How to adjust from accrual to cash basis Which way do the

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• Linda Dufresne, CPA
• Dufresne Associates, CPA, PA
• GNP Services, CPA, PA
• linda_at_dufresnecpas.com

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Steps to Understanding SOCF

• What entities must provide the SOCF?
• What guidance is applicable?
• Where to get information?
• How to adjust from accrual to cash basis?
• Which way do the signs go?
• Where are items reported on the SOCF?
• What additional information is required to be
  presented?
  
• How to analyze the SOCF what it reveals and
  what it does not

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Things to keep in mind

• Ten laws of Accounting
• 1.Trial balances dont
• 2.Working Capital does not
• 3.Liquidity tends to run out
• 4.Return on investments never will
• 5. Bottom line is only the tip of the iceberg.
• 6. If you need accounting to prove it, it was
  probably not true in the first place
  
• 7. There is nothing more permanent than a
  temporary account
  
• 8. An accountant is a man hired to explain that
  you did not make the money you did
  
• 9. Cash flow doesnt
• 10. Obviously accounting pays, otherwise there
  would be no accountants.

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Statement of Cash Flows (SOCF)

• GASB Statement 34, 105 says
• Governments should present a statement of cash
  flows
  
• for proprietary funds
• based on the provisions of GASB Statement 9, as
  amended by this Statement.
  
• The direct method of presenting cash flows from
  operating activities (including a reconciliation
  of operating cash flows to operating income)
  should be used.
• Proprietary funds CANNOT use FAS-95 for guidance

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Statement of Cash Flows (SOCF)

• Who must prepare the statement?
• Proprietary funds are required to present the
  statement
  
• What is our guidance?
• GASB 9 as amended by GASB 34
• What is the form of presentation?
• Direct method should be used

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Statement of Cash Flows (SOCF)

• The focus is on cash
• Cash in and out easy for users to grasp
• Removing effect of accruals also removes some of
  the harder to understand components
  
• Similarly, removing effect of accruals does not
  present the financial position picture so
  
• The intent of the SOCF is to provide an
  additional financial analysis tool as an
  alternative to the accrual basis financials

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Statement of Cash Flows (SOCF)

• What is included as cash
• Cash on hand
• Cash on deposit
• Cash in restricted accounts and
• A position in a cash and investment pool that has
  the same characteristics as a demand deposit
  (resources can be deposited or withdrawn without
  notice or penalty)

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Statement of Cash Flows (SOCF)

• Inclusion of cash equivalents is optional
• Short-term, highly liquid investment that is
  readily convertible to known amounts of cash
  
• Matures within three months of the date it is
  acquired
  
• Note that instruments initially purchased having
  a maturity greater than three months DO NOT
  become a cash equivalent when entering the last
  three months
• The determination as to whether an asset is a
  cash equivalent is made only once, when the asset
  is acquired

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Statement of Cash Flows (SOCF)

• Definition of cash equivalents may be determined
  by a government so long as the definition is more
  restrictive than the GAAP definition
  
• Cash definition enjoys no such flexibility
• For example, a government may define cash
  equivalents to exclude resources held in
  restricted accounts however, cash in restricted
  accounts must be included as part of the balance
  on the cash flow statement

10
Statement of Cash Flows (SOCF)

• SOCF only reports transactions that affect an
  entitys cash accounts
  
• Transactions that would not be reflected
• Receipts of proceeds of refunding bonds if the
  refunded debt qualifies for defeasance and the
  cash is placed directly in escrow
  
• Receipt of bond proceeds related to financing
  authorities if the proceeds are delivered
  directly to the intended recipients rather than
  to the financing authority
• Commodities and similar noncash items (for
  example, federal surplus food used in school
  lunch programs) even though they may be reported
  as revenues/expenses in the statement of
  revenues, expenses and changes in fund net
  assets/equity and
• Rollovers of certificates of deposit

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Statement of Cash Flows (SOCF)

• Exceptions to the basic rule that only cash (and
  cash equivalents) are reported on the SOCF
  
• Checks and warrants are considered cash flows
  when issued rather than when presented for
  payment
  
• Cash balance cannot be less than zero
• A negative position in cash is tatamount to a
  borrowing and reported as a cash flow
  
• Changes in fair value of investments subject to
  fair value reporting and classified as cash
  equivalents should be recognized as cash flows
  from investing activities when they occur

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Statement of Cash Flows (SOCF)

• Gross vs net presentation
• In most instances, gross presentation is
  required
  
• Exceptions
• Items whose turnover is quick, amounts are large
  and maturities are short provided the original
  maturity of the asset or liability is three
  months or less (Investments, loans receivable,
  debt)
• Governmental enterprises whose assets for the
  most part are highly liquid investments and that
  have little or no debt outstanding during the
  period

