Financial Accounting: An Integrated Statements Approach, 2nd Edition

2004 2003

Cash flows from investing activities:

Purchases of property and equipment $ (292,838) $ (365,384)

Purchases of investments (1,754,808) (2,035,053)

Maturities and sales of investments 1,079,548 1,297,262

Proceeds from sale of assets (8,646)

Acquisitions, net of cash acquired (1,036,476) (216,367)

Net cash used in investing activities $(2,013,220) $(1,319,542)

Chapter 12 Special Income and Investment Reporting Issues 555

SUMMARY OF LEARNING GOALS

Purchases and sales of investments are shown in the Investing

Activities section of the statement of cash flows. Purchases of

investments are a use of cash, while maturities and sales of

investments provide cash. For example, the Investing Activities

section of eBay’s statement of cash flows for 2004 and 2003

are as follows (in millions):

As can be seen, eBay purchased more investments than

were sold during 2003 and 2004. This reflects eBay’s invest-

ment of excess cash flows into temporary investments. As a re-

sult, eBay’s investments exceed $1.9 billion as of the end of

2004.

Under the equity method of accounting for income from an

investment, the amount of income recognized on the income

statement may exceed the amount received in cash as a divi-

dend. This difference is termed the undistributed net earnings

from equity investments. Since this amount does not impact cash

flow, the Operating Activities section of the statement of cash

flows must reduce the accrual net income number for undistrib-

uted net earnings from equity investments. However, eBay had

no equity method investments, so it did not make this adjust-

ment. eBay had permanent impairments that did not impact

cash flow in 2003, thus requiring a positive adjustment to net

income in determining cash flows from operations, shown as

follows:

Investment and Cash Flows

FOCUS ON CASH FLOW

2004 2003

Net income $ 778,223 $ 441,771

Depreciation and amortization 253,690 159,003

Impairment of equity investments 1,230

Other items 415,338 231,777

Net changes in current assets and liabilities (161,936) 40,338

Net cash provided by operating activities $1,285,315 $ 874,119

Prepare an income statement reporting the following
unusual items: fixed asset impairments, restructuring
charges, discontinued operations, extraordinary items, and
cumulative changes in accounting principles. Fixed asset
impairments occur when the fair value of a fixed asset falls
below its book value and is not expected to recover. The
asset is written down, and a loss is recognized. The loss is
deducted from gross profit on the income statement.
Restructuring charges are costs associated with involun-
tarily terminating employees, terminating contracts, consoli-
dating facilities, or relocating employees. The accrued
expenses associated with such a plan are recognized in the
period that senior executives approve and communicate the

plan. The expense is deducted from gross profit on the

income statement.

A gain or loss resulting from the disposal of a business

segment, net of related tax, should be added to or deducted

from income from continuing operations on the income

statement.

Gains and losses may result from events and transac-

tions that are unusual and occur infrequently. Such extra-

ordinary items, net of related income tax, should be added

to or deducted from income from continuing operations on

the income statement.

A change in an accounting principle results from the

adoption of a generally accepted accounting principle

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