Article # 1131
Technical Note: Understanding the Effects of Cash Flow Category
Assignment
Difficulty Level: Intermediate Level AccountMate User
Version(s) Affected: AccountMate 8 for SQL and Express
AccountMate 7 for SQL, Express and LAN
Module(s) Affected: GL
Posting Date: 07/31/2013
DESCRIPTION
In addition to the Balance Sheet and Income Statement reports, the Statement of
Cash Flows is an important tool used by management to analyze the company's
operations.
The Statement of Cash Flows provides information about the cash receipts and cash
payments of a company during a given accounting period. It also provides information
about all the investing and financing activities of the company during that period. The
Statement of Cash Flows explains the changes in cash and cash equivalents during
the period.
To generate a Statement of Cash Flows in AccountMate, each GL Account ID must be
assigned a cash flow category in the Chart of Account Maintenance function.
Although these cash flow categories are pre-defined in AccountMate, you can change
their captions in the GL Module Setup function.
AccountMate recognizes the need for some accounts to be included in the calculation
in more than one Statement of Cash Flows section. To address this requirement,
AccountMate provides two category fields. For example, pieces of machinery
purchased with cash could have two cash flow categories such as Property, Plant and
Equipment (PPE) and Acquisition of PPE for Cash in the Cash Flow 1 and Cash Flow
2 Category fields, respectively.
This Technical Note provides guidelines for the proper assignment of cash flow
categories using the Direct and Indirect methods of Statement of Cash Flows
presentations. It also provides answers to common questions concerning assignment
of cash flow categories.
SOLUTION
Statement of Cash Flow Captions Calculation in AccountMate 8.2 for
SQL/Express and lower versions
The following table provides information illustrating the formula to calculate the
value for each column in the Statement of Cash Flows report in AccountMate 8.2
for SQL/Express and lower versions. The formula variables are the cash flow
categories assigned to a GL Account ID in the Chart of Accounts Maintenance
function. Note that AccountMate adds or subtracts a combination of cash flow
categories to generate the value. You can use this tabular presentation as your
guide when assigning cash flow categories to your GL Account ID.
Note: The Statement of Cash Flows captions are default values that can be
amended and customized in the GL Module Setup function ► Cash Flow
Captions tab.
A. Direct Method
Statement of Cash
Flow Captions
Formula
Effects
on Cash
Cash flows from
Operating Activities
Cash received from
customers
+
Sales + Provision for
Losses on Accounts
Receivable
-
Accounts Receivable
+ Trade Notes
Receivable +
Allowance for Losses
on Accounts
Receivable
+
Cost of Sales +
Accounts Payable +
Selling and
Administration
Expenses + Other
Liabilities
-
Inventory + Other
Assets
Interest paid
-
Interest Expense Interest Payable
Decrease
Interest received
+
Interest Income
Increase
-
Interest Receivable
-
Current Taxes +
Deferred Taxes +
Income Taxes
Payable + Deferred
Taxes Liability
Cash paid to suppliers
and employees
Income taxes paid
Increase
Decrease
Decrease
Cash flows from
Investing Activities:
Purchase of investment
securities
-
Purchase of
Investment
Securities
Decrease
Proceeds from sale of
investments
+
Gain (Loss) on Sales
of Investments –
Investments
Increase
Acquisition of PPE
-
Acquisition of PPE
for Cash + Cost of
PPE Acquired Under
Capital Lease
Decrease
Proceeds from sale of
PPE
+
Gain (Loss) on Sale
of PPE +
Depreciation
Expense
Increase
-
Property, Plant and
Equipment (PPE) +
Accumulated
Depreciation
Purchase of intangible
assets
-
Acquisition of
