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Kerianne Maloney
Graduate Research Assistant
gtg335k@mail.gatech.edu
Cashflow Reporting
in the Presence of Overdrafts
Executive Summary
Numerous companies maintain cash overdraft balances. These seemingly innocuous accounts
can have material effects on reported amounts of cash and operating cash flow. In this report we
survey reporting practices for overdrafts and draw attention to cases where analysts may be
misled.
January, 2003
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Quick Stat.: 3.9% of 10-K filings sampled reported the existence of material overdrafts
______________________________
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Exhibit 1 presents reported cash balances, cash overdrafts, and net cash balances, for a sample of
companies noted in our survey of overdraft reporting. In the exhibit, the Reported Cash Balance
column is the amount of cash and cash equivalents reported on the balance sheet for the fiscal
year noted. The Cash Overdraft Balance column is the year-end amount of overdrafts disclosed
in the footnotes or as a liability on the balance sheet. The Net Cash Balance was computed by
subtracting the overdraft balance from the reported cash balance. Net cash reflects the actual onhand amount of cash and cash equivalents in the absence of any overdraft financing.
Exhibit 1. Cash Balances and Cash Overdrafts
Year
Ended
Reported
Cash
Balance
Cash
Overdraft
Balance
Net Cash
Balance
AIRBORNE INC.
12/31/00
$ 40,390,000
$ 51,738,000
($ 11,348,000)
03/28/02
219,432,000
31,751,000
187,681,000
AMGEN INC.
12/31/00
226,500,000
101,200,000
125,300,000
AVIALL INC.
12/31/01
2,526,000
7,500,000
(4,974,000)
09/30/01
41,678,000
20,100,000
21,578,000
BOEING CORPORATION
12/31/01
633,000,000
351,000,000
282,000,000
12/31/00
10,318,000
6,965,000
3,353,000
12/31/00
31,969,000
22,500,000
9,469,000
HUNT CORP.
12/03/00
23,878,000
4,100,000
19,778,000
12/31/00
6,709,000
1,234,000
5,475,000
MEDSOLUTIONS, INC.
12/31/01
145,500
(145,500)
12/31/01
22,000
608,000
(586,000)
12/31/01
35,439
326,936
(291,497)
03/31/02
7,307
48,495
(41,188)
PERINI CORPORATION
12/31/01
9,512,000
2,626,000
6,886,000
RAILWORKS CORP.
12/31/00
7,263,000
1,164,000
6,099,000
06/30/01
1,438,466
(1,438,466)
12/31/00
1,869,000
2,495,000
(626,000)
Company
In reviewing Exhibit 1, consider the results for Airborne, Inc. Because the company's cash
overdraft balance exceeds its cash balance at December 31, 2000, its net cash balance is a
negative amount at year-end. However, because the overdraft balance is not separately stated on
the companys balance sheet, but is instead included in its account payable balance, its negative
cash balance is not evident from the company's financial statements. A review of the financial
statement footnotes is necessary to reveal the effect of the overdraft balance on its reported
amount of cash. As reported in the notes:
Cash
The Company has a cash management system under which a cash overdraft exists for
uncleared checks in the Company's primary disbursement accounts. The cash amount in
the accompanying financial statements represents balances in other accounts prior to
being transferred to the primary disbursement accounts. Uncleared checks of $51,738,000
and $43,246,000 are included in accounts payable at December 31, 2000 and 1999,
respectively.
In the case of Boeing Corp., the cash overdraft balance at year-end does not exceed its reported
cash balance. