6.4 Format of the statement of cash flows

ASC 230 allows a reporting entity to prepare and present its statement of cash flows using either the direct or indirect method (see FSP 6.4.2), though ASC 230-10-45-25 encourages using the direct method.

6.4.1 Sample statement of cash flows

Figure FSP 6-1 is an illustrative cash flow statement prepared using the indirect method. It reflects certain captions required by ASC 230 (bolded) and other common captions. Not all captions are applicable to all reporting entities. In addition, some captions may be reflected in other classification categories depending on facts and circumstances.

Presentation and disclosure requirements are addressed in the relevant sections of this chapter and cross referenced in the last column of the figure. Not all items discussed within this chapter are presented in the figure.

Figure FSP 6-1
Sample consolidated statement of cash flows FSP Corp
Consolidated Statement of Cash Flows
For the years ended 20X3, 20X2, and 20X1 Section reference in millions $ in millions $ in millions $ Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by (used in) operating activities: Accretion (amortization) of discount (premium) on issued debt securities (Gain) loss on extinguishment of debt Depreciation and amortization Amortization of debt issue costs Share-based incentive compensation Impairment of assets Provision for bad debt expense Inventory obsolescence impairment Deferred taxes Noncash provisions for exit costs Loss (gain) on disposal of property and equipment (Income) loss from equity method investments, net of dividends received Foreign currency transactions Changes in operating assets and liabilities, net of effects of businesses acquired: Decrease (increase) in trade receivables Cash received on sale of accounts receivable Decrease (increase) in inventories Decrease (increase) in other assets, net Increase (decrease) in operating accounts payable Increase (decrease) in accrued liabilities Increase (decrease) in income taxes payable Increase (decrease) in other liabilities, net Net cash provided by (used in) operating activities Cash flows from investing activities: Acquisition [sale] of equity securities* Acquisition [proceeds from sale] of property, plant, and equipment* Acquisition [sale] of a business, net of cash and cash equivalents acquired [or sold]* Impact to cash resulting from initial consolidation [deconsolidation]* Contributions and advances to joint ventures Subsequent collections of receivables sold, and of receivables reacquired Net cash provided by (used in) investing activities Cash flows from financing activities: Bank overdrafts Payment of contingent consideration Proceeds from debt Repayments of debt Payments of debt issue costs Dividends paid Net payments of short-term borrowings Repurchases of equity securities Acquisition of common stock for tax withholding obligations Distributions to noncontrolling interests Principal payments under capital lease obligations Net activity from derivatives with an other-than-insignificant financing element Net cash provided by (used in) financing activities Effect of exchange rate changes on cash, cash equivalents and restricted cash Cash, cash equivalents, and restricted cash: Net change during the period Balance, beginning of period Balance, end of period Supplemental cash flow information: Cash paid for interest, net of amounts capitalized Cash paid for income taxes Noncash investing and financing activity*

Reconciliation of cash, cash equivalents, and restricted cash reported in the statement of financial position

Cash and cash equivalents Restricted cash Restricted cash included in other long-term assets Total cash, cash equivalents, and restricted cash shown in the statement of cash flows

* These line items generally should be presented gross; however, for ease of reference in Figure FSP 6-1, the inflows and outflows are reflected in the sample statement on one line.

6.4.2 Direct versus indirect method

As discussed in ASC 230-10-45-28, cash flows related to operating activities may be presented in one of two ways — the direct method or the indirect method. The presentation of investing and financing activities are identical under the direct and indirect methods. Although the presentation of operating cash flows differs between the two methods, both methods result in the same amount of net cash flows from operations. While ASC 230-10-45-25 encourages the use of the direct method, the large majority of reporting entities elect to use the indirect method. The concepts underlying classification within ASC 230 were conceived and explained solely from the perspective of the direct method. While the indirect method represents an alternative presentation model, it is not an alternative classification methodology. Accordingly, even when a reporting entity is using the indirect method, it should consider the direct method framework when evaluating the proper classification of a cash flow.

