TO: Go With the Flow Inc.
FROM: Olivia Bogle, Laura Cox, J.T. Mack, and Erica Patterson
RE: Statement of Cash Flows
Go With the Flow Inc. (Go With the Flow) designs, manufactures, and sells a large variety of mobile network and communication products. The company’s communication devices include mobile, cordless, and corded telephones. Go With the Flow’s liquidity primarily comes from the company’s cash flows, debt and revolving credit facilities, and the sale of trade accounts receivables. Three of the company’s cash flow transactions are insurance settlement proceeds, sale of accounts receivable, and acquisition of property, plant, and equipment on account. This memo ...view middle of the document...
ASC 230-10-45-16 part c. also says that insurance proceeds can be part of operating activities except those directly related to investing or financing activities. As defined above, the insurance proceeds in conjunction with a destroyed building is an investing activity.
The proper classification of the insurance proceeds is investing activities because the proceeds came directly from the insurance company in connection with a destroyed building.
NEED TO INSERT ANALYSIS
Sales of Accounts Receivable
What is the proper classification of securitization of accounts receivable on the statement of cash flows? Should this entry occur on this fiscal year’s statement of cash flows or next fiscal year?
Go With the Flow sells its accounts receivable to a nonconsolidated multi-seller securitization vehicle and receives proceeds consisting of cash and beneficial interest in the transferred receivables. During the current year, the company secured $11 million in accounts receivable. The company’s sale of receivables qualifies for derecognition under ASC 860 and therefore, this securitization is not reflected on the balance sheet under accounts receivable.
With securitization, the buyer owns the debt; however, the company is still obligated to retrieve the debt from its debtors per ASC 860-10-05-07 through 11. The logic behind this is that the company needs cash more quickly than the terms of its customers, and the interest on securitization is lower than they would get from the bank. Presumably, the company will only secure Accounts Receivable from low risk customers. Although, the securitization vehicle owns the accounts receivable, the amount on the balance sheet would not be diminished due to the derecognition criterion under ASC 860. Under this new rule, the main tenet is that the transferor no longer needs to prove ability to redeem or repurchase the transferred asset (in this case, accounts receivable). Furthermore, the amount of the cash transferred no longer determines whether the reposition is a financing or a sale transaction.
According to ASC 230-10-45-11 and 12, the funds received in the current year classify on the statement of cash flows as cash receipts from sale of investment securities, under the investing activities section. ASC 310-10-45-11 also agrees to this classification. If the company uses the proceeds immediately to pay higher interest debt, then the funds might not make it onto the next statement of cash flows due to timing. In addition, there will be an increase in securities payable and will be paid off as Go With the Flow receives payments from its customers. (Do we need to say how much the increase is?)
Acquisition of Property, Plant, and Equipment on Account
The invoice for the acquisition of the property, plant, and equipment remains unpaid at year-end. Should this entry occur on this fiscal year’s statement of cash flows or next...