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Cash flows from operating activities is the residual category in the cash flow statement. If a cash inflow (receipt) or outflow (payment) does not result from an investing or financing activity, it is classified as operating.
ASC 230-10 encourages entities to report cash flows from operating activities by showing major classes of operating cash receipts and payments (the direct method) (see NP 4.4.2). Alternatively, entities can use the indirect (or reconciliation) method to determine net cash flow from operating activities (see NP 4.4.1).
As discussed at NP 3.4.2, some NFPs may choose to present a statement of activities in a format that classifies transactions as operating or nonoperating. The definition of “operating activities” as used in the statement of cash flows is not intended to correspond to the definition of “operations” that an entity might use in its statement of activities. If an entity chooses to use an intermediate measure of operations in its statement of activities, it may define it in whatever manner it believes is most meaningful. However, “operating activities” as used in the statement of cash flows is prescribed by GAAP. Therefore, NFPs should be mindful of certain types of transactions that must be classified as operating activities under ASC 230 that might be classified differently in the statement of activities. For example:
  • Under ASC 230-10, all cash receipts from contributions must be classified within operating activities in the statement of cash flows unless the gifts are donor-restricted for long-term purposes. In the statement of activities, management might choose to classify some contributions as operating and others as nonoperating, or to assign all contributions to one category or the other.
  • ASC 230-10 similarly requires that dividends, interest, and other investment income received be classified within operating activities in the statement of cash flows unless those resources are donor-restricted for long-term purposes. In the statement of activities, many NFPs voluntarily apportion net investment return between operating and nonoperating categories using a spending rate.

4.4.1 Indirect method of determining operating cash flows

If an NFP chooses to report operating cash flows using the indirect method, ASC 230-10-45-28 requires that the operating section must reconcile from the overall “change in net assets" measure reported in the statement of activities (or, for NFP healthcare organizations (HCOs), in the statement of changes in net assets) to net cash provided by or used in operating activities.

Excerpt from ASC 230-10-45-28

Entities that choose not to provide information about major classes of operating cash receipts and payments by the direct method as encouraged in paragraph 230-10-45-25 shall determine and report the same amount for net cash flow from operating activities indirectly by adjusting net income of a business entity or change in net assets of a not-for-profit entity (NFP) to reconcile it to net cash flow from operating activities (the indirect or reconciliation method).

This requirement applies to all NFPs, including those that are required to report a performance indicator that is equivalent to earnings of a business enterprise, and those who choose to do so voluntarily. Entities cannot elect to use their performance indicator as the starting point of the reconciliation in order to more closely parallel the reporting by business enterprises.
Under the indirect method, the net cash provided by or used in operating activities is determined by adjusting the overall change in net assets to remove the effects of:
  • changes during the period in trade receivables and payables;
  • changes during the period in inventory, prepaid expenses, or deferred revenue;
  • changes during the period in pledges receivable; and
  • all other transactions included within the "change in net assets" measure that are either noncash or do not affect net cash provided by or used in operating activities, including:
    • non-cash expenses—for example, depreciation of property plant and equipment, amortization of finite-lived intangibles, or, for NFPs that have adopted the option to amortize goodwill, amortization of goodwill;
    • gains and losses on investments, changes in the fair value of derivatives, undistributed portions of changes in interest in financially interrelated foundations;
    • noncash contributions—for example, “in-kind” contributions and contributions of long-lived assets;
    • the gain or loss on disposal of property and equipment; and
    • inflows from cash contributions and investment income that are donor-restricted for long-term purposes, which must be reclassified into financing activities (see NP 4.5).

All adjustments made to reconcile the change in net assets to the net cash provided by or used in operating activities should be clearly identified as reconciling items. An illustration of an NFP cash flow statement that reports operating cash flows using the indirect method is provided at ASC 958-205-55-20.

4.4.2 Direct method of determining operating cash flows

NFPs are encouraged, but not required, to use the direct method of reporting cash flows from operating activities. According to ASC 230-10-45-25, entities that use the direct method should, at a minimum, separately report the following classes of operating receipts and payments:
  • Cash received from service recipients
  • Other operating cash receipts
  • Interest and dividends received (excluding any that are donor-restricted for long-term purposes and thus, are financing activities)
  • Cash paid to employees and suppliers
  • Interest paid
  • Income taxes paid (if material)
  • Grants paid
  • Miscellaneous receipts/payments

Operating activities would also include all cash receipts from contributions (with or without donor-restrictions) other than those that are donor-restricted for long-term purposes, which are financing activities (see NP 4.5).
Unlike business enterprises, if an NFP uses the direct method to present its cash flow statement, it is not required to present a reconciliation of the change in net assets to net cash flows provided by operating activities in a separate schedule.
An illustration of an NFP cash flow statement prepared using the direct method is provided at ASC 958-205-55-19.
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