Statement of Cash Flows (SCF) Reporting CBC reached a settlement with its casualty insurance carrier related to a claim it filed after a tornado destroyed one of its idle manufacturing facilities in Omaha, Nebraska early in the fiscal year (late February 2021). On April 14, 2021, CBC received proceeds of $1.75 million from the insurance company. Rather than immediately use the insurance proceeds to rebuild the destroyed facility, CBC began to repurchase its own stock (i.e., treasury stock) beginning on April 27, 2021. By the end of the fiscal year (December 31, 2021), CBC had purchased $1.2 million in treasury stock. Continuing, during the period from April 14, 2021, to the end of the fiscal year, CBC received interest and dividends in the amount of $51,000 related to unspent insurance proceeds that were invested in debt and equity securities of other corporations during the year. Part of the $1.75 million insurance proceeds were invested only until treasury stock was purchased throughout the remainder of the fiscal year while part of the proceeds was invested for the entire fiscal year after April 14, 2021. The company controller, Gary Fisher, indicated that he classified the $1.2 million spent to purchase treasury stock (from the proceeds of the $1.75 million insurance settlement) as a cash flow from financing activities in the statement of cash flows (SCF). According to Fisher, it seemed logical that that portion of the insurance proceeds received ($1.2 million) should also be classified as a cash flow from financing activities as the two amounts would offset each other. The remaining $550,000 in insurance proceeds ($1.75 million - $1.2 million) was classified as a cash flow from investing activities in the SCF. The amount that was invested in debt and equity securities of other corporations during the year was also classified as a cash flow from investing activities, as was the amount of interest and dividends received ($51,000) on these investments as this latter amount clearly resulted from making investments in debt and equity securities. In addition, in December of 2021, CBC acquired a new warehouse facility at a cost of $500,000. CBC signed a long-term mortgage agreement with the seller in which the latter agreed to finance the purchase price in its entirety over a 15-year period. The first mortgage payment for the warehouse was not due until January 2022. Fisher is not sure how to account for the purchase of the warehouse financed by a mortgage payable to the seller in the SCF. He knows that acquiring a building is an investing activity and incurring long-term debt is a financing activity. However, no cash flows related to the transaction occurred 2021. As a result, Fisher did not include any information related to this transaction in the SCF for the fiscal year ending December 31, 2021, nor did he recommend any disclosures be made. Instructions from the audit engagement manager The audit engagement manager has assigned you the task of 1) researching the accounting issues described below using the FASB Accounting Standards Codification (do not use any SEC portion of the Codification) and 2) preparing an accounting issue memorandum to address the issues. Accounting Issue 1: Whether the controller, Gary Fisher, was correct in his determination of the accounting treatment of the cash flows described above for the fiscal year ending December 31, 2021: $1.75 million insurance proceeds, $1.2 million paid to acquire treasury stock, the amount used to purchase debt and equity securities of other corporations and $51,000 in interest and dividends received from investing a portion of the insurance proceeds in those debt and equity securities. If not, what is the appropriate classification of the misclassified cash flows? Accounting Issue 2: Whether the controller, Gary Fisher, was correct in his decision to not include the $500,000 acquisition of the warehouse by incurring a mortgage payable to the seller in the SCF or provide any disclosure related to the transaction for the fiscal year ending December 31, 2021. The engagement team has separately determined that the accounting implications of this accounting issues above are material to CDC’s financial statements and financial reporting. The analysis supporting this determination can be found in Audit Workpaper K-26. 1-what is the authoritative literature that addresses the issue above ?
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Statement of CBC reached a settlement with its casualty insurance carrier related to a claim it filed after a tornado destroyed one of its idle manufacturing facilities in Omaha, Nebraska early in the fiscal year (late February 2021). On April 14, 2021, CBC received proceeds of $1.75 million from the insurance company. Rather than immediately use the insurance proceeds to rebuild the destroyed facility, CBC began to repurchase its own stock (i.e., The company controller, Gary Fisher, indicated that he classified the $1.2 million spent to purchase treasury stock (from the proceeds of the $1.75 million insurance settlement) as a cash flow from financing activities in the statement of cash flows (SCF). According to Fisher, it seemed logical that that portion of the insurance proceeds received ($1.2 million) should also be classified as a cash flow from financing activities as the two amounts would offset each other. The remaining $550,000 in insurance proceeds ($1.75 million - $1.2 million) was classified as a cash flow from investing activities in the SCF. The amount that was invested in debt and equity securities of other corporations during the year was also classified as a cash flow from investing activities, as was the amount of interest and dividends received ($51,000) on these investments as this latter amount clearly resulted from making investments in debt and equity securities.
In addition, in December of 2021, CBC acquired a new warehouse facility at a cost of $500,000. CBC signed a long-term mortgage agreement with the seller in which the latter agreed to finance the purchase price in its entirety over a 15-year period. The first mortgage payment for the warehouse was not due until January 2022. Fisher is not sure how to account for the purchase of the warehouse financed by a mortgage payable to the seller in the SCF. He knows that acquiring a building is an investing activity and incurring long-term debt is a financing activity. However, no cash flows related to the transaction occurred 2021. As a result, Fisher did not include any information related to this transaction in the SCF for the fiscal year ending December 31, 2021, nor did he recommend any disclosures be made. |
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Instructions from the audit engagement manager
The audit engagement manager has assigned you the task of 1) researching the accounting issues described below using the FASB Accounting Standards Codification (do not use any SEC portion of the Codification) and 2) preparing an accounting issue memorandum to address the issues.
- Accounting Issue 1: Whether the controller, Gary Fisher, was correct in his determination of the accounting treatment of the cash flows described above for the fiscal year ending December 31, 2021: $1.75 million insurance proceeds, $1.2 million paid to acquire treasury stock, the amount used to purchase debt and equity securities of other corporations and $51,000 in interest and dividends received from investing a portion of the insurance proceeds in those debt and equity securities. If not, what is the appropriate classification of the misclassified cash flows?
- Accounting Issue 2: Whether the controller, Gary Fisher, was correct in his decision to not include the $500,000 acquisition of the warehouse by incurring a mortgage payable to the seller in the SCF or provide any disclosure related to the transaction for the fiscal year ending December 31, 2021.
The engagement team has separately determined that the accounting implications of this accounting issues above are material to CDC’s financial statements and financial reporting. The analysis supporting this determination can be found in Audit Workpaper K-26.
1-what is the authoritative literature that addresses the issue above ?
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