Go With The Flow Inc Essay

660 words - 3 pages

1. Insurance Settlement Proceeds
230-10-45-12 states that receipts from disposing of loans, debt or equity instruments, or property, plant, and equipment include directly related to proceeds of insurance settlements, such as the proceeds of insurance on a building that is damaged or destroyed should be treated as cash inflows from investing activities.
Hence, according to 230-10-45-12, the insurance proceeds of $20 million from its insurance carrier in connection with its claim for reimbursement for the destroyed building should be classified as investing cash inflow.
Moreover, cash receipt is not presented in the cash flow statement based on its intended use. Thus, these proceeds ...view middle of the document...

In the instant case, no payment is made until the year-end. Hence, it the transaction should not form part of the cash flow statement.
Alternative 2 The acquisition of property, plant, and equipment on account should not be reflected in the statement of cash flows until actual payments have been made is the correct alternative.
3. Sale of Accounts Receivable
Accounts receivable securitization is a popular form of off balance sheet financing. Such transactions are carried out by selling accounts receivable and receiving cash in return. These accounts receivable are due but still not collected. By creating a special purpose entity, the entity arranges the finance for purchasing the accounts receivable by issuing commercial paper backed by future stream of cash to be collected from the customers.
In the instant case, during the current year, $11 million of receivables generated from sales of the company’s inventory were sold under the agreement, and therefore, are not reflected in the accounts receivable balance in the company’s balance sheet. Thus, effectively receivables have changed in the balance sheet.
As for the sales of receivables, the net change in receivables sold should be reported as an operating cash flow item. If the change during the current year is $11 million then it should be shown as a cash flow item in the operation cash flow section.
Specimen: Cash flow statement (Please note other items are only for display purpose and bears no resemblance to the three points above)

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