Advance Accounting: Comparative Analysis of F.A.S.B. to G.A.S.B. Financial Accounting Requirements: Bayo Cary

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ACC7020-8
	Dr. Wendy Achilles
Government and Non-For-Profit Accounting	Assignment 3

I enjoyed this assignment. I read a great deal of background information, prior to completing the research paper. I will email my direct quote notes, for the assignment, to your email. I may, for fun, compile a slide show, based on the research paper and notes. The assignment was both: challenging and enjoyable. Thank you.

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<Faculty comments here>

<Faculty Name>                                               <Grade Earned>                                               <Date Graded>

April 10, 2015

Miss. Bayo Elizabeth Cary, A.A., B.A., M.L.I.S.

Email: bayo.cary@yahoo.com  

Home/Cell: 001-352-262-9733 Toll Free: 1-888-571-0119

Fax: 1-352-433-1875

Advanced Accounting Post Master’s Degree Certificate: Northcentral University

Assignment 3: Non For Profit: F.A.S.B. and the G.A.S.B.: A Comparative Analysis:

Analyze the following statement and write a report supporting your opinions. How does the statement of cash flows under G.A.S.B. standards differ from the statement of cash flows under F.A.S.B. standards?

       

         The Financial Accounting Standards (F.A.S.B.), and the Governmental Accounting Standards Board (G.A.S.B.), were developed, and are intended for different financial accounting purposes. Although the two accounting methods, require similar procedures at times, they do differ to some marked extent, when it comes to the: laws, rules, and regulations that guide standards which are applicable, to the cash flow report and financial accounting statement. In this paper, I will first present background information, on the: F.A.S.B., and the G.A.S.B., then I will explain the process and importance of the: “cash flows,” portion of the F.A.S.B. and G.A.S.B., and finally, I will conclude, with information, about how the requirements, for cash flows information, for the F.A.S.B. differs from, the recording and presentation requirements, pertaining to the provision of cash flows information, for the G.A.S.B..

The F.A.S.B.: General Background Information:

        

       According to Wikipedia’s article (n.d.), on: The Financial Accounting Standards Board (F.A.S.B.)-works with the Security Exchange Commission (S.E.C.), in regulating the accounting practices, of: nongovernmental businesses in the United States, by establishing financial reporting: laws, rules, and regulations, which must be adhered to, called: Generally Accepted Accounting Principles (G.A.A.P.). (para. 1) The financial information, required by the F.A.S.B., is intended to assist investors, with enough accounting data, about various nongovernmental businesses-to provide useful guidance, regarding which nongovernmental businesses to support (para. 2). The F.A.S.B. receives oversight from the: Financial Accounting Foundation's Board of Trustees (para. 2).

        

        According to Wikipedia F.A.S.B. (n.d.), the F.A.S.B. is set up with a seven member board of directors (para. 6). Board members, of the F.A.S.B., are selected, for a 5 year term, by the F.A.F. (para. 6). The five year term, that the F.A.S.B. board members are selected to, can be extended, to one additional, five year term (para. 6). July 9, 2009, the F.A.S.B. announced a codification of accounting standards, which pertain to the F.A.S.B. (para. 9). “The Codification organizes the many pronouncements that constitute U.S. G.A.A.P. into a consistent, searchable format (para. 9).”

         

         According to Wikipedia F.A.S.B. (n.d.), the F.A.S.B., provides guidance for nongovernmental businesses, on how to report, their accounting, and financial transactions (para. 10). The guidance, for accounting format and structure, which is provided by the F.A.S.B., is referred to as: “conceptual framework (para. 10).” The information, which is provided in the F.A.S.B.-that is useful, is divided into three fundamental categories:

• Predictive Value – information that should help users form expectations about the value;
• Confirmatory Value – information that provides feedback to confirm or correct prior predictions and expectations;
• Materiality – refers to the nature and magnitude of an omission or misstatement of accounting information that would influence the judgment of a reasonable person relying on that information. (para.11)

According to Wikipedia F.A.S.B. (n.d.), when a F.A.S.B. is filed, with the required accounting and financial information, of a nongovernmental business, the information provided in the F.A.S.B., is supposed to be: honest, and accurate (para. 12). The honest and accurate reporting, of accounting and financial transactions, in a F.A.S.B., should provide the general public with information regarding (para. 12):

• Complete representation – provides a user with full disclosure of all information necessary to understand the information being reported, with all necessary facts, descriptions, and explanations;
• Neutral representation – not biased, slanted, emphasized or otherwise manipulated to achieve a pre-determined result or to influence users’ behavior in a particular direction;
• Free from error – the information is measured and described as accurately as possible, using a process that reflects the best available inputs. (para. 12)

According to Wikipedia F.A.S.B. (n.d.), in Norwalk, Connecticut, on September 18 2002, F.A.S.B. began a move towards, using the U.S. F.A.S.B. standards, for international accounting standards (para.13). F.A.S.B. joined with I.S.A.B., in compiling a: “Memorandum of Understanding,” which is also referred to, as the: Norwalk Agreement (para. 13). The Norwalk Agreement provides guidelines, and procedures, for the combining of the I.F.R.S. and U.S. G.A.A.P.: laws, rules, and regulations, into one set of accounting guidelines, which is intended application to U.S. and to international accounting standards (para. 13).

