Question

In: Accounting

Companies are required by GAAP to report investing and financing activities that do not affect cash...

Companies are required by GAAP to report investing and financing activities that do not affect cash flows in a separate schedule (or at the bottom of the statement of cash flows). Why do you think a company is required to prepare this schedule? What importance might these transactions have to a company?

Solutions

Expert Solution

A cash flow statement gives details of cash flow movements due to operating, financing and investing activities. But a firm can have non cash activities during the year as part of its operations. For example: acquisition of fixed assets by issue of long term notes payable or issue of equity shares, conversion of debt into equity ,etc These transactions are to be reported as part of non cash investing and financing activities since the transactions are material and help in understanding movement of account balances during the year. As per concept of materiality transactions which influence the users in understanding the financial statements and taking decisions should be disclosed separately. The users of the financial statement get to understand the non cash activities since there is no cash involved in the same. For example if debt is converted into equity during the year the users can get to know that long term liability is reduced during the year and there is no actual cash outflow for it due to increase in equity balance.

Companies undertake non cash transactions as part of restructuring exercise or to manage its cash flow. For example : If company wants to acquire fixed assets during the year it might fund the same partly by cash available and balance by non cash transactions like issue of long term note or shares. Similarly as part of restructuring exercise company can convert loans to equity to manage it cash flows. Hence non cash transactions are important to the firm.


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