Question

Kelly Company, a small corporation, is preparing its 2016 financial statements. At the end of 2016, the company purchased a building for $100,000, paid $20,000 as a down payment, and signed an $80,000 mortgage. Kelly's president is concerned about how to report this transaction on the company's statement of cash flows and has asked you to “look into this issue for me.” Research the related U.S. GAAP using the FASB's Accounting Standards Codification and prepare a short memo to the president that summarizes how to report this transaction on the 2016 statement of cash flows. Cite your reference and applicable paragraph numbers. Include ASC 230 with recent updates and explain why industry-specific subtopic guidance is so extensive with specific examples

Answer 1

• At the end of 2016, the company purchased a building for $100,000, paid $20,000 as a down payment, and signed an $80,000 mortgage.

According to FASB 230-10-45-11 the above shall be reported as cash flows from investing activities:

1. Cash flow from investing activities will decrease by $20,000 as purchasing of building is an investment activity.

Cash used for purchase of Building ($20,000)

Under US GAAP we only report those activities on the statement of cash flows that affect cash. Para ASC 230-10-50--3 requires that Activities that have no impact on cash are known as ‘non-cash financing activities’ and are disclosed in the foot notes under the caption ‘non-cash investing and financing activities’. Hence, balance $80,000 will be disclosed in foot notes under ‘non-cash investing and financing activities as "Purchase of Buildings by incurring a mortgage to the seller" (ASC 230-10-50--4).