The G.A.S.B.: General Background Information:

      

       According to the Governmental Accounting Standards Board (G.A.S.B.), the G.A.S.B. are accounting guidelines, which have been established in the United States, for accounting: laws, rules and regulations, which are designated for use by, both: “State and local government” agencies (para 1). The G.A.S.B. is a private organization, and, is therefore classified, as a: nongovernmental business (para. 1). Like the F.A.S.B., the F.A.F., choses the members of the G.A.S.B., and, like the F.A.S.B., the G.A.S.B., is supervised by the F.A.F. oversight board (para. 2).

         

        The objective and goals of the G.A.S.B., are: to provide useful financial and accounting guidelines, to State and local, U.S. government agencies (para. 3). The G.A.S.B. assists the U.S. government, with accurately recording and reporting, financial accounting information (para. 3). The G.A.S.B. provides guidelines for report and filing, of financial accounting information, to provide both: qualitative and qualitative financial information, to groups within the U.S. government, and the general public, who require access to financial records, for: inspection, evaluation, and consideration (para. 3). “The G.A.S.B. has issued Statements, Interpretations, Technical Bulletins, and Concept Statements defining G.A.A.P. for state and local governments since 1984 (para. 4).”

Cash Flows: General Background Information:

       

       According to Wikipedia (n.d.), the cash flow statement, also the statement of cash flow, is designed to provide information about how data on the balance sheet, of financial and accounting records, originated, and how the money-the cash, was processed, and moved, from one account on the balance sheet, to the next (para. 1). The cash flow statement provides an in-depth visual quantitative presentation, of the: “operating, investing and financing activities,” of a business, and provides that information, to the general public, and government agencies, for: review, evaluation, and interpretation (para. 1).

      

           According to Wikipedia (n.d.) the cash flow statement, provides current operating expenses and revenues, as well as current cash flows, in and out of the business (para. 1). The cash flows statement, provides information, on how well a business manages their finances, and whether the business is earning enough revenues, to cover their expenses (para. 1). It can be determined by the cash flow statement, of a business, whether the business has enough revenues, compared to their expenses, to prosper, and survive, in the U.S. market economy (para. 1). The following are enumerated statements, to add additional clarity for the intentions, of the cash flow statement:

1. provide information on a firm's liquidity and solvency and its ability to change cash flows in future circumstances;
2. provide additional information for evaluating changes in assets, liabilities and equity;
3. improve the comparability of different firms' operating performance by eliminating the effects of different accounting methods;
4. indicate the amount, timing and probability of future cash flows. (para. 3)

According to Wikipedia (n.d.), “International Accounting Standard 7 (IAS 7), is the International Accounting Standard that deals with cash flow statements (para. 1).”

The cash flows statement is divided into three separate sections:

1. cash flow resulting from operating activities;
2. cash flow resulting from investing activities;
3. cash flow resulting from financing activities. (para. 8)

1)      Cash Flow: Operating Expenses: General Information:

        

      Operating expenses include all costs associated with producing a product or service, with delivery of the product or service, and with collecting all fees charged, for the product or service, i.e.-under IAS 7, operating cash flows include:

• Receipts from the sale of goods or services
• Receipts for the sale of loans, debt or equity instruments in a trading portfolio
• Interest received on loans
• Payments to suppliers for goods and services
• Payments to employees or on behalf of employees
• Interest payments (alternatively, this can be reported under financing activities in IAS 7, and US GAAP)
• buying Merchandise (para. 9)

2)      Cash Flow: Investing Activities: General Information

     

         According to Wikipedia (n.d.), investing activities, are any activities that a business partakes in, in order to raise revenue, which can be utilized to cover expenses (para. 11). Examples of cash flow investing activities, that a business may partake in, are as follows (para. 11):

• Purchase or Sale of an asset (assets can be land, building, equipment, marketable securities, etc.)
• Loans made to suppliers or received from customers
• Payments related to mergers and acquisition. (para. 11)

3)      Cash Flow: Financing Activities: General Information:

         

       According the Wikipedia (n.d.), financing activities include: cash flows from: investors, bankers, shareholders, dividend payments, long-term liabilities, and equity (para. 12). Examples of a business’s possible cash flow financing activities, are as follows-“Under IAS 7” (para. 12):

• Payments of dividends
• Payments for repurchase of company shares
• For non-profit organizations, receipts of donor-restricted cash that is limited to long-term purposes. (para. 12)

Items under the financing activities section include:

• Dividends paid
• Sale or repurchase of the company's stock
• Net borrowings
• Payment of dividend tax
• Repayment of debt principal, including capital leases (para. 13)

Cash Flow: Disclosure of Non Cash Activities:

       

       According to Wikipedia (n.d.), non-cash information disclosure, is required, as part of cash flow accounting (para. 14). Non cash, cash flow information, according to guidelines, provided by: the IAS 7, should be presented in the foot notes to the financial statements (para. 14).  G.A.A.P. allows for the non-cash flow information, to be presented in the foot notes of the financial statements-like the requirements under the IAS 7, or, the G.A.A.P.: laws, rules, and regulations, also allow for non-cash flow information, to be included, as a part of the cash flow statement (para. 14). Examples of non-cash flow business activities, are as follows (para. 14):

• Leasing to purchase an asset
• Converting debt to equity
• Exchanging non-cash assets or liabilities for other non-cash assets or liabilities
• Issuing shares in exchange for assets. (para. 14)

A Comparative Analysis of the Cash Flows of F.A.S.B. to a G.A.S.B.:

         

          According to Wiley (2014), the F.A.S.B. and the G.A.S.B., were established for different purposes, and therefore, the: laws, rules, and regulations which guide how the information on the financial statement is recorded, vary (para. 1). The F.A.S.B., was established to report the financial accounting, for the: “private sector”-for nongovernmental businesses (para. 1). The G.A.S.B., was established, for State and local governments, to report their financial accounting activities, to the general public, and to government agencies, to prove that government funds have been recorded accurately, and that they have been spent responsibly (para. 1).

Balance Sheet: Requirements for the F.A.S.B. as compared to the G.A.S.B.:

          

          According to Wiley (2014), the F.A.S.B. allows for a: “classified balance sheet,” like the one required, by the G.A.S.B., however, the F.A.S.B., does not require a: “statement of financial position.” The G.A.S.B. requires that government, both State and local, file a: “classified balance sheet,” which contains: “the statement of net assets, present current assets separately from non-current assets and present current liabilities separately from non-current liabilities (para. 2).” The G.A.S.B., also requires, a separate statement, represented as a balance sheet, of both: “non-depreciable” and “depreciable” capital assets (para. 2).

Net Assets: Requirements for the F.A.S.B as compared to the G.A.S.B.:

          

          According to Wiley (2014), the F.A.S.B., and the G.A.S.B. both separate net assets into three discreet categories, however, the three discreet categories utilized by the F.A.S.B., and G.A.S.B., are not the same (para. 3). The F.A.S.B. three discreet categories, of net assets are, as follows: “1) permanently restricted, 2) temporarily restricted or 3) unrestricted (para. 3).” The G.A.S.B, classifies net assets, into the following four discreet categories: “1) unrestricted, 2) restricted or 3) invested in capital assets, 4) net of related debt (para. 3).” The G.A.S.B., also requires a division of any: “true endowments-restricted net assets,” into: “restricted nonexpendable and restricted expendable components (para. 3).”

Cash Flow: Requirement for the F.A.S.B. as compared to the G.A.S.B.:

           

        According to Wiley (2014), the F.A.S.B., has only three discreet categories, as compared to the G.A.S.B., which has four discreet categories-for cash flow classifications (para. 4). The three discreet categories, required in the area of cash flow information, for the F.A.S.B., are: “1) operating, 2) investing and 3) financing (para. 4).” The F.A.S.B. allows for the indirect or the direct method of accounting, for the recording and reporting of financial information (para. 4). The four discreet categories, in the area of cash flow, that are required for the G.A.S.B., are: “1) operating, 2) investing, 3) cash flows from noncapital financing activities and 4) cash flows from capital and related financing activities (para. 4).” The G.A.S.B., requires the direct method of accounting, for the recording and reporting, of financial information (para. 4).

Works Cited

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Accounting4Management: Accounting Tips. Retrieved from http://www.accounting4management.com/preparation_of_statement_of_cash_flows.htm

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improve their accounting departments' policies. Journal of Academy of Business and Economics, 11(4). Retrieved from
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Nonprofit Organizations That Report Zero Fundraising Expenses. Journal of Finance and Accountancy, no volume number (no issue number). Retrieved from http://www.aabri.com/manuscripts/111006.pdf

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            & Nonprofit Entities. Boston: McGraw-Hill Irwin.

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FSAB. Retrieved from http://www.ehow.com/info_8739181_difference-practices-between-gasb-fasb.html

Direct Quote Notes:

April 8, 2015

Assignment 3: Non For Profit: FASB GASB

Analyze the following statement and write a report supporting your opinions. How does the statement of cash flows under GASB standards differ from the statement of cash flows under FASB standards?

