Disclosing Non-Cash Investing and Financing Activities

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  • 0:00 Reasons & Methods of…
  • 1:48 Disclosure or Reporting
  • 2:18 Examples of Methods of…
  • 2:59 Why Disclosure Is Important
  • 3:55 Lesson Summary
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Lesson Transcript
Instructor: Donna Imrisek

Donna has taught business classes and has a master's degree in Management:Accounting

In this lesson, we'll explore examples of non-cash investing and financing activities. You'll learn what these activities are, how to disclose them and why it's so important to disclose properly.

Reasons & Methods of Disclosure

As the name suggests, non-cash investing and financing activities involve the use of financial tools other than cash to make an investment or purchase. For example, if you use a company credit card to buy a new computer, you've used non-cash financing to make a purchase. Other examples of non-cash spending include taking out a loan or signing a note payable.

Let's look at a common example. Imagine that you own a construction business, and you need another truck. You go to the local truck dealership and buy the perfect truck for your business. However, instead of writing a check, you take out a loan from the dealership. Your loan is approved and you drive away with the truck, but you haven't exchanged any cash. The terms of your loan dictate that you'll be spending money to pay back this purchase every month until the terms of the loan are fulfilled. However, the purchase will definitely impact your business. It'll allow you to accomplish more work and earn even more money.

Information about non-cash investing and financing activities is useful for determining how financially healthy a business or other organization is. Non-cash investing and financing activities can impact a business' performance and may need to be analyzed to help determine future performance. The impact of non-cash investing and financing activities on an organization can be seen in revenues, profits, and cash flow.

Because these activities are very important to decision makers and the organization, the General Accepted Accounting Principles (GAAP), a set of reporting regulations for the accounting industry, requires that these activities are recorded if they are significant. In some cases, this recording may be referred to as 'disclosure.'

Disclosure or Reporting

Normally, transactions involving the generation or use of cash are recorded in the statement of cash flows, but since we're looking at non-cash transactions, we cannot use the exact same technique.

Instead, to record a non-cash investing and financing activity, you should include a footnote on the bottom of the statement of cash flows or in the notes of the financial statements. You can also disclose the non-cash investing and financing activity in a separate schedule or list.

Examples of Methods of Disclosure

Let's talk about specific techniques for reporting your non-cash investing and financing activities. Returning to the previous example, you can see how you could disclose the fact that you bought a truck.

Disclosure should appear at the bottom of the statement of cash flows. Let's say you have a statement of cash flows that has information about how much cash you have that looks like this:

Net increase in cash during the year $98,000
Total Cash at the beginning of the year $20,000
Total Cash at the end of the year $118,000

To report your non-cash investing and financing activity, you'd simply include a line item underneath this information with a defining statement about the non-cash investing and financing activity that would look something like this:

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