Disclosure Requirements for Cash Flow Statements

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  • 0:03 Statement of Cash Flows
  • 0:35 What Needs to Be Disclosed?
  • 2:02 Non-Cash Investing & Financing
  • 3:11 Example Disclosures
  • 3:47 Lesson Summary
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Lesson Transcript
Instructor: James Walsh

M.B.A. Veteran Business and Economics teacher at a number of community colleges and in the for profit sector.

In order to make the statement of cash flows more meaningful to investors, supplemental disclosures are required. In this lesson, we'll cover the requirements with some specific examples.

Statement of Cash Flows

Investors and potential investors can gain a lot of useful information from the statement of cash flows, which shows, in detail, how a company's cash position has changed from one period to another. The cash flow statement, as prepared under U.S. generally accepted accounting principles (GAAP) or international financial reporting standards (IFRS), omits some very useful information for investors. Thus, this information needs to be included in the disclosures at the bottom of the cash flow statement.

What Needs to Be Disclosed?

Kelly is the Controller for Bright Future Tutoring Solutions, a national chain of after school tutoring centers. She is putting the final touches on the financial statements for the year. Business activities in three broad areas need to be disclosed in the notes or disclosures at the bottom of the statement of cash flows. These include:

  1. A reconciliation of operating cash if the direct method is used when preparing the cash flow statement: This is best accomplished by preparing the indirect method for the operating cash flow section and putting the results in a note at the bottom of the cash flow statement. Most businesses, including Bright Future, prepare the statement of cash flows with the indirect method so no disclosure is required.
  2. Cash paid for interest and taxes: Interest and tax expenses shown in the income statement often differ from the actual cash paid. Interest and tax expense amounts are included in net income when the indirect method is used when preparing the cash flow statement. However, the actual cash paid needs to be disclosed in the notes. This is required by U.S. GAAP and IFRS. Bright Future paid $20,000 cash for taxes and $10,000 in interest during the year. Thus, these are disclosed per the accounting rules.
  3. A disclosure of any non-cash investing and financing activities: These items are useful information for investors, but will not appear in the body of the statement of cash flows.

Non-Cash Investing & Financing

Some examples of non-cash investing and financing activities include:

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