Intangibles
Decrease
Proceeds from sale of
intangible assets
+
Gain (loss) on Sale
of Intangibles +
Amortization
Expense
Increase
-
Intangible Assets
Net borrowings
+
Short-term debt
Increase
Principal payments for
capital lease obligations
-
Lease obligation
Decrease
Proceeds from issuance
of long-term debt
+
Cost of PPE Acquired
Under Capital Lease
+ Long-term Debt
Increase
-
Payment of
Retirement of Longterm Debt
Retirement of long-term
debt
-
Payment of Longterm Debt
Retirement + Gain
(Loss) on Long-term
Debt
Decrease
Proceeds from issuance
of stock
+
Capital Stock
Increase
Dividends paid
-
Retained Earnings
Decrease
Cash flows from
Financing Activities:
B. Indirect Method
Statement of Cash
Flow Captions
Formula
Effects on
Cash **
Cash flows from
Operating Activities:
Net income (loss)
Adjustments to reconcile
net income to net cash
provided by operating
activities
Depreciation
+
Depreciation
Expense
Increase
Amortization
+
Amortization
Expense
Increase
Provision for losses on
accounts receivable
+
Provision for Losses
on Accounts
Receivable
Increase
Gain (loss) on sale of
investment securities
-
Gain on Sale of
Investments
Decrease
+
Loss on Sale of
Investments
Increase
-
Gain on Sale of PPE
Decrease
+
Loss on Sale of PPE
Increase
-
Gain on Sale of
Intangibles
Decrease
+
Loss on Sale of
Intangibles
Increase
-
Gain on Retirement
of Long Term Debt
Decrease
+
Loss on Retirement
of Long Term Debt
Increase
-
Accounts Receivable
+ Provision for
Losses on Accounts
Receivable
Decrease
+
Allowance for Losses
on Accounts
Receivable
Increase
-
Current Period Trade
Notes Receivable
Decrease
Gain (loss) on sale of
property
Gain (loss) on sale of
intangible assets
Gain (loss) on retirement
of long term debt
(Increase) decrease in
accounts receivable
(Increase) decrease in
notes receivable
+
Prior Period Trade
Notes Receivable
Increase
(Increase) decrease in
interest receivable
-
+
(Increase) decrease in
inventory
(Increase) decrease in
other assets
Increase (decrease) in
accounts payable
Increase (decrease) in
income taxes payable
Increase (decrease) in
deferred taxes
Increase (decrease) in
other liabilities
Prior Period Interest
Receivable
Decrease
Increase
-
Current Period
Inventory
Decrease
+
Prior Period
Inventory
Increase
-
Current Period Other
Assets
Decrease
+
Prior Period Other
Assets
Increase
+
Current Period
Accounts Payable
Increase
Increase (decrease) in
interest payable
Current Period
Interest Receivable
Prior Period
Accounts Payable
Decrease
+
Current Period
Interest Payable
Increase
-
Prior Period Interest
Payable
Decrease
+
Current Period
Income Taxes
Payable
Increase
-
Prior Period Income
Taxes Payable
Decrease
+
Current Period
Deferred Taxes
Liability
Increase
-
Prior Period Deferred
Taxes Liability
Decrease
+
Current Period Other
Liabilities
Increase
-
Prior Period Other
Liabilities
Decrease
C. Notes
The formulas used to calculate the Cash flows from Investing and Financing
activities captions using the Indirect method are the same as those used in the
Direct method.
** See the Cash Flow Captions to determine which has a "+" or "-" effect on
Cash. For example, an increase in accounts payable will have a positive effect
on cash while a decrease will have a negative effect; thus, + / (-).
Statement of Cash Flow Captions Calculation in AccountMate 8.3 for
SQL/Express
Starting in AccountMate 8.3 for SQL/Express, Statement of Cash Flow captions
and calculations has been enhanced to comply with US GAAP standards. The table
below provides information illustrating the formula to calculate the value for each
column in the Statement of Cash Flows report in AccountMate 8.3 for
SQL/Express.
Notes: The Statement of Cash Flows captions are default values that can be
amended and customized in the GL Module Setup function ► Cash Flow
Captions tab.
A. Direct Method
Statement of Cash
Flow Captions
Formula
Effects on
Cash
Cash flows from
Operating Activities
Cash received from
customers
+
Cash paid to suppliers
and employees
+
-
Sales + Bad Debts Expense
+ Deferred Revenue + Gain
(Loss) on Foreign Exchange
Increase
Accounts Receivable +
Trade Notes Receivable +
Allowance for Bad Debts
Cost of Sales + Accounts
Payable + General, Selling
& Admin Expenses + Other
Non-Current Liabilities +
Other Current Liabilities +
Payroll Leave Accruals +
Deferred Liability
Decrease
Inventory + Other Current
Assets + Other NonCurrent Assets
Interest paid
-
Interest Expense - Interest
Payable
Decrease
Interest received
+
Interest Income
Increase
-
Interest Receivable
+
Share in Profits of
Associates + Dividend
Income
-
Dividend Receivable
-
Current Taxes + Deferred
Taxes + Income Taxes
Payable + Deferred Taxes
Dividends received
Income taxes paid
Increase
Decrease
Liability
Cash flows from
Investing Activities:
Purchase of investment
securities
-
Purchase of Investment
Securities
Decrease
Proceeds from sale of
investment securities
+
Gain (Loss) on Sales of
Investments
Increase
-
Investments + Purchase of
Investment Securities
Purchase of property,
plant and equipment
-
Acquisition of PPE for Cash
+ Cost of PPE Acquired
Under Capital Lease
Decrease
Proceeds from sale of
property, plant and
equipment
+
Gain (Loss) on Sale of PPE
+ Depreciation Expense
Increase
-
Property, Plant and
Equipment (PPE) +
Accumulated Depreciation
+ Acquisition of PPE for
Cash + Cost of PPE
Acquired Under Capital
Lease
Purchase of intangible
assets
-
Acquisition of Intangibles
Decrease
Proceeds from sale of
intangible assets
+
Gain (loss) on Sale of
Intangibles + Amortization
Expense
Increase
-
Intangible Assets +
Accumulated Amortization
Intangibles + Acquisition of
Intangibles
Cash flows from
Financing Activities:
Proceeds from issue of
share capital
+
Capital Stock & Paid In
Capital
Increase
Proceeds from issue of
capital lease
+
Cost of PPE Acquired Under
Capital Lease
Increase
Principal payments for
capital lease
-
Capitalized Lease Obligation
+ Cost of PPE Acquired
Under Capital Lease
Decrease
Proceeds from issue of
long-term debt
+
Long-term Debt
Increase
-
Payment on Retirement of
Long-term Debt
Retirement of long-term
debt
+
Long-term Debt
-
Payment on Retirement of
Increase
Long-term Debt
Net borrowings
+
Short-term debt
Increase
Dividends paid
-
Retained Earnings
Decrease
B. Indirect Method
Statement of Cash
Flow Captions
Formula
Effects on
Cash **
Cash flows from
Operating Activities:
Net income (loss)
Adjustments to reconcile
net income (loss) to net
cash from operations
Depreciation
+
Depreciation Expense
Increase
Amortization
+
Amortization Expense
Increase
Bad debts expense
+
Bad Debts Expense
Increase
(Gain) loss on foreign
exchange
-
Gain on Foreign Exchange
Decrease
+
(Gain) loss on sale of
investment securities
(Gain) loss on sale of
property, plant and
equipment
(Gain) loss on sale of
intangible assets
(Increase) decrease in
accounts receivable
Gain on Sale of
Investments
Decrease
+
Loss on Sale of Investments
Increase
-
Gain on Sale of PPE
Decrease
+
Loss on Sale of PPE
Increase
-
Gain on Sale of Intangibles
Decrease
Loss on Sale of Intangibles
Increase
-
Gain on Retirement of Long
Term Debt
Decrease
+
Loss on Retirement of Long
Term Debt
Increase
-
Accounts Receivable +
Allowance for Bad Debts
Decrease
+
(Increase) decrease in
notes receivable
Increase
-
+
(Gain) loss on retirement
of long-term debt
Loss on Foreign Exchange
Bad Debts Expense + Gain
(Loss) on Foreign Exchange
Increase
-
Current Period Trade Notes
Receivable
Decrease
+
Prior Period Trade Notes
Receivable
Increase