Wikipedia: F.A.S.B.:

The Financial Accounting Standards Board (FASB) is a private, non-profit organization whose primary purpose is to establish and improve generally accepted accounting principles (GAAP) within the United States in the public's interest. The Securities and Exchange Commission (SEC) designated the FASB as the organization responsible for setting accounting standards for public companies in the U.S. The FASB replaced the American Institute of Certified Public Accountants' (AICPA) Accounting Principles Board (APB) on July 1, 1973. (para. 1)

Mission

The FASB's mission is "to establish and improve standards of financial accounting and reporting that foster financial reporting by nongovernmental entities that provides decision-useful information to investors and other users of financial reports."^[1]

The FASB accomplishes its mission "through a comprehensive and independent process that encourages broad participation, objectively considers all stakeholder views, and is subject to oversight by the Financial Accounting Foundation's Board of Trustees. (para. 2)

Description:

The FASB is subject to oversight by the Financial Accounting Foundation (FAF), which selects the members of the FASB and the Governmental Accounting Standards Board and funds both organizations. (para. 5)

The FASB's structure is very different from its predecessors in many ways. The board consists of seven full-time members.^[3] These members are required to sever all ties to previous firms and institutions that they may have served prior to joining the FASB. This is to ensure the impartiality and independence of the FASB. All members are selected by the FAF. They are appointed for a five-year term and are eligible for one additional five-year term. (para. 6)

In 1984, the FASB formed the Emerging Issues Task Force (EITF).^[1] This group was formed in order to provide timely responses to financial issues as they emerged. This group includes 15 people from both the private and public sectors coupled with representatives from the FASB and an SEC observer.^[3] As issues emerge, the task force considers them and tries to reach a consensus on what course of action to take. If that consensus can be reached, they issue an EITF Issue and FASB doesn't get involved. An EITF Issue is considered just as valid as a FASB pronouncement and is included in the GAAP. (para. 8)

Codification

On July 1, 2009, the FASB announced the launch of its Accounting Standards Codification, declaring it to be "the single source of authoritative nongovernmental U.S. generally accepted accounting principles." The Codification organizes the many pronouncements that constitute U.S. GAAP into a consistent, searchable format.^[4] The Codification is not to be confused with the FASB's Conceptual Framework, a project begun in 1973 to develop a sound theoretical basis for the development of accounting standards in the United States. (para. 9)

Conceptual Framework

The Conceptual Framework include: measurement attributes used to measure and report economic transactions, events, and arrangements in financial statements; and accounting principles and assumptions that guide recognition, derecognition, and disclosure, as well as the classification and presentation of information in financial statements. (para. 10)

Fundamental qualitative characteristics, relevance and faithful representation allow for decision usefulness. Information that is capable of making a difference in decisions made by financial statement users is relevant. The three components of relevance are:

• Predictive Value – information that should help users form expectations about the value
• Confirmatory Value – information that provides feedback to confirm or correct prior predictions and expectations
• Materiality – refers to the nature and magnitude of an omission or misstatement of accounting information that would influence the judgment of a reasonable person relying on that information (para.11)

Faithful representation is when the words and numbers accurately predict the economic substance of what they purport to represent. The three components of faithful representation are:

• Complete representation – provides a user with full disclosure of all information necessary to understand the information being reported, with all necessary facts, descriptions, and explanations
• Neutral representation – not biased, slanted, emphasized or otherwise manipulated to achieve a pre-determined result or to influence users’ behavior in a particular direction
• Free from error – the information is measured and described as accurately as possible, using a process that reflects the best available inputs (para. 12)

Norwalk Agreement

FASB is pursuing a convergence project with the International Accounting Standards Board (IASB) and International Financial Reporting Standards (IFRS). On Sept. 18, 2002, in Norwalk, Connecticut, FASB and IASB met and issued a Memorandum of Understanding.^[6] This document outlined plans to converge IFRS and US GAAP into one set of high quality and compatible standards. (para. 13)

Wikipedia: Generally Accepted Accounting Principles

Generally Accepted Accounting Principles, also called GAAP or US GAAP, are the generally accepted accounting principles adopted by the U.S. Securities and Exchange Commission (SEC). While the SEC has stated that it intends to move from US GAAP to the International Financial Reporting Standards (IFRS), the latter differ considerably from GAAP and progress has been slow and uncertain. (para. 1)

Basic Objectives

Financial reporting should provide information that is:

• Useful to present to potential investors and creditors and other users in making rational investment, credit, and other financial decisions
• Helpful to present to potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts about economic resources, the claims to those resources, and the changes in them
• Helpful for making financial decisions
• Helpful in making long-term decisions
• Helpful in improving the performance of the business
• Useful in maintaining records. (para. 6)

Wikipedia: G.A.S.B.

The Governmental Accounting Standards Board (GASB) is the source of generally accepted accounting principles (GAAP) used by State and Local governments in the United States. As with most of the entities involved in creating GAAP in the United States, it is a private, non-governmental organization. (para. 1)

The GASB is subject to oversight by the Financial Accounting Foundation (FAF), which selects the members of the GASB and the Financial Accounting Standards Board, and funds both organizations. (para. 2)

The mission of the Governmental Accounting Standards Board is to establish and improve standards of state and local governmental accounting and financial reporting that will result in useful information for users of financial reports and guide and educate the public, including issuers, auditors, and users of those financial reports. (para. 3)

The GASB has issued Statements, Interpretations, Technical Bulletins, and Concept Statements defining GAAP for state and local governments since 1984. GAAP for the Federal government is defined by the Federal Accounting Standards Advisory Board. (para. 4)

Wikipedia: Cash Flow Statement

In financial accounting, a cash flow statement, also known as statement of cash flows,^[1] is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing and financing activities. Essentially, the cash flow statement is concerned with the flow of cash in and out of the business. The statement captures both the current operating results and the accompanying changes in the balance sheet.^[1] As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills. International Accounting Standard 7 (IAS 7), is the International Accounting Standard that deals with cash flow statements. (para. 1)

The balance sheet is a snapshot of a firm's financial resources and obligations at a single point in time, and the income statement summarizes a firm's financial transactions over an interval of time. These two financial statements reflect the accrual basis accounting used by firms to match revenues with the expenses associated with generating those revenues. The cash flow statement includes only inflows and outflows of cash and cash equivalents; it excludes transactions that do not directly affect cash receipts and payments. These non-cash transactions include depreciation or write-offs on bad debts or credit losses to name a few.^[3] The cash flow statement is a cash basis report on three types of financial activities: operating activities, investing activities, and financing activities. Non-cash activities are usually reported in footnotes.

The cash flow statement is intended to^[4]

1. provide information on a firm's liquidity and solvency and its ability to change cash flows in future circumstances
2. provide additional information for evaluating changes in assets, liabilities and equity
3. improve the comparability of different firms' operating performance by eliminating the effects of different accounting methods
4. indicate the amount, timing and probability of future cash flows. (para. 3)

Cash Flow Activities

The cash flow statement is partitioned into three segments, namely:

1. cash flow resulting from operating activities;
2. cash flow resulting from investing activities;
3. cash flow resulting from financing activities. (para. 8)

Operating Activities

Operating activities include the production, sales and delivery of the company's product as well as collecting payment from its customers. This could include purchasing raw materials, building inventory, advertising, and shipping the product.

Under IAS 7, operating cash flows include:^[11]

• Receipts from the sale of goods or services
• Receipts for the sale of loans, debt or equity instruments in a trading portfolio
• Interest received on loans
• Payments to suppliers for goods and services
• Payments to employees or on behalf of employees
• Interest payments (alternatively, this can be reported under financing activities in IAS 7, and US GAAP)
• buying Merchandise (para. 9)

Items which are added back to [or subtracted from, as appropriate] the net income figure (which is found on the Income Statement) to arrive at cash flows from operations generally include:

• Depreciation (loss of tangible asset value over time)
• Deferred tax
• Amortization (loss of intangible asset value over time)
• Any gains or losses associated with the sale of a non-current asset, because associated cash flows do not belong in the operating section (unrealized gains/losses are also added back from the income statement).
• Dividends received
• Revenue received from certain investing activities. (para. 10)

Investing Activities

Examples of Investing activities are

• Purchase or Sale of an asset (assets can be land, building, equipment, marketable securities, etc.)
• Loans made to suppliers or received from customers
• Payments related to mergers and acquisition. (para. 11)

Financing Activities

Financing activities include the inflow of cash from investors such as banks and shareholders, as well as the outflow of cash to shareholders as dividends as the company generates income. Other activities which impact the long-term liabilities and equity of the company are also listed in the financing activities section of the cash flow statement.

Under IAS 7,

• Payments of dividends
• Payments for repurchase of company shares
• For non-profit organizations, receipts of donor-restricted cash that is limited to long-term purposes. (para. 12)

Items under the financing activities section include:

• Dividends paid
• Sale or repurchase of the company's stock
• Net borrowings
• Payment of dividend tax
• Repayment of debt principal, including capital leases (para. 13)

Disclosure of Non Cash Activities

Under IAS 7, non-cash investing and financing activities are disclosed in footnotes to the financial statements. Under US General Accepted Accounting Principles (GAAP), non-cash activities may be disclosed in a footnote or within the cash flow statement itself. Non-cash financing activities may include^[11]

• Leasing to purchase an asset
• Converting debt to equity
• Exchanging non-cash assets or liabilities for other non-cash assets or liabilities
• Issuing shares in exchange for assets. (para. 14)

Direct Method

The direct method for creating a cash flow statement reports major classes of gross cash receipts and payments. Under IAS 7, dividends received may be reported under operating activities or under investing activities. If taxes paid are directly linked to operating activities, they are reported under operating activities; if the taxes are directly linked to investing activities or financing activities, they are reported under investing or financing activities. Generally Accepted Accounting Principles (GAAP) vary from International Financial Reporting Standards in that under GAAP rules, dividends received from a company's investing activities is reported as an "operating activity," not an "investing activity. (para. 15)”^[13]

Indirect Method

The indirect method uses net-income as a starting point, makes adjustments for all transactions for non-cash items, then adjusts from all cash-based transactions. An increase in an asset account is subtracted from net income, and an increase in a liability account is added back to net income. This method converts accrual-basis net income (or loss) into cash flow by using a series of additions and deductions (para. 16).^[15]

eHow The Difference Between the GASB and the FSAB

Two boards establish generally accepted accounting principles in the United States. The Government Accounting Standards Board sets standards for state and local government entities, and the Financial Accounting Standards Board sets rules for private sector accounting. Because the FASB's focus is to help investors and creditors make decisions, while the focus of the GASB is to make sure government entities are accountable for the money they receive from the public or taxpayers, differences in accounting practices exist between GASB and FASB. (para.1)