13
Comic relief?

• An accountant was walking along a beach and
  stumbled across an old lamp. He picked it up,
  rubbed it and out popped a genie. The genie said
  "You released me from the lamp, blah blah blah.
  This is the fourth time this month and I'm
  getting a little sick of these wishes so you can
  forget about three. You only get one wish!"
• The accountant sat and thought about it for a
  while and said, "I've always wanted to go to
  Hawaii but I'm scared to fly and I get very
  seasick. "Could you build me a bridge to Hawaii
  so I can drive over there to visit?"
• The genie laughed and said, "That's impossible!
  Think of the logistics of that! How would the
  supports ever reach the bottom of the Pacific?
  Think of how much concrete! How much steel!
  You're going to have to think of another wish."
• The Accountant agreed, and tried to think of a
  really good wish. Finally, he said, "I don't
  understand how banks have managed to package crap
  mortgages and sell them to other, supposedly
  astute, banks, can you explain it to me please."
  
• The genie paused for a while and said, "How many
  lanes do you want on that bridge?"

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SOCF Layout

• Cash flows from operating activities
• Cash flows from noncapital financing activities
• Cash flows from capital and related financing
  activities
  
• Cash flows from investing activities
• Reconciliation of net operating revenues
  (expenses) to net cash provided (used) by
  operating activities
  
• Supplemental schedule of noncash transactions

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CASH FLOWS from Operating Activities

• GASB Statement 9, 16
• Operating activities generally result from
  providing services and producing and delivering
  goods, and include
  
• all transactions and other events that are not
  defined as capital and related financing,
  noncapital financing, or investing activities
  
• Cash flows from operating activities generally
  are the cash effects of transactions and other
  events that enter into the determination of
  operating income.

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CASH FLOWS from Operating Activities

• Generally include all cash flows related to
  transactions and events reported as components of
  operating income in the statement of revenues,
  expenses and changes in fund net assets/equity
• Also category is used for any cash inflow or
  outflow that cannot properly be classified in one
  of the other three categories
  
• Must be reported by major categories of receipts
  and payments
  
• At a minimum, receipts from customers, receipts
  from interfund services, payments to suppliers,
  payments to employees, payments related to
  interfund services

17
CASH FLOWS from Operating Activities

• Interest receipts
• Rarely qualify for inclusion as part of cash
  flows from operating activities
  
• Exception
• Loans made to fulfill government social programs
  rather than for income or profit and
  
• Directly benefit individual constituents of the
  government (low income housing and student
  loans)
  
• Program loans typically refer to loans that meet
  both of these criteria
  
• Making and collection of program loans also are
  classified as cash flows from operating activities

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Statement of Cash Flows Common Cash Flows from
Operating Activities - Items to Consider
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Statement of Cash Flows Common Cash Flows from
Operating Activities - Items to Consider
20
Statement of Cash Flows Common Cash Flows from
Operating Activities - Items to Consider
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Statement of Cash Flows Common Cash Flows from
Operating Activities - Items to Consider
22
CASH FLOWS from Noncapital financing Activities

• GASB Statement 9, 20
• Noncapital financing activities include borrowing
  money for purposes other than to acquire,
  construct, or improve capital assets and repaying
  those amounts borrowed, including interest
• This category includes proceeds from all
  borrowings (such as revenue anticipation notes)
  not clearly attributable to acquisition,
  construction, or improvement of capital assets,
  regardless of the form of the borrowing
• Also included are certain other interfund and
  intergovernmental receipts and payments.

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CASH FLOWS from Noncapital financing Activities

• Borrowings to finance program loans would
  properly be reported in this category even though
  the loans themselves would be treated as part of
  cash flows from operating activities
• Grant proceeds not specifically restricted to
  capital purposes
  
• Grant payments to other entities
• Includes transfers to and from other funds
  (except when capital related)
  
• Tax receipts not attributable to capital
  purposes
  
• Interest paid on noncapital-related vendor
  payables

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Statement of Cash Flows Common Cash Flows from
Noncapital Financing Activities - Items to
Consider
25
CASH FLOWS from CAPITAL AND RELATED FINANCING
Activities

• GASB Statement 9, 23
• Capital and related financing activities include
  
  
• acquiring and disposing of capital assets used in
  providing services or producing goods,
  
• borrowing money for acquiring, constructing, or
  improving capital assets and repaying the amounts
  borrowed, including interest, and
  
• paying for capital assets obtained from vendors
  on credit.