(Increase) decrease in
interest receivable
(Increase) decrease in
dividends receivable
(Increase) decrease in
inventory
-
Current Period Interest
Receivable
Decrease
+
Prior Period Interest
Receivable
Increase
-
Current Period Dividend
Receivable
Decrease
+
Prior Period Dividend
Receivable
Increase
-
Current Period Inventory
Decrease
+
(Increase) decrease in
income taxes receivable
-
+
(Increase) decrease in
current deferred tax
assets
(Increase) decrease in
other current assets
Increase (decrease) in
accounts payable
Increase (decrease) in
payroll leave accruals
Increase
Decrease
+
Prior Period Deferred Tax
Assets
Increase
-
Current Period Other Assets
Decrease
-
Prior Period Other Assets
Current Period Non-Current
Deferred Tax Assets
Prior Period Non-Current
Deferred Tax Assets
Increase
Decrease
Increase
-
Current Period Other NonCurrent Assets
Decrease
+
Prior Period Other NonCurrent Assets
Increase
+
Current Period Accounts
Payable
Increase
-
Prior Period Accounts
Payable
Decrease
+
Current Period Payroll
Leave Accruals
Increase
Increase (decrease) in
deferred revenue
Prior Period Income Taxes
Receivable
Decrease
Current Period Deferred Tax
Assets
+
(Increase) decrease in
other non-current assets
Current Period Income
Taxes Receivable
Increase
-
+
(Increase) decrease in
non-current deferred tax
assets
Prior Period Inventory
+
Prior Period Payroll Leave
Accruals
Current Period Deferred
Revenue
Decrease
Increase
Increase (decrease) in
interest payable
Increase (decrease) in
income taxes payable
-
Prior Period Deferred
Revenue
Decrease
+
Current Period Interest
Payable
Increase
-
Prior Period Interest
Payable
Decrease
+
Current Period Income
Taxes Payable
Increase
Increase (decrease) in
current deferred tax
liabilities
+
Increase (decrease) in
other current liabilities
Increase (decrease) in
deferred liability
Increase (decrease) in
long-term deferred tax
liabilities
Current Period Deferred
Taxes Liability
Prior Period Deferred Taxes
Liability
Decrease
Increase
Decrease
+
Current Period Other
Liabilities
Increase
-
Prior Period Other Liabilities
Decrease
+
Current Period Deferred
Liability
Increase
-
Prior Period Deferred
Liability
Decrease
+
Current Period Long-term
Deferred Tax Liabilities
Increase
Increase (decrease) in
other non-current
liabilities
Prior Period Income Taxes
Payable
+
-
Prior Period Long-term
Deferred Tax Liabilities
Current Period Other NonCurrent Liabilities
Prior Period Other NonCurrent Liabilities
Decrease
Increase
Decrease
Cash flows from
Investing Activities:
Purchase of investment
securities
-
Purchase of Investment
Securities
Decrease
Proceeds from sale of
investment securities
+
Gain (Loss) on Sales of
Investments
Increase
-
Investments + Purchase of
Investment Securities
Purchase of property,
plant and equipment
-
Acquisition of PPE for Cash
+ Cost of PPE Acquired
Under Capital Lease
Decrease
Proceeds from sale of
property, plant and
+
Gain (Loss) on Sale of PPE
+ Depreciation Expense
Increase
equipment
-
Property, Plant and
Equipment (PPE) +
Accumulated Depreciation
+ Acquisition of PPE for
Cash + Cost of PPE
Acquired Under Capital
Lease
Purchase of intangible
assets
-
Acquisition of Intangibles
Decrease
Proceeds from sale of
intangible assets
+
Gain (loss) on Sale of
Intangibles + Amortization
Expense
Increase
-
Intangible Assets +
Accumulated Amortization
Intangibles + Acquisition of
Intangibles
Cash flows from
Financing Activities:
Proceeds from issue of
share capital
+
Capital Stock & Paid In
Capital
Increase
Proceeds from issue of
capital lease
+
Cost of PPE Acquired Under
Capital Lease
Increase
Principal payments for
capital lease
-
Capitalized Lease Obligation
