ACC327_CH23_Notes - Chapter 23 Statement of Cash Flows 1....

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Chapter 23 Statement of Cash Flows 1. With the issuance of SFAS No. 95 (now ASC 715-30) in 1987, the FASB made the Statement of Cash Flows (SCF) a required financial statement. To understand the need for a SCF, a history of its development is helpful. A. Prior to the early 1900's, the balance sheet was the most important fin. stmt. because 1. The capital (stock) markets had developed little; thus, there was not a great deal of investing. 2. Therefore, most companies obtained their external resources by borrowing, which was an adequate source b/c entities were small. 3. Creditors (i.e., the primary fin. stmt. users) were mainly concerned with a company's asset position and liquidity. B. In the early 1900s, two primary factors caused a shift in emphasis from the balance sheet to the income statement. These were 1. The passage of a law in 1913 requiring a federal income tax. 2. The rapid expansion of the corporate form of business and hence the development of capital markets. a. Business entities were becoming larger and could no longer obtain external financing primarily from creditors. b. Instead, firms turned to absentee owners (i.e., investors) as their primary financiers. Investors were more concerned with a firm's profitability and earnings on their investments than they were with a firm's liquidity or asset position. C. A heavy emphasis has remained on the income statement even to today, but the SCF is growing in popularity for several reasons. Some of these are 1. Fin. stmt. users have become more sophisticated and realize that net income is not necessarily the best indication of a firm's financial health because a. so many noncash items affect net income (e.g., depreciation, deferred income taxes, etc) b. accrual accounting net income is subject to manipulation under the various alternate procedures of GAAP
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c. numerous estimates are used in determining net income (e.g., useful lives of plant assets, bad debts, warranty exp. etc) 2. Cash flow is often viewed as a better indicator of financial health than NI because cash flow is more of a "hard and fast" number (i.e., not subject to estimates or alternative methods). 2. The purposes of a SCF are A. The primary purpose is to provide fin. stmt. users with information about a company's cash payments and cash receipts from operations during the period. B. The secondary purpose is to provide users with information on a company's financing and investing activities during the period. 3. The FASB chose cash and cash equivalents as the definition of funds for the SCF. A. Cash and cash equivalents - are short-term, highly liquid investments that are both 1. readily convertible into known amounts of cash, and 2. so near maturity that they represent insignificant risk of changes in value because of changes in interest rates. a. For an investment in a debt security to qualify as a cash
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This note was uploaded on 04/10/2011 for the course ACC 327 taught by Professor Sign during the Spring '11 term at S. Alabama.

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ACC327_CH23_Notes - Chapter 23 Statement of Cash Flows 1....

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