CASH FLOWS FRA


Use the following four categories of activities to classify cash transactions:
  • Operating
  • Noncapital financing
  • Capital and related financing
  • Investing
Generally, cash receipts and cash payments are reported as gross rather than net. Two exceptions to the gross reporting are:
  • Cash purchases and sales of cash and cash equivalents
  • Assets and liabilities for which the turnover is quick and the maturities are three months or less (such as debt, loans receivable and the purchase and sale of highly liquid investments)
  1. Cash Flows from Operating Activities
Cash flows from operating activities result from providing services and producing and delivering goods. They include all other transactions not defined as noncapital financing, capital and related financing or investing activities. The operating activities section is, in a sense, a “catch-all” category.
Cash inflows (proceeds) from operating activities include:
    • Cash receipts from sales of goods and services including receipts from collection of accounts receivable and both short/long-term notes receivable from customers and students arising from those sales
    • Cash receipts from quasi-external operating transactions with other funds
    • Grant receipts for activities considered as operating activities of the grantor government
    • Cash receipts for reimbursement of operating transactions
    • Cash receipts from collection of program loans
Note: “Program loans” are loan programs undertaken to fulfill a governmental responsibility (such as low-income housing mortgages and student loans). As the loans made and collected (including the interest) are part of a governmental program, the loan activities are reported as operating activities, rather than investing activities.
    • Cash contributions to a defined benefit pension plan administered through a trust that meets the criteria in GASB 68, paragraph 4, or to a defined benefit OPEB plan administered through a trust that meets the criteria in GASB 75, paragraph 4.
    • Other cash receipts not classified in the other categories.
Cash outflows (payments) from operating activities include:
    • Cash payments to suppliers of goods and services
    • Cash payments to employees for services including benefits
Note: Separate accounts payable and payroll payable when determining the cash payments.
    • Cash payments for grants considered to be operating activities of the grantor
    • Cash payments for quasi-external operating transactions (including payments in lieu of taxes)
    • Cash payments for program loans
    • Cash payments for pensions or OPEB regardless of whether the defined benefit pension plan or defined benefit OPEB plan is administered through a trust that meets the specified criteria of either GASB 68, paragraph 4, or GASB 75, paragraph 4, respectively.
    • Other cash payments not classified in the other categories
  1. Cash Flows from Noncapital Financing Activities
Cash flows from noncapital financing activities include borrowing money and repaying the principal and interest on amounts borrowed for purposes other than to acquire, construct or improve capital assets.
Cash inflows (proceeds) from noncapital financing activities include:
    • Cash receipts from short and long-term borrowings used for purposes other than to acquire, construct or improve capital assets
    • Cash receipts from grants and voluntary non-exchange transactions (gifts) not used for capital assets or for specific activities considered to be operating activities of the grantor
    • Cash receipts from other funds except amounts used for capital assets, quasi-external operating transactions or reimbursement for operating transactions
    • Cash receipts from property and other taxes not specifically restricted for capital purposes
    • Cash receipts from proceeds of state appropriations
Cash outflows (payments) for non-capital financing activities include:
    • Repayments of principal and interest on borrowings for purposes other than acquiring, constructing or improving capital assets
    • Grant payments to other governments or organizations for activities not considered as operating activities of the grantor
Note: It is irrelevant whether the grantee uses the grant as an operating subsidy or for capital purposes.
    • Cash payments to other funds except for quasi-external operating transactions
  1. Cash Flows from Capital and Related Financing Activities
Cash flows from capital and related financing activities include acquiring and disposing of capital assets, borrowing money to acquire, construct or improve capital assets, repaying the principal and interest amounts and paying for capital assets obtained from vendors on credit.
Cash inflows (proceeds) from capital financing activities include:
    • Receipts from proceeds of issuing or refunding bonds and other short or long-term borrowings used to acquire, construct or improve capital assets
    • Receipts from capital grants awarded to the governmental enterprise or other contributions for capital assets
    • Receipts from contributions made by other governments, organizations or individuals (gifts) for the specific purpose of defraying the cost of acquiring, constructing or improving capital assets
    • Receipts from sales of capital assets and proceeds from insurance on capital assets that are stolen or destroyed
    • Receipts from special assessments or property and other taxes levied for capital purposes
Cash outflows (payments) for capital financing activities include:
    • Payments to acquire, construct or improve capital assets
    • Payments on principal and interest or refunding on amounts borrowed for capital assets
Note: Proceeds of a refunding debt issue used to refund capital debt are reported in the capital and related financing category. Likewise, subsequent principal and interest payments on the refunding debt are also reported as cash outflows in the capital and related financing category.
  1. Cash Flows from Investing Activities
Cash flows from investing activities include making and collecting loans (except program loans; see Cash Flows from Operating Activities) and the acquisition and disposition of debt or equity instruments.
Cash inflows (proceeds) from investing activities include:
    • Receipts from collections of loans (except program loans) and sales of other entities’ debt instruments (other than cash equivalents)
    • Receipts from sales of equity instruments and from returns of investment in those instruments
    • Receipts of interest and dividends received as returns on loans (except program loans), debt instruments of other entities, equity securities and cash management or investment pools
    • Receipts from withdrawals on investment pools the governmental enterprise is not using as demand accounts
Cash outflows (payments) for investing activities include:
    • Payments for loan disbursements (except program loans) and acquisition of debt instruments of other entities
    • Payments to acquire equity instruments
    • Payments for deposits into investment pools the governmental enterprise is not using as demand accounts

