Financial Accounting

Learn the toughest concepts covered in your Financial Accounting class with step-by-step video tutorials and practice problems.

13. Statement of Cash Flows

Significant Noncash Activities


Significant Non-cash Investing and Financing Activities

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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. No. Remember when we were talking about 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 and financing activities. It's just for the operation 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 gonna 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 no 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 mentioned 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. So let's see a couple examples of what these journal entries look like for these transactions. So the first one, the exchanger company signed 100 and 10,000 note payable in exchange for land a lot of times when you see these types of transactions, it's gonna say that there was an exchange right? We exchange the note payable for land. So we would have made a journal entry that looked like this land debit land for 100 and 10,000. 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. Which 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 trans. 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 uh exchanged $110,000 note payable for $110,000 of land. Okay. And finally, we would have another example here Where we have the exchanger company retired $110,000 of bonds payable by issuing 50,000 shares of one cent par value. Common stock. So what happened in this case we had a 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 gonna have a pick for everything above the par value. So the common stock was 50,000 shares times a one cent 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 would go to a pick. So this was 100,000 of bonds that we got rid of. 500 was common stock and the rest of it, 99,500 was a pick notice. We again don't have cash. This bonds payable was the financing activity where we got rid of bonds payable. And this common stock and a pick. 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 a pick. Right? And we get this cash. And then we used the cash to pay off the bonds payable, right? But in this case we skip that step. We didn't have the cash. We didn't collect the cash from issuing the common stock and then used 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 in investing or financing section, it would only be a disclosure at the bottom. Cool. So that's about it for a significant non cash investing and financing activities. Remember that? It's just gonna be a disclosure if there's an exchange like this without cash. Alright, let's go ahead and move on to the next video.