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Balance Sheet

GASB requires that the balance sheet, usually called the statement of net assets, present current assets separately from non-current assets and present current liabilities separately from non-current liabilities. FASB permits this type of classified balance sheet, usually called the statement of financial position, but does not require it. The GASB, but not the FASB, requires a separate display of nondepreciable capital assets and depreciable capital assets. (para.2)

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Net Assets

Although both the GASB and FASB recognize three classes of net assets, the classes are different. FASB classifies net assets as permanently restricted, temporarily restricted or unrestricted. GASB classifies net assets as unrestricted, restricted or invested in capital assets, net of related debt. The classification "invested in capital assets, net of related debt" refers to the original cost of the capital assets minus the accumulated depreciation and capital-related debt. GASB also requires that an entity with any true endowments divide restricted net assets into restricted nonexpendable and restricted expendable components. (para. 3)

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Cash Flows

FASB has three categories of cash flows: operating, investing and financing. The GASB has four categories: operating, investing, cash flows from noncapital financing activities and cash flows from capital and related financing activities. GASB requires that entities use the direct method of determining cash flows from operating activities, while the FASB allows either the direct or indirect method. (para. 4)

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Considerations

The rules of the two boards give rise to many detailed differences in accounting. This difference in accounting practices between GASB and FASB sometimes presents a problem when it comes to comparing entities that can be either publicly or privately owned, such as a utility, hospital, college or university. Because the publicly owned entities follow GASB and the privately owned entities follow FASB, it's difficult to compare the financial statements of, for example, a public university and a private university. (para. 5)

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The Difference Between FASB, GASB & Statement of Cash Flows

Although they operate in a similar way, there are some accounting and reporting differences between the FASB and GASB when setting standards. The purpose of the FASB is to help investors and creditors make informed decisions related to a company's overall financial health. Accountability is the chief mission of the GASB, which sets the accounting and reporting standards for governmental and public institutions. (para. 1)

FASB

The Financial Accounting Standards Board strives to improve corporate accounting practices by establishing standards and guidelines that nongovernmental organizations and companies are required to follow when developing their accounting reports. The FASB is made up of seven independent board members. These accounting professionals are responsible for setting standards of financial accounting and reporting practices. Formal statements issued by the FASB are the primary sources of Generally Accepted Accounting Principles -- the accounting rules that accountants and other financial experts use for financial reporting and preparing financial statements. (para. 2)

GASB

Similar in mission to the FASB, the Governmental Accounting Standards Board is responsible for setting financial accounting and reporting standards for local and state governmental agencies. Because governments operate differently from for-profit businesses, accounting and financial standards reporting also differ. State and local governments fund the GASB. The GASB itself is not a government agency; therefore, it has no enforcement authority, as the standards it sets are not federal laws. Compliance and standards are basically enforced through the audit process. Standards set by the GASB aid government officials in showing accountability as it applies to the use of public resources. (para. 3)

Nonprofit Reporting

Despite few laws regulating how nonprofit organizations must manage their financial responsibilities, nonprofits must comply with IRS reporting requirements and accounting standards that their funding agencies require. The annual report the IRS requires most tax-exempt organizations to submit includes financial reporting in the form of an income statement, expense report, balance sheet and other key financial reports. Familiarity with Generally Accepted Accounting Principles offers basic structure and guidelines for financial reporting. (para. 4)

Statement of Cash Flows

The statement of cash flows is a basic financial statement used to report the cash a company or organization generates from operating activities, investments and financing activities. The amount of income taxes and interest a company pays is also included in a cash flow statement. Lenders and investors examine a company's cash flow statement to compare cash from operating activities to net income. Investors may raise questions if cash from operating activities continues to be less than a company's net income. On the other hand, companies that generate more cash than they are using are able to reduce debt and increase dividends. (para. 5)

The Difference Between the FASB & GASB Effects on the Statement of Cash Flow

The Financial Accounting Standards Board and Governmental Accounting Standards Board share more similarities than differences. Both are composed of a seven-member board of directors, both are nongovernmental agencies and both share a similar mission centering on accounting and financial reporting standards. Despite these similarities, however, their focus and effects on the statement of cash flows is significantly different. To start with, the FASB focuses on public and some privately-held businesses, while the focus of the GASB is on state and local governmental agencies. (para. 1)

Accounting Principles and Standards

The FASB has been, since 1973, the organization responsible for creating and publishing public sector standards of financial accounting and reporting guidelines called generally accepted accounting principles. The creation and issuance of GAAP standards is, in fact, the main mission of the FASB. In 1984, the GASB was created and immediately began establishing similar accounting principles and standards for private sector nonprofit government agencies. Although many FASB and GASB standards are similar or identical, some are significantly different. For example, while FASB standards define a single reporting method, GASB standards identify three methods. One applies to business-type activities, one to governmental agencies and a third to governmental agencies with business-type activities. (para. 2)

