Glossary—Chapter 23
cash equivalentsShort-term, highly liquid investments that are both: (a) readily convertible to known amounts of cash, and (b) so near their maturity that they present insignificant risk of changes in interest rates. Generally, only investments with original maturities of 3 months or less qualify under this definition. Examples are Treasury bills, commercial paper, and money market funds purchased with cash that is in excess of immediate needs. (p. 1245) (n).
direct method Method of preparing the cash flow statement, which reports cash receipts and cash disbursements from operating activities. This results in the presentation of a condensed cash receipts and cash disbursements statement. (p. 1250).
financing activitiesCash flow activities that include (1) obtaining cash from issuing debt and repaying the amounts borrowed, and (2) obtaining cash from stockholders and paying them dividends. (p. 1245).
indirect methodMethod of preparing the cash flow statement that starts with net income and converts it to net cash provided by operating activities, by adjusting net income for items that affected reported net income but did not affect cash. Also called the reconciliation method. (p. 1250).
investing activitiesCash flow activities that include (1) purchasing and disposing of investments and productive long-lived assets using cash, and (2) lending money and collecting the loans. (p. 1245).
operating activitiesCash flow activities include the cash effects of transactions that create revenues and expenses, and thus enter into the determination of net income. (p. 1245).
significant noncash transactionsTransactions and events that are investing or financing activities but that do not involve cash and thus are omitted from the statement of cash flows. These include: acquisition of assets by assuming liabilities or by issuing equity securities, exchanges of nonmonetary assets, refinancing of long-term debt, conversion of debt or preferred stock to common stock, and issuance of equity securities to retire debt. Companies either disclose these transactions in a separate schedule on the statement of cash flows or in a separate note to the financial statements. (p. 1272).
statement of cash flowsThe basic financial statement that reports cash receipts, cash payments, and net change in cash resulting from operating, investing, and financing activities, in a format that reconciles the beginning and ending cash balances. (p. 1244).