Non-Cash Activities and other Required Disclosures

Learning Outcomes

  • Explain required disclosures, including non-cash activities
The side view of a white building with windows.

What happens if we purchase a building by signing a mortgage with no cash down payment? Or if we convert bonds payable to common stock, how would we account for these transactions? These transactions do not involve cash but they are significant enough for investors to need to know. We will report them in a separate section at the bottom of the statement of cash flows. For example, assume a company did purchase a $100,000 building by paying $20,000 down in cash and signed a note for the balance of $80,000. This would be reported as follows (note: the $20,000 down payment would be including in the investing section of the statement of cash flows):

Noncash investing and financing activities:
Purchased building for $100,000 by signing a note and a downpayment of $20,000 $80,000

In addition to disclosing transactions that do not otherwise appear on the statement of cash flows (non-cash transactions), companies using the direct approach must supplement the cash flow statement with a reconciliation of income to cash from operations. This reconciliation may be found in notes accompanying the financial statements. For our Rumble Corp. example it would look like this:

Reconciliation of net income to net cash provided by operating activities:
Net income $ 2,610
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 125
Decrease in Accounts Receivable 15
Gain on sale of equipment (90)
Increase in Accounts Payable 32
Increase in income taxes payable 80
Increase in other liabilities 18
Total adjustments 180
Net cash provided by operating activities $ 2,790


As you can see, it’s basically just the top portion of the statement prepared using the indirect method.

Companies using the indirect method have to disclose cash paid for interest and income taxes, since those numbers are not apparent on the face of the statement as they were under the direct method.

Practice Question