Direct vs. Indirect Reporting

Variations in reporting standards significantly affect how information is presented in a statement of cash flows. One major difference is that while the FASB allows either the direct or indirect method of converting net income into net cash flow, GASB standards mandate the indirect method. The direct method, also called the income statement method, displays cash receipts and disbursements originating from operational activities such as cash collected from sales revenues and cash payments for expenses and income taxes. Net cash flow is then calculated by deducting cash disbursements from receipts. In contrast, the GASB indirect method, also known as the reconciliation method, lists and then adjusts net income to account for items -- mainly increases to accounts receivable and payable -- that affected net income but didn't affect cash. The overall effect is most often a significant lower amount of net cash reported on the income statement. (para. 3)

Cash Flow Categories

Another difference that affects the statement involves the number of allowable cash-flow reporting categories. The FASB requires the cash flow statement to report cash flows from operational, investment and financing activities. The GASB requires the cash flow statement to report cash flows from operational, investment, capital and related financing and noncapital financing activities. The effect is increased transparency and a more accurate representation of financing activities from private sector agencies. (para. 4)

Comparison Considerations

Variations in statement of cash flow reporting standards of the FASB and GASB result in significantly different representations of net cash flows on the cash flow statement. This difference in accounting practices between the FASB and GASB can present issues when attempting to compare the financial statements of entities that can be either publicly or privately held. This most includes entities such as a utility company, hospital, college or university. Because private sector businesses adhere to FASB standards and public sector entities adhere to GASB standards, it can be difficult to impossible for someone other than a professional accountant to compare the financial statements of, for example, a public and a private university or hospital. (para. 5)

Definition and Explanation of a Cash Flow Statement

Definition and explanation of cash flow statement.

The purpose of the statement of cash flows is to highlight the major activities that directly and indirectly impact cash flows and hence affect the overall cash balance. Managers focus on cash for a very good reason―without sufficient cash balance at the right time, a company may miss golden opportunities or may even fall into bankruptcy. (para. 1)

The cash flow statement answers questions that cannot be answered by the income statement and a balance sheet. For example a statement of cash flows can be used to answer questions like where did the company get the cash to pay dividend of nearly $140 million in a year in which, according to income statement, it lost more than $1 billion? To answer such questions, familiarity with the statement of cash flows is required. (para. 2)

The cash flow statement is a valuable analytical tool for managers as well as for investors and creditors, although managers tend to be more concerned with forecasted statements of cash flows that are prepared as a part of the budgeting process. (para. 3)

cash flow statement can be used to answer crucial questions such as the following: 

1. Is the company generating sufficient positive cash flows from its ongoing operations to remain viable?
2. Will the company be able to repay its debts?
3. Will the company be able to pay its usual dividends?
4. Why is there a difference between net income and net cash flow for the year?
5. To what extent will the company have to borrow money in order to make needed investments? (para. 4)

Understanding Cash Flow Statement-Format and Sections

Introduction To Cash Flow Statement

Three major financial statements are ordinarily required for external reports―an income statement, a balance sheet, and a statement of cash flows. The purpose of the statement of cash flow is to highlight the major activities that directly and indirectly impact cash flows and hence affect the overall cash balance. Managers focus on cash for a very good reason―without sufficient cash balance at the right time, a company may miss golden opportunities or may even fall into bankruptcy.  The cash flow statement answers questions that cannot be answered by the income statement and a balance sheet. For example a statement of cash flows can be used to answer questions like where did the company get the cash to pay dividend of nearly $140 million in a year in which, according to income statement, it lost more than $1 billion? To answer such questions, familiarity with the statement of cash flows is required. (para. 1)

The statement of cash flows is a valuable analytical tool for managers as well as for investors and creditors, although managers tend to be more concerned with forecasted statements of cash flows that are prepared as a part of the budgeting process. The statement of cash flows can be used to answer crucial questions such as the following:

1. Is the company generating sufficient positive cash flows from its ongoing operations to remain viable?
2. Will the company be able to repay its debts?
3. Will the company be able to pay its usual dividends?
4. Why is there a difference between net income and net cash flow for the year?
5. To what extent will the company have to borrow money in order to make needed investments? (para. 2)

Definition of Cash

In preparing a statement of cash flows, the term cash is broadly defined to include both cash and cash equivalents. Cash equivalents consist of short term, highly liquid investments such as treasury bills, commercial paper, and money market funds that are made solely for the purpose of generating a return on temporary idle funds. Instead of simply holding cash, most companies invest their excess cash reserves in these types of interest bearing assets that can be easily converted into cash. These short term liquid investments are usually included in marketable securities on the balance sheet. Since such assets are equivalent to cash, they are included with cash in preparing a statement of cash flows. (para. 4)

Sections of Cash Flow Statement

The cash flow statement is usually divided into three sections: Operating, investing and financing activities. (para. 5)

