Describe the effects of transactions involving investments on the statement of cash flows
THE EFFECTS OF TRANSACTIONS INVOLVING INVESTMENTS ON THE STATEMENT OF CASH FLOWS
The effects of transactions involving investments on the statement of cash flows in U.S. GAAP are as follows.
Accounting Method Effects on Statement of Cash Flows
Fair value method for securities available for sale and cash flow hedges. Realized gains and losses appear in net income. Unrealized gains and losses appear in Other Comprehensive Income.
Fair value method for trading securities trading securities and fair value hedges. Both realized and unrealized gains and losses appear in net income.
Amortized cost method for debt where investor has both ability and intent to hold to maturity.
Investor reports interest revenue.
Equity method, where investor reports its share of investee's income.
Consolidation, where investor reports all income of consolidated subsidiaries and subtracts the
minority's interest in income of less than 100%owned subsidiaries.
Dividends received from investee included in investor's cash flow from operations. In indirect
method, add back realized holding losses, and subtract realized holding gains included in income for the period to derive cash flow from operations.
All proceeds of sale of securities available for sale appear as (dis)investing source of cash.
Dividends received from investee included in investor's cash flow from operations. In indirect
method, add back both realized and unrealized holding losses, and subtract both realized and
unrealized holding gains included in income for the period. All proceeds of sale of trading securities appear as (dis)investing source of cash.
If investor acquired the debt at a price below par, then cash flow from operations includes only the interest coupon received. If the holder acquired the debt at a price below par, then cash flow from operations will include the amount of interest revenue for the period, with source of the remainder of the cash received appearing as a (dis)investing activity,
the same as the proceeds of selling an investment.
Investor's cash flow from operations increases by only the amount of dividends received. In the indirect method, deduct the investor's share of the undistributed earnings of the investee.
In indirect method, add back the subtraction for minority interest in earnings of consolidated, but less than 100%-owned subsidiaries to derive cash flow from operations.
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