand our
operations?
• Cash inflows and outflows are easier for many folks to
comprehend
• Removing the “unknown” quantity represented by accruals
helps condense the information into an “understandable”
quantity
Accounting noise
• The distortion that is caused in a company’s financial
statements due to accounting rules and regulations
• makes it difficult to easily ascertain a government’s true
financial condition
• can make a company's financial reports look better OR worse.
• can be seen as either a consequence of necessary rules
regarding generally accepted accounting principles (GAAP) or a
result of management's attempts to massage the numbers to
present a rosier financial picture of the firm
• Paying attention to the footnotes can help cut through the
accounting noise and get the real story.
How to Analyze the Statement of
Cash Flows (SOCF)
It is important to note the distinction
between being profitable and having
positive cash flow transactions: just
because a proprietary fund is bringing in
cash does not mean it is making a profit
(and vice versa).
Because cash flow can be positive while
profitability is negative, financial
statement users should analyze income
statements as well as cash flow
statements, not just one or the other.
How to Analyze the Statement of
Cash Flows (SOCF)
The cash flow statement differs from other
financial statements
• acts as a kind of proprietary fund checkbook that
reconciles the other two statements
• records the cash transactions (the inflows and outflows)
during the given period
• Shows whether revenues booked on the income
statement have actually been collected
• does not necessarily show all the expenses: not all
expenses accrued have to be paid right away. So even
though liabilities may have incurred that must
eventually be paid, expenses are not recorded as a cash
outflow until they are paid
How to Analyze the Statement of
Cash Flows (SOCF)
When you look at a cash flow
statement, the first thing you should
look at is the bottom line item that
says something like "net
increase/decrease in cash and cash
equivalents“
this line reports the overall change in
cash and its equivalents (the assets
that can be immediately converted
into cash) as compared to the prior
period.
How to Analyze the Statement of
Cash Flows (SOCF)
What Cash Flow Doesn't Tell Us - Cash is one of the major
lubricants of business activity, but there are certain things that
cash flow doesn't shed light on.
• It doesn't tell us the “profit” earned or lost during a particular period
profitability is composed also of things that are not cash based
This is true even for numbers on the cash flow statement like "cash increase
from sales minus expenses", which may sound like they are indication of
profit but are not.
• It doesn't do a very good job of indicating the overall financial well-
being of the proprietary fund
indicates what is being done with its cash and where cash is being
generated
these do not reflect the company's entire financial condition
does not account for liabilities and assets, which are recorded on the
balance sheet.
Receivables and payables are also not reflected in the cash flow statement.
• In other words, the cash flow statement is a compressed version of
the company's checkbook that includes a few other items that affect
cash
the financing section shows the amount of issuance or retirement of debt
Exercises
(+) or (-)?
SOCF – Fill in the Blanks
Thanks for your attention!
Linda Dufresne, CPA
Dufresne & Associates, CPA, PA
GNP Services, CPA, PA
linda@dufresnecpas.com
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