As discussed in ASC 230-10-45-25, the direct method requires the presentation of major types of gross cash receipts and gross cash payments and their arithmetic sum, which represents the net cash flow from operating activities. At a minimum, the following types of operating receipts and disbursements are required in a direct method presentation:

Cash collected from customers, including lessees, licensees, etc.
Interest and dividends received (except for return of capital)
Other operating cash receipts, if any
Cash paid to employees and other suppliers of goods or services, including suppliers of insurance, advertising, etc.
Interest paid
Income taxes paid
Other operating cash payments, if any

To illustrate how operating cash flows (prepared on the cash basis of accounting) relate to net income (prepared on the accrual method of accounting), as discussed in ASC 230-10-45-28, the direct method also requires a reconciliation of net income to net cash flows from operating activities. Net income, including earnings attributable to the controlling and noncontrolling interests, is the starting point to reconcile cash flows from operating activities. The reconciliation removes the effects of the following:

All deferrals of past operating cash receipts and payments, and all accruals of expected future operating cash receipts and payments (e.g., changes during the period in receivables and payables pertaining to operating activities)
All items included in net income that do not affect operating cash receipts and payments (e.g., all items for which cash effects are related to investing or financing activities (e.g., depreciation, amortization, gains or losses on dispositions of long-lived assets, and foreign currency gains and losses from the retirement of foreign denominated debt))
Adjustments for noncash items in the reconciliation of net income to net cash flows from operating activities, which may include items such as:
- Depreciation and amortization relating to fixed assets, definite-lived intangible assets, capital leases, premiums, or discounts on debt (including debt issuance costs)
- Lessee’s amortization of right-of-use assets (see FSP 6.8.16.1)
- Provisions for bad debts and inventory
- Share-based incentive compensation
- Deferred income taxes
- Impairment losses
- Unrealized foreign currency transaction gains or losses
- Gains or losses from the sale of long-lived assets or businesses
- Gains or losses from the settlement of asset retirement obligations
- Gains or losses from the extinguishment of debt
- Realized foreign currency transaction gains or losses related to investing or financing activities
As discussed in ASC 230-10-45-25 and ASC 230-10-45-28, when the indirect method is used, a reporting entity does not report the gross cash receipts and gross payments required by the direct method. Instead, only the reconciliation of net income to net operating activities, as described above, is reported.

Reporting entities have latitude in how they present an indirect method reconciliation, as there is no prescribed format. As with most forms of practical expediency, the indirect method yields information that is less useful than the direct method. For example, because the individual line items within a reconciliation of net income to net operating cash flows do not represent cash flows, they by themselves provide no incremental information about a reporting entity's cash flows.

Although ASC 230 encourages the use of the direct method, a reporting entity can change from the indirect to the direct method (or vice versa) retrospectively. This retrospective change in the presentation of the statement of cash flows would not be considered a discretionary accounting change and would not require an assessment of preferability.

Even when a reporting entity is using the indirect method, the direct method may be helpful in evaluating the proper classification of cash flows. Example FSP 6-1 illustrates how a reporting entity can use the direct method to isolate cash flows from operations to ensure that the presentation under the indirect method of cash flows from operations is the same.
EXAMPLE FSP 6-1
Foreign currency cash flows in operating and financing cash flows
FSP Corp is a US dollar functional currency entity with two Euro-denominated liabilities: a €1,000 account payable due in 30 days and a €100,000 long-term note due in 3 years that may be repaid at any time, in any increment. At the beginning of the quarter, the spot rate for Euros was $1.20 per €1. The account payable was remeasured at the beginning of the quarter at $1,200 and the long-term note at $120,000. FSP Corp has $50,000 of cash and cash equivalents on the balance sheet at the beginning of the quarter.

A week later, when the spot rate for Euros is $1.15 per €1, FSP Corp pays the €1,000 account payable and settles €40,000 of the note payable. When preparing its financial statements at the end of the quarter, the exchange rate for remeasurement of the remaining €60,000 of long-term note payable is $1.10 per €1. FSP Corp records the following journal entries.