Statement of Cash Flows Under ASC 230
Classifying and reporting cash receipts and payments in the cash flow statement is all in the details. Make sure you get it right using BDO's "Blueprint" publication.
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Summary
The guidance in ASC 230, Statement of Cash Flows, requires a cash flow statement to be included as part of a full set of financial statements for most entities. The primary objective of a cash flow statement is to provide users with relevant information about an entity’s cash receipts and payments during the reporting period, which they use along with other information in the financial statements and disclosures to assess the entity’s cash flow generation capabilities, liquidity, and financial flexibility (for example, the entity’s ability to finance growth organically). The cash flow statement and related disclosures also help users understand and bridge the differences between net income and the associated cash receipts and payments and assess the effects on an entity's financial position of both its cash and noncash investing and financing transactions during the period.
Scope of ASC 230
ASC 230 applies to all entities, including business entities and not-for-profit entities (NFPs), with some exceptions. If the entity provides a set of financial statements that includes both a balance sheet and an income statement, it must provide a cash flow statement for each period for which an income statement (or statement of activities for NFPs) is provided.
See Chapter 1 for scope and scope exceptions.
Cash, Cash Equivalents, and Restricted Cash
A cash flow statement explains the changes during a reporting period in an entity’s total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Transfers among cash, cash equivalents, restricted cash, and restricted cash equivalents are not cash inflows or outflows of the entity because there is no cash receipt or payment with a source outside the entity. In contrast, cash receipts into or payments from cash, cash equivalents, restricted cash and restricted cash equivalents with third parties represent cash flows an entity classifies as operating, investing, or financing. Accordingly, an entity must appropriately identify items reported as cash, cash equivalents, restricted cash, and restricted cash equivalents.
See Chapter 2 for what is considered cash, cash equivalents, restricted cash, and restricted cash equivalents.
Reporting Cash Flows
In reporting its cash flows, an entity typically must report cash receipts and payments separately so that users receive relevant information about its cash flow activities. That is the case for investing and financing activities, which typically must be reported separately. However, gross reporting might not always be necessary to understand the entity’s cash flows, and net reporting is sufficient when conditions are met.
For operating activities, ASC 230 encourages entities to report them directly by showing major classes of operating cash receipts and payments (the direct method) but stops short of requiring it. Most entities report operating cash flows indirectly (the indirect method). Under the indirect method, the entity adjusts net income for revenue and expense items that were not the result of operating cash transactions during the reporting period.
Other reporting matters an entity considers include:
- Whether to report constructive cash receipts and payments for transactions when cash did not pass through the entity’s cash accounts.
- How to report cash flows when an entity has components (or groups of components) presented as discontinued operations.
- What cash flow information is required in interim financial statements.
See Chapter 3 for reporting requirements.
Classifying Cash Flows
Under ASC 230, an entity classifies cash receipts and payments as either investing, financing or operating activities. Classification is based on the nature of the cash flow and is intended to provide financial statement users with relevant information about how an entity generates and uses cash. Some cash receipts and payments have aspects of more than one class of cash flows. Therefore, the three categories are not mutually exclusive, and judgment may be required to classify a transaction.
See Chapter 4 for the general classification requirements, Chapter 5 for in-depth cash flow guidance on specific transactions and Chapter 7 for a comprehensive example on classifying cash flows and disclosing cash flow information under ASC 230.
Disclosures
ASC 230 (or sometimes other U.S. GAAP) requires entities to provide disclosures to inform users about an entity’s accounting policies in preparing its cash flow statement and to provide additional information not otherwise provided in the statement itself. For example, entities must disclose information about noncash investing and financing activities which, while not having a current-period cash effect, generally have a significant effect on the entity’s future cash flows.
See Chapter 6 for disclosure requirements.
Industry Guidance
While ASC 230 is the primary source of cash flow guidance, some industry specific topics in U.S. GAAP include incremental cash flow guidance.
See Chapter 8 for industry guidance.