Cash Flow Statement & Interest Income

[fishwithwings]

Does anyone know why Interest Income is negative (cash used in operating activities)?

[LongHaul]

GAAP income is booked on an accrual basis.  Accrual essentially means income/expense is recognized when earned as opposed to the cash basis which is recognized when cash goes in or out.

 

My guess is that the company "earned" the income but didn't collect the cash.  Perhaps deferred interest or a PIK note. 

 

I have seen this on at least a couple of frauds though where interest was accrued but nothing was actually collected.  Imagine a borrower who cannot repay a loan but a fraud keeps booking the interest income.

 

[jawn619]

GAAP income is booked on an accrual basis.  Accrual essentially means income/expense is recognized when earned as opposed to the cash basis which is recognized when cash goes in or out.

 

My guess is that the company "earned" the income but didn't collect the cash.  Perhaps deferred interest or a PIK note. 

 

I have seen this on at least a couple of frauds though where interest was accrued but nothing was actually collected.  Imagine a borrower who cannot repay a loan but a fraud keeps booking the interest income.

 

+1

 

great explanation

[fishwithwings]

For some reason the company adds back the interest under "Cash flows from investing activities."  Is this a unusual?

[lessthaniv]

Interest income is not really an operating cashflow. Because the cashflow from operations reconciliation begins with net income, they are backing out the effect of interest income received. They then account for it under the cashflows from investing where it more properly belongs. The intent would be to provide readers with a clearer picture of what the operations are doing wrt cashflow.

 

This is a difference between US GAAP and IFRS.

 

http://i728.photobucket.com/albums/ww289/MikeNCathy/IMG_1105_zpsgkvlka3n.png

 

 

[Kapitalust]

This thread reminded me of a question I had regarding a line on a Statement of Shareholders' Equity that I recently was looking at. I don't mean to hijack this thread from thinleyw- I feel like the original question was answered and I don't want to go about making more threads on the General board on questions regarding financial statements so I thought I'd just plop in my question here.

 

In the red square, what do you make of the amount spent on stock-based compensation and repurchases of common stock being the same dollar amount? My first thought is that this effectively cancels out any dilution or any impact of repurchases, but my gut tells me that this is incorrect.

[LongHaul]

Interest income is not really an operating cashflow. Because the cashflow from operations reconciliation begins with net income, they are backing out the effect of interest income received. They then account for it under the cashflows from investing where it more properly belongs. The intent would be to provide readers with a clearer picture of what the operations are doing wrt cashflow.

 

This is a difference between US GAAP and IFRS.

 

http://i728.photobucket.com/albums/ww289/MikeNCathy/IMG_1105_zpsgkvlka3n.png

 

Great point lessthaniv and this is probably the case.

Great job!

 

[dyow]

What lessthaniv said.

 

Interest income related to the business' day-to-day operations, anything earned on working capital, would go under cf from operations.  Any interest income on excess cash is considered passive, and outside the normal course of operations, and should not be included in cf from ops. Including it in cf from operations is misleading.

 

Think about it, you have a million bucks, you start a new corp, invest the million in bonds, and your business could be losing money but you could still show positive CF from operations.  And you could scam newbies on COBF to invest in your "profitable" company and take that money to feed your secret crack addiction....

 

The accounting rules are there to protect you.....next time you see an accountant shake their hand TS.

 

 

[woltac]

In the red square, what do you make of the amount spent on stock-based compensation and repurchases of common stock being the same dollar amount? My first thought is that this effectively cancels out any dilution or any impact of repurchases, but my gut tells me that this is incorrect.

 

When a company purchases their own stock, the purchase price first reduces common stock to the extent there is a balance in the account, then reduces paid in capital followed by retained earnings.  In the statement you attached, there is no balance in common stock/pic at the beginning of the year. The entry to record stock based compensation during the year increases common stock and the entry to record the stock purchases during the year reduces the capital stock/pic balance back to 0.  So the two numbers (stock repurchases and stock based compensation) are the same only because the beginning balance in capital stock/pic is 0 prior to the entries.

 

 

[Seahug]

Could it be they own a bond that pays annually or semi annually?

 

Interest is accrued/earned & reflected in NPAT, but the interest is only paid on the payment dates so is noncash until it's cash.

[lessthaniv]

Neu?

[fishwithwings]

Interest income is not really an operating cashflow. Because the cashflow from operations reconciliation begins with net income, they are backing out the effect of interest income received. They then account for it under the cashflows from investing where it more properly belongs. The intent would be to provide readers with a clearer picture of what the operations are doing wrt cashflow.

 

This is a difference between US GAAP and IFRS.

 

http://i728.photobucket.com/albums/ww289/MikeNCathy/IMG_1105_zpsgkvlka3n.png

 

 

Great point lessthaniv and this is probably the case.

Great job!

 

Thanks guys!  This is a Canadian company, they prepare their FS in accordance with the IFRS.

[Kapitalust]

Neu?

 

yes

[lessthaniv]

Woltac has it correct.

 

Their common stock/paid in capital account was already reduced to zero by past repurchases. During the period the company issued new stock which served  to increase the common stock/paid in capital account but that was entirely offset by the stock repurchases that occurred during the same period. In fact, the stock repurchases exceeded the issuances and therefore the balance was accounted for by a reduction in retained earnings as the common stock/paid in capital account was again, zero'd out. Your original chart cut this information off. This one shows the missing entry if you scroll to the right.  ;D

 

http://i728.photobucket.com/albums/ww289/MikeNCathy/IMG_1108_zpsij4ld8mt.jpeg