Benefits of cash flow information
A statement of cash flows, when used in conjunction with the rest of the financial statements, provides information that enables users to evaluate the changes in net assets of an entity, its financial structure (including its liquidity and solvency) and its ability to affect the amounts and timing of cash flows in order to adapt to changing circumstances and opportunities. Cash flow information is useful in assessing the ability of the entity to generate cash and cash equivalents and enables users to develop models to assess and compare the present value of the future cash flows of different entities. It also enhances the comparability of the reporting of operating performance by different entities because it eliminates the effects of using different accounting treatments for the same transactions and events.
5 Historical cash flow information is often used as an indicator of the amount, timing and certainty of future cash flows. It is also useful in checking the accuracy of past assessments of future cash flows and in examining the relationship between profitability and net cash flow and the impact of changing prices


Cash Flow in the Financial Statement
The cash flow statement is one of the three main financial statements that show the state of a company's financial health. The other two important statements are the balance sheet and income statement. The balance sheet shows the assets and liabilities as well as shareholder equity at a particular date. Also known as the profit and loss statement, the income statement focuses on business income and expenses. The cash flow statement measures the cash generated or used by a company during a given period. The cash flow statement has three sections:
  1. Cash flow from operating (CFO) indicates the amount of cash that a company brings in from its regular business activities or operations. This section includes accounts receivable, accounts payable, amortization, depreciation, and other items.
  2. Cash flow from investing (CFI) reflects a company's purchases and sales of capital assets. CFI reports the aggregate change in the business cash position as a result of profits and losses from investments in items like plant and equipment. These items are considered long-term investments in the business.
  3. Cash flow from financing activities (CFF) measures the movement of cash between a firm and its owners, investors, and creditors. This report shows the net flow of funds used to run the company including debt, equity, and dividends.
Investors can also get information about CFF activities from the balance sheet’s equity and long-term debt sections and possibly the footnotes.
Capital From Debt or Equity
CFF indicates the means through which a company raises cash to maintain or grow its operations. A company's source of capital can be from either debt or equity. When a company takes on debt, it typically does so by issuing bonds or taking a loan from the bank. Either way, it must make interest payments to its bondholders and creditors to compensate them for loaning their money.
When a company goes through the equity route, it issues stock to investors who purchase the stock for a share in the company. Some companies make dividend payments to shareholders, which represents a cost of equity for the firm.
Positive and Negative CFF
Debt and equity financing are reflected in the cash flow from financing section, which varies with the different capital structures, dividend policies, or debt terms that companies may have.
Transactions That Cause Positive Cash Flow From Financing Activities
  • Issuing equity or stock, which is sold to investors
  • Borrowing debt from a creditor or bank
  • Issuing bonds, which is debt that investors purchase
A positive number for cash flow from financing activities means more money is flowing into the company than flowing out, which increases the company’s assets.
Transactions That Cause Negative Cash Flow From Financing Activities
  • Transactions That Cause Negative Cash Flow From Financing Activities
  • Stock repurchases
  • Dividends
  • Paying down debt
  • repayment of long-term debt
  • principal repayments of capital lease obligations
  • principal repayments of finance lease obligations
  •  
Negative CFF numbers can mean the company is servicing debt, but can also mean the company is retiring debt or making dividend payments and stock repurchases, which investors might be glad to see.
Foreign currency cash flows
 Cash flows arising from transactions in a foreign currency shall be recorded in an entity’s functional currency by applying to the foreign currency amount the exchange rate between the functional currency and the foreign currency at the date of the cash flow.
The cash flows of a foreign subsidiary shall be translated at the exchange rates between the functional currency and the foreign currency at the dates of the cash flows.
(Here functional currency can be explained with an example - If India trades with Canada the two currencies involved are Canadian dollar and Indian Rupee. The Indian rupee is the functional currency)

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