Significant Noncash Activities: Videos & Practice Problems

The Statement of Cash Flows includes significant non-cash investing and financing activities, which are crucial for users of financial statements. These activities, such as exchanging a note payable for land or retiring bonds by issuing stock, do not involve cash transactions and are disclosed at the bottom of the statement. For example, a company may sign a $110,000 note payable for land, or retire $110,000 of bonds by issuing stock. Such disclosures ensure transparency in financial reporting, highlighting important transactions that affect the accounting equation without impacting cash flow.

Significant Non-cash Investing and Financing Activities

Alright. Let's wrap up the Statement of Cash Flows by dealing with that disclosure at the bottom for the significant non-cash investing and financing activities. So significant non-cash activities are going to include investing and financing activities that do not affect cash. Okay? We've seen some examples of this, but let's talk about it a little more now. Note, remember when we were talking about the indirect or direct method? Well, that was only with operating activities. That has nothing to do with what we're talking about now; it has nothing to do with investing activities or financing activities, it's just for the operating section to calculate our operating cash flow. Okay? So when we're talking about significant non-cash activities, well, we're going to see that these activities have no cash receipt or disbursement. But they're going to be significant transactions that the users of the financial statements are going to want to know about. Okay? So if we didn't disclose these at this point, there would really be nowhere on the financial statements that they would see that this happened. Okay? So it's important that we disclose these things. And these significant non-cash activities, they show up at the bottom of the statement of cash flows and we just mention them and we tell them the amounts. Okay? So they're not going to be included in the change in the cash account, in the operating, investing, or financing section. They're not included because cash is not affected.

Let's see a couple of examples of what these journal entries look like for these transactions. So the first one, the company signed a $110,000 note payable in exchange for land. A lot of times when you see these types of transactions, it's going to say that there was an exchange, right? We exchange the note payable for land. So we would have made a journal entry that looks like this: Debit land for $110,000 and credit note payable, the liability account for $110,000. So if you look at these separately, right, this land, this increase in land would have been an investing activity, right? And this increase in our note payable would have been a financing activity. But there's no cash. There's no cash in this transaction, so they don't end up in those sections. What you could have maybe, if you expanded this to have cash involved, maybe there would have been something like this: First, we bought land with cash for $110,000, right? And then we got cash of $110,000 by signing a note payable. But what did we do? We skipped this middle step. We skipped this middle step of getting cash from the note payable and using cash to pay for the land. Right? And all we had was the land and the note payable. Right? So there was no cash in this transaction, so it wouldn't show up in the operating, investing, or financing activities. It would be a disclosure at the bottom where we might say the company exchanged a $110,000 note payable for $110,000 of land.

And finally, we would have another example here where the company retired $110,000 of bonds payable by issuing 50,000 shares of 1¢ par value common stock. So what happened in this case? We had bonds payable that we had to pay off, but instead of paying it in cash, we retired it by offering this common stock. Right? So we got rid of the bonds payable and we issued common stock, right? And we're going to have pricks for everything above the par value. So, the common stock was 50,000 shares times a 1¢ par value would be $500 in par value, right? So that's the par value of the stock and that's what would go to the stock account, $500, and everything else, $99,500, was additional paid-in capital (APIC). Notice, we, again, don't have cash. This bonds payable was a financing activity where we got rid of bonds payable and this common stock in APIC, well, that's equity. So that's also a financing activity. And it has nothing to do with cash, right? There's no cash again in this transaction. So what could we have done separately to actually have cash involved? Well, maybe we issued the common stock. So first, we have the cash and the common stock. Common stock and APIC. Right? And we get this cash and then we use the cash to pay off the bonds payable. Right? But in this case, we skipped that step. We didn't have the cash, we didn't collect the cash from issuing the common stock, and then use the cash to pay the bonds payable. No, we just exchanged the bonds payable for the cash. So since there was no cash involved, it doesn't show up in the operating, investing, or financing sections. It would only be a disclosure at the bottom. Cool? So that's about it for our significant non-cash investing and financing activities. Remember that it's just going to be a disclosure if there's an exchange like this without cash. Alright. Let's go ahead and move on to the next video.

Here’s what students ask on this topic:

What are significant non-cash investing and financing activities?

Significant non-cash investing and financing activities are transactions that do not involve cash but still impact the financial position of a company. Examples include exchanging a note payable for land or retiring bonds by issuing stock. These activities are disclosed at the bottom of the Statement of Cash Flows to ensure transparency. They are not included in the operating, investing, or financing sections because they do not affect cash flow. This disclosure helps users of financial statements understand important transactions that impact the accounting equation without involving cash.

Why are significant non-cash activities disclosed at the bottom of the Statement of Cash Flows?

Significant non-cash activities are disclosed at the bottom of the Statement of Cash Flows to provide transparency and ensure that users of financial statements are aware of important transactions that do not involve cash. These activities, such as exchanging a note payable for land or issuing stock to retire bonds, impact the financial position of the company but do not affect cash flow. Without this disclosure, there would be no other place in the financial statements to report these significant transactions, potentially leading to incomplete financial information.

Can you provide examples of significant non-cash investing and financing activities?

Examples of significant non-cash investing and financing activities include: 1) Exchanging a $110,000 note payable for land. In this case, the company acquires land without using cash, and the transaction is recorded as a debit to land and a credit to note payable. 2) Retiring $110,000 of bonds payable by issuing 50,000 shares of 1¢ par value common stock. Here, the company eliminates its bond liability by issuing stock, recorded as a debit to bonds payable and credits to common stock and additional paid-in capital (APIC). These transactions are disclosed at the bottom of the Statement of Cash Flows.

How do significant non-cash activities impact the accounting equation?

Significant non-cash activities impact the accounting equation by altering assets, liabilities, or equity without affecting cash. For example, exchanging a note payable for land increases assets (land) and liabilities (note payable) equally, maintaining the balance in the accounting equation. Similarly, retiring bonds payable by issuing stock decreases liabilities (bonds payable) and increases equity (common stock and APIC). These transactions ensure that the accounting equation (Assets = Liabilities + Equity) remains balanced, even though no cash is involved.

How are significant non-cash activities recorded in journal entries?

Significant non-cash activities are recorded in journal entries by recognizing the changes in relevant accounts without involving cash. For example, if a company exchanges a $110,000 note payable for land, the journal entry would be: Debit Land $110,000, Credit Note Payable $110,000. Similarly, if a company retires $110,000 of bonds payable by issuing 50,000 shares of 1¢ par value common stock, the journal entry would be: Debit Bonds Payable $110,000, Credit Common Stock $500 (50,000 shares × $0.01), Credit Additional Paid-In Capital (APIC) $99,500. These entries reflect the transaction's impact on the company's financial position without affecting cash.