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Scenic Video Transcript

Route 6Statement of Cash Flows Entry Map (SCF Entry Map)

Topics

  • Characteristics of route 6: Investing, financing, and/or foreign exchange gain/loss entries that don’t affect income or cash
  • Example:

-Entry

-Entry SCF effects

  • Noncash investing and financing disclosures
  • Scope of relative importance
  • R&R Map regions relative to route’s entries
  • Take-aways

Transcript

Introduction

Welcome to the Route 6 Scenic Route. This video will help you know when an entry falls on Route 6 of the SCF Entry Map, and more generally, the defining characteristics of all entries that fall on Route 6 and how they affect the statement of cash flows and other financial statements.

Here’s our agenda. We’re going to start with characteristics of the Route 6 entries, then we’ll look at an example, then we’re going to do something called “Noncash investing and financing disclosures” which pertains to Route 6, and then we’re going to look at the scope of entries that fall on Route 6 which show the regions in the R&R Map affected by them so you can see their similarities to other entries, but also, so you can see how they affect other financial statements, and then some quick take-aways.

Characteristics of route 6: Investing, financing, and/or foreign exchange gain/loss entries that don’t affect income or cash

How will you know you’re on Route 6? You ask the question, is this an operating event? And, the answer would be definitely not. Does the event affect income through gains or losses? No. There will not be a gain or loss here. Does the event affect cash? Again, no. So, this is not an operating event. It’s investing or financing event. It does not affect the income through gains and losses and it does not affect cash.

This event definitely doesn’t affect either the direct cash flow statement or the indirect cash flow statement, so no effects on the cash flow statement. There could be supplementary disclosures if it’s an investing and financing event, and I’ll give an example in a few minutes.

Example

Entry

Here’s an example of an event that falls on Route 6, Bischoff E17, we studied this entry in the income statement. We have a dividend being declared, so retained earnings decreases by $25 M and dividends payable -- it’s not being paid, it’s being declared -- goes up by $25 M. So debit retained earnings and credit dividends payable.

Now, does this satisfy the Route 6 criteria? Well, first of all, this entry does not affect operations. It’s a financing related activity because it deals with shareholders. Does it affect net income? No. Does it affect cash? No. So it meets all those criteria, so this is definitely on Route 6. Now let’s go see why it doesn’t affect the cash flow statement.

Entry SCF effects

Again, we set up a column that we’ve done for every entry. And, just to remind you, we can have all our entries stacked up over here to get the grouped effects, but we’re looking one entry at a time, and that’s what you were doing when you’re looking at the SCF Entry Map. What is the effect on net profit of this entry? Well, Route 6 entries cannot affect profit.

Do they affect cash from operations? No. Do they affect any cash flows? No. So this entry does not affect the cash flow statement at all. Now, when we pay the dividends, well then, there will be a cash flow statement effect.

Noncash investing and financing disclosures

Now, I want to talk about non-cash investment and financing entries. There is GAAP requirements for disclosure and GAAP actually gives examples of non-cash investing -- and the keyword here is “and financing transactions.” So these are neither pure investing nor pure financing. There can’t be any cash flows related so they’re called non-cash investing and financing.

Here’s a great example, purchasing a building by incurring a mortgage to the seller. So if you have assets equals liabilities plus owners’ equity the way that would look is you buy an asset, PP&E, see so assets go up and your liabilities go up, but there would be no effect on cash. Well, that would be an example of a Route 6 entry and that would be an example also of a significant investing, this would be viewed as an investing because you’re buying property, plant, and equipment, and financing because you’re financing it with debt. So that’s one example.

Another example we’ll see in later chapters is entering what’s called a financing lease or a capital lease, under US GAAP it’s called a capital lease, under IFRS a financing lease, and we’ll be talking about those leases later. As you enter those leases, the entry looks very much like this entry and we’ll study those in great detail later.

The important thing to realize now is when these take place, they don’t go on the cash flow statement because there’s no cash effects but where they do go is in a supplementary disclosure and sometimes you’ll see that in a footnote adjacent to the cash flow statement or at the bottom of the cash flow statement and they’re only there when they are significant. And, so they’re not that frequent but when you see them, they’ll be called supplementary non-cash financing and investing activities.

Scope of relative importance

What’s the scope of Route 6 entries? Well, only one of Bischoff’s first nineteen entries, but nine of the seventy-eight entries are going to fall on Route 6 and a lot of those fall on Route 6 because they impact other comprehensive income. So there are gains and losses through OCI but not through regular income.

R&R Map regions relative to route’s entries

And, that’s what we’re showing right here. Remember, it’s investing or financing so it’s down here. It can’t affect cash. It can’t affect regular income so it can’t be here, it can’t be here. It will be somewhere in here. For example, we saw that with our dividend, retained earnings went down and dividends payable, over here somewhere, and liabilities, went up. It will actually be a current liability over here. It went up.

So the entries must fall in here but they can also go over here in OCI and quite a few of Bischoff’s entries go into OCI and, of course, that’s beyond the scope of the current chapter but we set a place holder so you’ll understand some of the entries we’ll look at later that affect OCI are in fact going to be Route 6 entries.

Take-aways

What should you know about Route 6? It’s not an operating event. It’s investing or financing. There are no gains or losses through regular income. Does the event affect cash? Definitely not and it does not affect the cash flow statement either direct or indirect but there may be the supplementary disclosures if it’s an investing and financing transaction.

I hope you enjoyed this video, see you in the next one.