Last updated on Feb 29, 2024
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Non-cash transactions
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Indirect and direct methods
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Reporting non-cash transactions
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Why are non-cash transactions important?
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How to identify non-cash transactions?
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Here’s what else to consider
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A cash flow statement is a financial report that shows how a company generates and uses cash during a specific period. It helps investors and managers assess the liquidity and solvency of the business. However, not all transactions that affect the cash position of a company are cash transactions. Some transactions involve non-cash items, such as depreciation, amortization, stock-based compensation, and exchange of assets. How do you account for these non-cash transactions in a cash flow statement? In this article, you will learn the basics of non-cash transactions and how to report them in the cash flow statement.
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- Tomi Akinwale ACCA, ACA, ACTI, B.TECH, FMVA, AAT. LinkedIn Growth Hacks | Tax | Financial Reporting | Deloitte | CV optimization
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- Prateek Babbar Senior Team Leader at Buck
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1 Non-cash transactions
Non-cash transactions are transactions that do not involve the inflow or outflow of cash, but still have an impact on the financial position of a company. For example, a company may issue shares to acquire another company, or exchange an old equipment for a new one. These transactions affect the assets, liabilities, and equity of the company, but not the cash balance. Non-cash transactions are also called non-cash investing and financing activities, because they usually relate to the long-term assets and liabilities of a company.
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- Tomi Akinwale ACCA, ACA, ACTI, B.TECH, FMVA, AAT. LinkedIn Growth Hacks | Tax | Financial Reporting | Deloitte | CV optimization
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Non-cash transactions have to be added back to the accounting profits computation. examples include depreciation and amortization. Since CF statement basically deals with Cash.
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2 Indirect and direct methods
There are two methods to prepare a cash flow statement: the indirect method and the direct method. The indirect method starts with the net income from the income statement and adjusts it for non-cash items, such as depreciation, amortization, gains and losses on asset sales, changes in working capital, and others. The direct method starts with the cash receipts and payments from operating activities and does not require adjustments for non-cash items. However, both methods result in the same net cash flow from operating activities.
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- Prateek Babbar Senior Team Leader at Buck
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Changes in working capital include items like accounts receivable, accounts payable, and inventory are non-cash items. Changes in these accounts affect cash flow but don't directly involve cash transactions. An increase in accounts receivable, for example, means less cash collected from customers, so it's deducted from net income in the operating activities section.
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3 Reporting non-cash transactions
Non-cash transactions are not reported in the body of the cash flow statement, because they do not affect the cash flow from operating, investing, or financing activities. Instead, they are reported in a separate section at the bottom of the cash flow statement, or in the notes to the financial statements. This section provides supplemental information about the nature and amount of non-cash transactions that occurred during the period. For example, a company may disclose that it issued $10 million worth of shares to acquire a subsidiary, or that it exchanged a land worth $5 million for a building worth $6 million.
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4 Why are non-cash transactions important?
Non-cash transactions are important because they reflect significant changes in the financial position of a company that are not captured by the cash flow statement. They provide additional insights into the investing and financing decisions of a company, such as its acquisition strategy, capital structure, asset management, and risk exposure. They also help users of financial statements to reconcile the changes in the balance sheet items with the cash flow statement.
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5 How to identify non-cash transactions?
One way to identify non-cash transactions is to compare the changes in the balance sheet items with the cash flow statement. If there is a difference between the change in an asset or liability and the cash flow related to it, it may indicate a non-cash transaction. For example, if the property, plant, and equipment increased by $8 million, but the cash flow from investing activities only showed a purchase of $4 million, it may imply that the company exchanged another asset for $4 million worth of equipment. Another way to identify non-cash transactions is to read the notes to the financial statements, where the company usually discloses the details of non-cash transactions.
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6 Here’s what else to consider
This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?
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