Measuring the Effects of Non-Cash Investing & Financing Activities

Journal of Law and Financial Management, Vol. 13, No. 1, June 2014, pp. 2-17

21 Pages Posted: 5 Aug 2014

See all articles by Charles W. Mulford

Charles W. Mulford

Georgia Institute of Technology - Accounting Area

Husbert Nicholson

Georgia Institute of Technology - Scheller College of Business

Date Written: August 3, 2014

Abstract

In this study, for a sample of 120 companies, we identify and recast the statement of cash flows for the implied cash effects of six general categories of non-cash activity, transactions affecting 1) capital expenditures and operating activities, 2) capital expenditures and other investing activities, 3) capital expenditures and financing activities, 4) other investing activities and operating activities, 5) other investing activities and financing activities, and 6) financing activities and operating activities. We focus on the implied cash effects of two key non-cash activities from category three, debt issued for capital assets and capital lease financing of capital assets. These are transactions that directly affect capital expenditures and free cash flow. When revising the statement of cash flows to include the implied cash effects of these two non-cash transactions, we find a reduction in free cash flow in 62 instances for a median amount that comprised 2.8% of reported free cash flow. Among the 62 firms, 24 saw free cash flow decline by more than 5%, 16 by more than 10% and 9 by more than 25%. In a paired t-test, adjusted free cash flow was significantly less than reported free cash flow at the .00 level.

Given the importance of non-cash capital expenditures to calculations of free cash flow, the FASB may wish to revise its stance regarding the exclusion of all non-cash activities from the statement of cash flows. As to analysts and investors, in the absence of changes to the reporting of non-cash activities, such users of financial statements will want to ensure that such non-cash activities are given explicit consideration when analysing financial results.

Keywords: non-cash investing, capital expenditures, cash flows

JEL Classification: M40, M41

Suggested Citation

Mulford, Charles W. and Nicholson, Husbert, Measuring the Effects of Non-Cash Investing & Financing Activities (August 3, 2014). Journal of Law and Financial Management, Vol. 13, No. 1, June 2014, pp. 2-17 , Available at SSRN: https://ssrn.com/abstract=2475645

Charles W. Mulford (Contact Author)

Georgia Institute of Technology - Accounting Area ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

Husbert Nicholson

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
267
Abstract Views
1,506
Rank
208,488
PlumX Metrics