The Effective Interest Method
Typically, companies maintain the historical cost (sales proceeds) of bonds after issuance, and... Read More
In addition to activities that generate cash flows (operating, investing, and financing), companies also engage in investing and financing activities that do not generate any cash flows. These activities are therefore not reported on the cash flow statement.
Non-Cash Investing and Financing Activities
A company does not generate any cash inflows or cash outflows from non-cash investing and financing activities. However, these activities can still have a material effect on a company’s financial position.
Examples of non-cash activities include:
- issuance of common shares for dividend purposes, or conversion of convertible bonds or convertible preferred shares; and
- exchange of one non-monetary asset for another non-monetary asset.
From these examples, it is easy to see that non-cash activities can significantly affect a company’s capital composition. As a result, once a significant non-cash transaction is involved, a company must disclose this transaction in its cash flow statement. It can do so either in a separate note or in a supplementary schedule.
Question 1
Which of the following transactions is an example of a non-cash activity?
- Purchase of equipment.
- Investment in another company’s debt.
- Issuance of common stock in relation to the conversion of preferred stock.
Solution
The correct answer is C.
Issuance of common stock in relation to the conversion of preferred stock is an example of a non-cash activity.
A is incorrect. The purchase of equipment is an operating activity.
B is incorrect. Investment in another company’s debt is an investing activity. Both options A and C are cash activities that would be reflected on a company’s cash flow statement.
Question 2
XXR Co. replaced a physical asset with a carrying amount of $50,000 with another asset of the same value. The company didn’t pay any cash to settle the transaction. Under which section of the cash flow statement should the transaction be recorded?
- Investing.
- Financing.
- Neither investing nor financing.
Solution
The correct answer is C.
Given that the transaction didn’t involve cash, it would have no effect on the cash flow statement.
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2021-07-23
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2021-07-17
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