Disclosure of Non-Cash Activities

by Vicki A. Benge

Investors and creditors analyze the financial statements of public companies to evaluate the liquidity of the company, a determinative indicator as to how well the business can meet current debt obligations and to evaluate profitability. Certain aspects of a business that affect the overall value without affecting current cash flow are non-cash activities. Full disclosure of non-cash activities is a normal business procedure for publicly owned companies, as the law requires these disclosures.

Statement of Cash Flows

A typical statement of cash flows separates revenue and expenditures into the three categories of operating, investing and financing. Operating activities encompass the day-to-day expenses of running the business. Investing activities included in the statement of cash flows are those for which the company paid cash, such as purchasing property or equipment. An example of financing activities would be paying dividends to stockholders. When a company purchases assets through non-cash activities, the cash flow statement may reflect the increase in assets through an overstatement of cash flow. Reconciliation of the report can be accomplished through disclosure of non-cash activities.

Regulations and Standards

According to the Financial Accounting Standards Board, the private agency in the United States that establishes the generally accepted accounting principles used by U.S. companies, a business must report all non-cash investing and financing activities that affect the assets or liabilities of the company. The statement of cash flows and the supplemental material showing non-cash activities are reported in the company’s annual audited financial report, the Form 10k filings as required by the U.S. Securities and Exchange Commission. Accountants may refer to the supplemental materials as the schedule of significant non-cash investing and financing activities.

Presentation

Standard accounting procedures dictate that non-cash activities are disclosed as an addendum to the statement of cash flows. Companies generally report the non-cash activities immediately following the statement of cash flows, occasionally on the same page of the financial report, if space permits.

Examples of Non-Cash Activities

Common business transactions that fall into this category of "significant non-cash investing and financing activities," include issuing new securities in the form of shares of common stock or corporate bonds to purchase assets. Conversion of outstanding bonds into shares of common stock is another significant non-cash activity that should be reported. A company may issue additional shares of common stock to finance the purchase of real property or issue bonds to purchase equipment. Any significant activity that changes the capital structure of the company must be reported as part of the disclosure of non-cash activities.

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