Operating Activities

Operating activities involve the cash effects of transactions that enter into the determination of net income, such as cash receipts from sales of goods and services and cash payments to suppliers and employees for acquisition of inventory and expenses. (para. 6)

Investing Activities

Investing activities generally involve long term assets and include (a) making and collecting loans (b) acquiring and disposing of investments and productive long lived assets. (para. 7)

Financing Activities

Financing activities involve liability and stock holder’s equity items and include obtaining cash from creditors and repaying the amounts borrowed and obtaining capital from owners and providing them with a return on, and a return of, their investment. (para. 8)

Format of The Cash Flow Statement

The cash flows from operating activities section always appears first, followed by the investing section and then financing activities section. The individual inflows and outflows from investing and financing activities are reported separately. That is, they are reported gross, not netted against one another. Thus, cash outflows from the purchasing of property is reported separately from the cash inflow the sale of property. Similarly, the cash inflow from the issuance of debt is reported separately from the cash outflow from its retirement. The net increase or decrease in cash reported during the period should reconcile the beginning and ending cash balances as reported in the comparative balance sheets. (para. 9)

Cash Flow Statement Example-Direct and Indirect Method

Unlike the major financial statements, cash flow statement is not prepared from the adjusted trial balance. The information to prepare this statement usually comes from three sources:

1. Comparative balance sheets provide the amount of the changes in assets, liabilities, and equities from the beginning to the end of the period.
2. Current income statement data help the reader determine the amount of cash provided by or used by operations during the period.
3. Selected transaction data from the general ledger provide additional detailed information needed to determine how cash was provided or used during the period (para. 1)

Preparing the statement of cash flows from the data sources above involves three major steps:

1.      Step 1. Determine the change in cash:
This procedure is straight forward because the difference between the beginning and the ending cash balance can be easily computed from an examination of the comparative balance sheet.

2.      Step 2. Determine the net cash flow from operating activities:
This procedure is complex. It involves analyzing not only the current year’s income statement but also comparative balance sheets and selected transitions data.

3.      Step 3. Determine net cash flows from investing and financing activities:
All other changes in the balance sheet accounts must be analyzed to determine their effects on cash. (para. 2)

Step 1: Determine the Change in Cash:
To prepare a statement of cash flows, the first step―determining the change in cash―is a simple computation. The company has no cash on hand at the beginning of the year 2003, but $49,000 at the end of 2003. Thus the change in cash for 2003 was an increase of $49,000. (para. 3)

Step 2: Determine Net Cash Flow from Operating Activities:
A usual starting point in determining net cash flow from operating activities is to understand why net income must be converted. Under generally accepted accounting principles, most companies must use the accrual basis of accounting, requiring revenues be reported when earned and that expenses be recorded when incurred. Net income may include credit sales that have not been collected in cash and expenses incurred that may not have been paid in cash. Thus, under the accrual basis of accounting, net income will not indicate the net cash flow from operating activities. (para. 4)

To arrive at net cash flow from operating activities, it is necessary to report revenue and expenses on cash basis. This is done by eliminating the effects of statement transactions that did not result in a corresponding increase or decrease in cash. (para. 5)

Direct or Indirect Method: Conversion of Net Income Into Cash Flow

Direct Method

(also called the income statement method) reports cash receipts and cash disbursements from operating activities. The difference between these two amounts in the net cash flow from operating activates. In other words, the direct method deducts from operating cash receipts the operating cash disbursements. The direct method results in the presentation of a condensed cash receipts and cash disbursements statement. (para. 6)

Indirect Method

(or reconciliation method) starts with net income and converts it to net cash flow from operating activities. In other words, the Indirect method adjusts net income for items that affected reported net income but didn’t affected cash. To compute net cash flows from operating activities, noncash changes in the income statement are added back to net income, and net cash credits are deducted. Explanations for the two adjustments to net income in this example―namely, the accounts receivable and accounts payable―are as follows. (para. 8)

Increase in Accounts Receivable―Indirect Method:
When accounts receivable increase during the year, revenues on an accrual basis are higher than on a cash basis because goods sold on account are reported as revenues. In other words, operations for the period led to increased revenues, but not all of these revenues resulted in an increase in cash. Some of the increase in revenues resulted in an increase in accounts receivable. To convert net income to net cash flow from operating activities, the increase of $36,000 in accounts payable must be deducted from net income. (para. 9)

Increase in Accounts Payable―Indirect Method:
When accounts payable increase during the period, expenses on an accrual basis are higher than they are on a cash basis because expenses are incurred for which payment has not taken place. To convert net income to net cash flow from operating activities, the increase of $5,000 in accounts payable must be added back to net income. (para. 10)

Note that net cash provided by operating activities is the same whether the direct or indirect method is used. (para. 11)

Step 3: Determine Net Cash Flows from Investing and Financing Activities:
Once the net cash flows from operating activities is computed, the next step is to determine whether any other changes in balance sheet accounts caused an increase or decrease in cash. (para. 12)

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