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Linda Dufresne, CPA Dufresne & Associates, CPA, PA GNP Services, CPA, PA [email protected] 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?

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  • Linda Dufresne, CPA

  • Dufresne & Associates, CPA, PA

  • GNP Services, CPA, PA

  • [email protected]


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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


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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.


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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)


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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)


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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)


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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)


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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)


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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)


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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)


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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)


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Gross vs net presentation equivalents) are reported on the SOCF:

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

Statement of Cash Flows (SOCF)


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Comic relief? equivalents) are reported on the SOCF:

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?"


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Cash flows from operating activities equivalents) are reported on the SOCF:

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

SOCF Layout


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GASB Statement 9, ¶ 16 equivalents) are reported on the SOCF:

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


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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


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Interest receipts events reported as components of operating income in the statement of revenues, expenses and changes in fund net assets/equity

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

CASH FLOWS from Operating Activities


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Statement of Cash Flows events reported as components of operating income in the statement of revenues, expenses and changes in fund net assets/equityCommon Cash Flows from Operating Activities - Items to Consider


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Statement of Cash Flows events reported as components of operating income in the statement of revenues, expenses and changes in fund net assets/equityCommon Cash Flows from Operating Activities - Items to Consider


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Statement of Cash Flows events reported as components of operating income in the statement of revenues, expenses and changes in fund net assets/equityCommon Cash Flows from Operating Activities - Items to Consider


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Statement of Cash Flows events reported as components of operating income in the statement of revenues, expenses and changes in fund net assets/equityCommon Cash Flows from Operating Activities - Items to Consider


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GASB Statement 9, ¶ 20 events reported as components of operating income in the statement of revenues, expenses and changes in fund net assets/equity

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


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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

CASH FLOWS from Noncapital financing Activities


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Statement of Cash Flows reported in this category even though the loans themselves would be treated as part of cash flows from operating activitiesCommon Cash Flows from Noncapital Financing Activities - Items to Consider


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GASB Statement 9, ¶ 23 reported in this category even though the loans themselves would be treated as part of cash flows from operating activities

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.

CASH FLOWS from CAPITAL AND RELATED FINANCING Activities


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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

CASH FLOWS from CAPITAL AND RELATED FINANCING Activities


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Statement of Cash Flows clearly attributable to capital purposesCommon Cash Flows from Capital and Related Activities - Items to Consider


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GASB Statement 9, ¶ 26 clearly attributable to capital purposes

Investing activities include

making and collecting loans (except program loans, as discussed in paragraph 19) and

acquiring and disposing of debt or equity instruments.

CASH FLOWS from INVESTING Activities


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Statement of Cash Flows clearly attributable to capital purposes(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


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Statement of Cash Flows clearly attributable to capital purposesCommon Cash Flows from Investing Activities - Items to Consider


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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)


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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


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Supplemental Schedule of Noncash Transactions Cash Provided (Used) by Operating Activities

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”.


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Supplemental Schedule of Noncash Transactions Cash Provided (Used) by Operating Activities

  • 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


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Examples of noncash transactions include: Cash Provided (Used) by Operating Activities

Assets acquired by capital leasing

Gifts in kind

Capital contributions (including transfers of assets between the special districts and local governments)


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All comedy has a grain of truth! Cash Provided (Used) by Operating Activities

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!"


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Survival Tips for Preparing the Statement of Cash Flows Cash Provided (Used) by Operating Activities

  • Analyze net asset line items by statement of cash flow categories during preparation of audit workpapers and lead schedules.

  • Prepare Statement of Net Asset (SONA) Variance worksheet.

  • Compile the Additional Cash Flow Data worksheet and Statement of Revenues, Expenses and Changes in Fund Net Assets (SRENA).


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Survival Tips for Preparing the Statement of Cash Flows, continued

  • Using the “Cash Flow Stmt Worksheet” template, transfer/link amounts from, SNA Variance, SRENA and Additional Cash Flow Data Worksheet.

  • Prepare Operating Activities section first. Then prepare reconciliation section. It is important to keep these two sections in balance.

  • Most common pitfall is transposing the sign (+/-) on amounts.