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CASH FLOWS from CAPITAL AND RELATED FINANCING
Activities

• Borrowing and repayment (principal and interest)
  of debt clearly attributable to capital purposes
  
• Proceeds of capital grants and contributions
• Transfers from other funds for capital purposes
• Payments related to acquisition, construction or
  improvement of capital assets
  
• Sale or involuntary conversion of capital assets
  such as insurance proceeds
  
• Capital type special assessments
• Taxes levied for capital purposes or related debt
  service
  
• Tap fees in excess of actual cost of connection
• Interest capitalization is reported as interest
  payments rather than capital acquisition even
  though the payments may be capitalized in the
  statement of position and not reported as
  interest expense in the statement of revenues,
  expenses and changes in fund net assets/equity

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Statement of Cash Flows Common Cash Flows from
Capital and Related Activities - Items to
Consider
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CASH FLOWS from INVESTING Activities

• GASB Statement 9, 26
• Investing activities include
• making and collecting loans (except program
  loans, as discussed in paragraph 19) and
  
• acquiring and disposing of debt or equity
  instruments.

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Statement of Cash Flows (INVESTING Activities
Section)

• Interest receipts (except program loans)
• Loan collections (except program loans)
• Proceeds from sale of investments
• Receipt of interest on customer deposits
• Changes in the fair value of investments subject
  to fair value reporting and classified as cash
  equivalents
  
• Loans made to others (except program loans)
• Purchases of investments

30
Statement of Cash Flows Common Cash Flows from
Investing Activities - Items to Consider
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Reconciliation of Net Operating Revenues
(Expenses) to Net Cash Provided (Used) by
Operating Activities

• Begin with Operating Income (Loss)
• Add back noncash expenses included in the
  determination of operating income (loss)
  
• Plus or minus changes in assets and liabilities
  pertaining to operating activities (GASB 9,
  33)
  

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Reconciliation of Net Operating Revenues
(Expenses) to Net Cash Provided (Used) by
Operating Activities

• Purpose is to draw users attention to the
  important difference between cash from operations
  and operating income/loss
  
• Present either on the face of the SOCF or as a
  schedule accompanying the SOCF
  

33
Supplemental Schedule of Noncash Transactions

• GASB Statement 9 37 states that a disclosure
  is required for all investing, capital and
  financing activities during the year that affect
  recognized assets or liabilities but do not
  result in cash receipts or cash payments in the
  period.

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Supplemental Schedule of Noncash Transactions

• Financial statement users need information on
  certain noncash activities that otherwise would
  fail to be reported
  
• Two specific criteria
• Transaction affects recognized assets or
  liabilities and
  
• Had it involved cash, the transaction would not
  properly have been classified as cash flows from
  operating activities
  
• Presentation either narrative or tabular form on
  a separate schedule accompanying the SOCF
  
• When a transaction involves both cash and noncash
  components (for example, initiation of a capital
  lease involving a down payment), clear
  description of cash and noncash aspects is
  required
• Example of easily overlooked noncash transaction
  that would require disclosure on this schedule is
  net appreciation/depreciation in the value of
  investments reported at fair value but not
  classified as cash equivalents

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Examples of noncash transactions include

• Assets acquired by capital leasing
• Gifts in kind
• Capital contributions (including transfers of
  assets between the special districts and local
  governments)
  

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All comedy has a grain of truth!

• Late one night in Washington, a mugger wearing a
  ski mask jumped into the path of a well-dressed
  man and stuck a gun in his ribs."Give me your
  money!" he demanded.Indignant, the well-dressed
  man bellowed, "Hrm! Do you realize that you are
  attempting to rob a United States
  Congressman!""In that case," replied the
  robber, "give me my money!"

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Survival Tips for Preparing the Statement of Cash
Flows

• Analyze net asset line items by statement of cash
  flow categories during preparation of audit
  workpapers and lead schedules.
  
• Prepare Statement of Net Asset (SONA) Variance
  worksheet.
  
• Compile the Additional Cash Flow Data worksheet
  and Statement of Revenues, Expenses and Changes
  in Fund Net Assets (SRENA).

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Survival Tips for Preparing the Statement of Cash
Flows, continued

• Using the Cash Flow Stmt Worksheet template,
  transfer/link amounts from, SNA Variance, SRENA
  and Additional Cash Flow Data Worksheet.
  
• Prepare Operating Activities section first. Then
  prepare reconciliation section. It is important
  to keep these two sections in balance.
  
• Most common pitfall is transposing the sign (/-)
  on amounts.

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Survival Tips for Preparing the Statement of Cash
Flows

• Analyze net asset line items by statement of cash
  flow categories.
  
