FAR | Governmental Accounting | Cash Flow Reconciliation

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  • #187989
    Anonymous
    Inactive

    Hello All, I have a query related to the following question-

    Durban Township’s Water and Sewer Fund had $40,000 in operating income and a total change in net assets of 150,000. The Water and Sewer Fund also had the following transactions either derived from a comparison of current and prior year Statements of Net Assets or displayed on the current year Statement of Activities:

    Increase in current assets other than cash including amounts due from other funds for water services $ 30,000

    Increase in current liabilities including the current portion of bonded indebtedness of $25,000 $ 50,000

    Depreciation expense $ 70,000

    Gain on disposal of fixed assets $ 2,000

    Cash flows from operating activities would reconcile to what amount?

    a. $105,000

    b. $242,000

    c. $130,000

    d. $107,000

    Choice “a” is correct. Cash flows from operating activities would reconcile as follows:

    Operating Income $ 40,000

    Less: Increases in current assets other than cash (30,000)

    Plus: Increases in current liabilities (net of current portion of bonded debt) 25,000

    Plus: Depreciation 70,000

    Total $ 105,000

    Operating income is used to reconcile to cash flows from operations. Non operating income items (such as revolving debt financing and gains on the sale of assets) are excluded from the reconciliation. Interfund receivables for services are considered part of operations.

    My question is that why current portion of bonded debt of 25000 excluded in the calculation? The current portion is considered to be a current liability.

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  • #610570
    Anonymous
    Inactive

    This question has gotten me a few times as well. But this is how I can explain the answer

    I believe it is because the $25,000 has nothing to do with the cash. Also the $25,000 isn't for the current portion of the increase in the current liabilities it is for the noncurrent portion, the part that isn't due within the next year. Thus, you would need to add it back, same as you would need to add back the $70,000 of Depreciation Expense. This is because they do not affect the cash flow. Also you are subtracting the Increase in Current Assets other than cash because it doesn't affect the cash flow.

    Remember the seven differences between for the statement of cash flow. I thought of this mnemonic to help me out:

    CARDIIO:

    * Categories (4)

    * Operating activities

    * Noncapital Financing activities

    * Capital Financing activities

    * Investing Activities

    * Assets (Capital) purchases are “Financing Activities”

    * Reconciliation of operating income

    * Direct Method

    * Interest Income/cash receipts are “Investing Activities”

    * Interest Expense/Cash payments are:

    * Capital Financing

    * Noncapital Financing

    * Order of financing and investing activities reversed

    Hopefully this helps you out.

    #610571
    Anonymous
    Inactive

    Just came across a good example, to help you see why it isn't the the current portion but the noncurrent portion. Hope this helps.

    Cabot Township's Water and Sewer Fund had $40,000 in operating income and a total change in net position of 150,000. The Water and Sewer Fund also had the following transactions either derived from a comparison of current and prior year Statements of Net Position or displayed on the current year Statement of Activities:

    Increase in current assets other than cash $ 30,000

    Increase in current liabilities including the $15,000 current portion of revolving debt 50,000

    Depreciation expense 70,000

    Gain on disposal of fixed assets 2,000

    Cash flows from operating activities would reconcile to what amount?

    a. $242,000

    b. $115,000

    c. $132,000

    d. $130,000

    Explanation:

    Choice “b” is correct. Cash flows from operating activities would reconcile as follows:

    Operating Income $ 40,000

    Less: Increases in current assets other than cash (30,000)

    Plus: Increases in current liabilities (net of change in revolving debt) 35,000

    Plus: Depreciation 70,000

    Total $ 115,000

    Operating income is used to reconcile to cash flows from operations. Non operating income items (such as revolving debt financing and gains on the sale of assets) are excluded from the reconciliation.

    Choice “d” is incorrect. Operating Income is used to reconcile to cash flows from operations. Non operating income items (such as revolving debt financing) are excluded from the reconciliation.

    Choice “c” is incorrect. Operating income is used to reconcile to cash flows from operations. Non operating income items (such as revolving debt financing and gains on the sale of assets) are excluded from the reconciliation.

    Choice “a” is incorrect. Operating income, not the total change in net position is used to reconcile to cash flows from operations. Non operating income items (such as revolving debt financing and gains on the sale of assets) are excluded from the reconciliation.

    So as you can see the $15,0000 is the current portion and the noncurrent portion is $35,000 = $50,000 – $15,000. Thus the $25,000 from the question before is just a coincidence that the current and noncurrent portion of the increased liability are the same, $25,000, number.

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