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Survival Tips for Preparing the Statement of Cash Flows continued

Analyze net asset line items by statement of cash flow categories.

See previous slides


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Survival Tips for Preparing the Statement of Cash Flows continued

Prepare Statement of Net Asset (SONA) Variance worksheet.

See sample on following slides




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Survival Tips for Preparing the Statement of Cash Flows continued

Compile the Statement of Revenues, Expenses and Changes in Fund Net Assets (SRENA) and Additional Cash Flow Data worksheet.




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SRENA continued


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SRENA, continued continued


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SRENA, concluded continued


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Survival Tips for Preparing the Statement of Cash Flows, continued

Using the “Cash Flow Stmt Worksheet” template, transfer/link amounts from SONA Variance, SRENA and Additional Cash Flow Data Worksheet.


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Statement of Cash Flows continued(Operating Activities Section)



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From SRENA and SONA to Statement of Cash Flows continued(How to adjust accrual balances to cash)


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From SRENA and SONA to Statement of Cash Flows continued(How to adjust accrual balances to cash)


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From SRENA and SONA to Statement of Cash Flows continued(How to adjust accrual balances to cash)


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From SRENA and SONA to Statement of Cash Flows continued(How to adjust accrual balances to cash)


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From SRENA and SONA to Statement of Cash Flows continued(How to adjust accrual balances to cash)


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From SRENA and SONA to Statement of Cash Flows continued(How to adjust accrual balances to cash)


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From SRENA and SONA to Statement of Cash Flows continued(How to adjust accrual balances to cash)


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From SRENA and SONA to Statement of Cash Flows continued(How to adjust accrual balances to cash)


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From SRENA and SONA to Statement of Cash Flows continued(How to adjust accrual balances to cash)


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CASH FLOWS from Noncapital financing Activities continued

  • 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.


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Statement of Cash Flows continued(NONCAPITAL FINANCING Activities Section)


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SRENA, concluded continued


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CASH FLOWS from CAPITAL AND RELATED FINANCING Activities continued

  • 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.


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Statement of Cash Flows continued(CAPITAL and related FINANCING Activities Section)




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CASH FLOWS from INVESTING Activities continued

  • 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.


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Statement of Cash Flows continued(INVESTING Activities Section)


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From SRENA and SONA to Statement of Cash Flows continued(How to adjust accrual balances to cash)


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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)


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Statement of Cash Flows Cash Provided (Used) by Operating Activities(RECONCILIATION to operating activities Section)


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Statement of Cash Flows Cash Provided (Used) by Operating Activities(RECONCILIATION to operating activities Section)


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Supplemental Schedule of Noncash Transactions Cash Provided (Used) by Operating Activities

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”.


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Examples of noncash transactions include: Cash Provided (Used) by Operating Activities

  • Assets acquired by capital leasing

  • Gifts in kind

  • Capital contributions (including transfers of assets between the special districts and local governments)


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Statement of Cash Flows Cash Provided (Used) by Operating Activities

(Supplemental schedule of noncash transactions section)


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Statement of Cash Flows Cash Provided (Used) by Operating Activities

Summary of Sections


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Secret Survival Tips Cash Provided (Used) by Operating Activities

  • 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


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Excellent tool for understanding financial position Cash Provided (Used) by Operating Activities

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)


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How to Analyze the Statement of Cash Flows (SOCF) Cash Provided (Used) by Operating Activities

  • 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


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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)


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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)


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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)


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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)


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What Cash Flow Doesn't Tell Us - should look at is the bottom line item that says something like "net increase/decrease in cash and cash equivalents“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

How to Analyze the Statement of Cash Flows (SOCF)


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Exercises should look at is the bottom line item that says something like "net increase/decrease in cash and cash equivalents“

  • (+) or (-)?

  • SOCF – Fill in the Blanks


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Thanks for your attention! should look at is the bottom line item that says something like "net increase/decrease in cash and cash equivalents“

  • Linda Dufresne, CPA

  • Dufresne & Associates, CPA, PA

  • GNP Services, CPA, PA

  • [email protected]


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