• See previous slides

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Survival Tips for Preparing the Statement of Cash
Flows

• Prepare Statement of Net Asset (SONA) Variance
  worksheet.
  
• See sample on following slides

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Comparative SONA for Preparing the SOCF
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Comparative SONA for Preparing the SOCF
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Survival Tips for Preparing the Statement of Cash
Flows

• Compile the Statement of Revenues, Expenses and
  Changes in Fund Net Assets (SRENA) and Additional
  Cash Flow Data worksheet.

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Additional Cash Flow Data
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Additional Cash Flow Data
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SRENA
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SRENA, continued
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SRENA, concluded
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Survival Tips for Preparing the Statement of Cash
Flows, continued

• Using the Cash Flow Stmt Worksheet template,
  transfer/link amounts from SONA Variance, SRENA
  and Additional Cash Flow Data Worksheet.
  

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Statement of Cash Flows (Operating Activities
Section)
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Cash Flow Statement Worksheet
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From SRENA and SONA to Statement of Cash Flows
(How to adjust accrual balances to cash)
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From SRENA and SONA to Statement of Cash Flows
(How to adjust accrual balances to cash)
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From SRENA and SONA to Statement of Cash Flows
(How to adjust accrual balances to cash)
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From SRENA and SONA to Statement of Cash Flows
(How to adjust accrual balances to cash)
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From SRENA and SONA to Statement of Cash Flows
(How to adjust accrual balances to cash)
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From SRENA and SONA to Statement of Cash Flows
(How to adjust accrual balances to cash)
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From SRENA and SONA to Statement of Cash Flows
(How to adjust accrual balances to cash)
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From SRENA and SONA to Statement of Cash Flows
(How to adjust accrual balances to cash)
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From SRENA and SONA to Statement of Cash Flows
(How to adjust accrual balances to cash)
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CASH FLOWS from Noncapital financing Activities

• GASB Statement 9, 20
• Noncapital financing activities include borrowing
  money for purposes other than to acquire,
  construct, or improve capital assets and repaying
  those amounts borrowed, including interest, and
• includes proceeds from all borrowings (such as
  revenue anticipation notes) not clearly
  attributable to acquisition, construction, or
  improvement of capital assets, regardless of the
  form of the borrowing and
• certain other interfund and intergovernmental
  receipts and payments.

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Statement of Cash Flows (NONCAPITAL FINANCING
Activities Section)
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SRENA, concluded
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CASH FLOWS from CAPITAL AND RELATED FINANCING
Activities

• GASB Statement 9, 23
• Capital and related financing activities include
• acquiring and disposing of capital assets used in
  providing services or producing goods,
  
• borrowing money for acquiring, constructing, or
  improving capital assets and repaying the amounts
  borrowed, including interest, and
  
• paying for capital assets obtained from vendors
  on credit.

65
Statement of Cash Flows (CAPITAL and related
FINANCING Activities Section)
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Cash Flow Statement Worksheet
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Comparative SONA for Preparing the SOCF
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CASH FLOWS from INVESTING Activities

• GASB Statement 9, 26
• Investing activities include
• making and collecting loans (except program
  loans, as discussed in paragraph 19) and
  
• acquiring and disposing of debt or equity
  instruments.

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Statement of Cash Flows (INVESTING Activities
Section)
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From SRENA and SONA to Statement of Cash Flows
(How to adjust accrual balances to cash)
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Reconciliation of Net Operating Revenues
(Expenses) to Net Cash Provided (Used) by
Operating Activities

• Begin with Operating Income (Loss)
• Add back noncash expenses included in the
  determination of operating income (loss)
  
• Plus or minus changes in assets and liabilities
  pertaining to operating activities (GASB 9,
  33)
  

72
Statement of Cash Flows (RECONCILIATION to
operating activities Section)
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Statement of Cash Flows (RECONCILIATION to
operating activities Section)
74
Supplemental Schedule of Noncash Transactions

• GASB Statement 9 37 states that a disclosure
  is required for all investing, capital and
  financing activities during the year that affect
  recognized assets or liabilities but do not
  result in cash receipts or cash payments in the
  period.

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Examples of noncash transactions include

• Assets acquired by capital leasing
• Gifts in kind
• Capital contributions (including transfers of
  assets between the special districts and local
  governments)
  

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Statement of Cash Flows (Supplemental schedule o
f noncash transactions section)
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Statement of Cash Flows Summary of Sections
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Secret Survival Tips

• Lots of chocolate or other appropriate comfort
  food
  
• Lots of caffeine or limit it, depending on its
  effect on the preparer
  
• Provide the Cash Flow Statement preparer a
  protected cash flow conducive environment
  
• LOTS OF DESK space without ANY interruptions for
  as long as he/she needs!
  