+ Cost of PPE Acquired
Under Capital Lease
Decrease
Proceeds from issue of
long-term debt
+
Long-term Debt
Increase
-
Payment on Retirement of
Long-term Debt
Retirement of long-term
debt
-
Payment on Retirement of
Long-term Debt + Gain
(Loss) on Retirement of
Long-term Debt
Decrease
Net borrowings
+
Short Term Debt
Increase
Dividends paid
-
Retained Earnings
Decrease
Note: ** See the Cash Flow Captions to determine which has a "+" or "-"
effect on Cash. For example, an increase in accounts payable will have a
positive effect on cash while a decrease will have a negative effect; thus, + /
(-).
Tips for Determining Proper Cash Flow Category Assignments
Q. What is the importance of cash flow categories?
A. Cash flow categories can be assigned to each GL Account ID record. These cash
flow categories are necessary to generate a Statement of Cash Flows in
AccountMate. Non-assignment of a cash flow category in a GL Account ID record
results in an inaccurate report.
For example, if you failed to assign your Depreciation GL Account ID with a cash
flow category, this transaction will not appear in the Statement of Cash Flows
Report. Depreciation has a positive effect on cash; omitting this account will
understate the Cash and Cash Equivalents value in the report.
Q. What basis should be used to decide what cash flow category should be
assigned to a GL Account ID?
A. The cash flow categories should correspond to the transactions nature posted
to the GL Account ID. Management, investors and creditors relying on misleading
reports may come up with wrong business decisions.
For instance, assigning "Payment of Retirement of Long-Term Debt" cash flow
category to a Depreciation Expense GL Account ID, will result to incorrect values
under the Cash Flows from Operating and Financing Activities captions. The
Depreciation GL Account ID should have a "Depreciation" Cash Flow Category.
Q. Can I assign the same cash flow category in Cash Flow 1 and 2 fields for a
particular GL Account ID?
A. No GL Account ID should have duplicate cash flow categories; otherwise, the
cash flow amount computation will either be overstated for the duplicate cash flow
category assignment or understated for the correct cash flow category that should
be assigned.
Q. Is it possible for a GL Account ID to have two different cash flow categories?
A. Yes, you can assign two different cash flow categories to a GL Account ID when
you want to show under two sections the transactions effects posted in that GL
Account ID. For example, if the operating equipment is paid for in cash, the
Property, Plant and Equipment GL Account ID can have a “Property, Plant and
Equipment” Cash Flow Category 1 and “Acquisition of PPE for Cash” Cash Flow
Category 2.
Q. For those GL Account IDs that have two different cash flow categories, will it
matter whether I assign a category as Cash Flow 1 or Cash Flow 2?
A. No, it doesn’t. As long as the cash flow category captions you assign to the GL
Account ID are correct, the order in which you assign them does not matter.
Though assigning cash flow categories in AccountMate is quick and simple, an indepth knowledge of basic accounting will complement your understanding of how
AccountMate handles cash flow transactions.
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Software Corporation disclaims all warranties, either express or implied. In no event
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including direct, indirect, incidental, consequential, loss of business profits, or special
damages, even if AccountMate Software Corporation has been advised of the
possibility of such damages.
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