• Warning!!! NEVER ASK THE PREPARER IF THE
  STATEMENT IS IN BALANCE!
  
• Lots of encouragement

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How to Analyze the Statement of Cash Flows (SOCF)

• Excellent tool for understanding financial
  position
  
• Statement of net assets and change in net assets
  are heavily relied on by management but without a
  cash flow statement
  
• they are limited barometers
• may even be misleading without the context of
  cash inflows and outflows
  
• Operating Activities section
• tell you where money came from
• and how it was used
• whether cash was generated or whether need a cash
  infusion
  
• Noncapital Financing Activities section
• may indicate a diversion of funds
• may indicate inadequate charges for services

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How to Analyze the Statement of Cash Flows (SOCF)

• Capital and Related Financing Activities
• see whether or not a surplus in operations is
  being used to grow
  
• lack of purchases of assets, etc may indicate
  stagnant growth or a diversion of funds
  
• Investing Activities
• see whether or not a surplus in operations is
  being used generate investment income
  
• lack of investing activities may indicate
  inappropriate investing policies
  
• Comparison between past periods
• Good idea of the trend
• Positive or negative trends in cash flow may
  encourage appropriate action
  
• Powerful tool for growth and long-term success

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How to Analyze the Statement of Cash Flows (SOCF)

• How does it help financial statement users
  understand our operations?
  
• Cash inflows and outflows are easier for many
  folks to comprehend
  
• Removing the unknown quantity represented by
  accruals helps condense the information into an
  understandable quantity
  
• Accounting noise
• The distortion that is caused in a companys
  financial statements due to accounting rules and
  regulations
  
• makes it difficult to easily ascertain a
  governments true financial condition
  
• can make a company's financial reports look
  better OR worse.
  
• can be seen as either a consequence of necessary
  rules regarding generally accepted accounting
  principles (GAAP) or a result of management's
  attempts to massage the numbers to present a
  rosier financial picture of the firm
• Paying attention to the footnotes can help cut
  through the accounting noise and get the real
  story.

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How to Analyze the Statement of Cash Flows (SOCF)

• It is important to note the distinction between
  being profitable and having positive cash flow
  transactions just because a proprietary fund is
  bringing in cash does not mean it is making a
  profit (and vice versa).
• Because cash flow can be positive while
  profitability is negative, financial statement
  users should analyze income statements as well as
  cash flow statements, not just one or the other.

83
How to Analyze the Statement of Cash Flows (SOCF)

• The cash flow statement differs from other
  financial statements
  
• acts as a kind of proprietary fund checkbook that
  reconciles the other two statements
  
• records the cash transactions (the inflows and
  outflows) during the given period
  
• Shows whether revenues booked on the income
  statement have actually been collected
  
• does not necessarily show all the expenses not
  all expenses accrued have to be paid right away.
  So even though liabilities may have incurred that
  must eventually be paid, expenses are not
  recorded as a cash outflow until they are paid

84
How to Analyze the Statement of Cash Flows (SOCF)

• When you look at a cash flow statement, the first
  thing you should look at is the bottom line item
  that says something like "net increase/decrease
  in cash and cash equivalents
• this line reports the overall change in cash and
  its equivalents (the assets that can be
  immediately converted into cash) as compared to
  the prior period.

85
How to Analyze the Statement of Cash Flows (SOCF)

• What Cash Flow Doesn't Tell Us - Cash is one of
  the major lubricants of business activity, but
  there are certain things that cash flow doesn't
  shed light on.
• It doesn't tell us the profit earned or lost
  during a particular period
  
• profitability is composed also of things that are
  not cash based
  
• This is true even for numbers on the cash flow
  statement like "cash increase from sales minus
  expenses", which may sound like they are
  indication of profit but are not.
• It doesn't do a very good job of indicating the
  overall financial well-being of the proprietary
  fund
  
• indicates what is being done with its cash and
  where cash is being generated
  
• these do not reflect the company's entire
  financial condition
  
• does not account for liabilities and assets,
  which are recorded on the balance sheet.
  
• Receivables and payables are also not reflected
  in the cash flow statement.
  
• In other words, the cash flow statement is a
  compressed version of the company's checkbook
  that includes a few other items that affect cash
  
• the financing section shows the amount of
  issuance or retirement of debt

86
Exercises

• () or (-)?
• SOCF Fill in the Blanks

87
Thanks for your attention!

• Linda Dufresne, CPA
• Dufresne Associates, CPA, PA
• GNP Services, CPA, PA
• linda_at_dufresnecpas.com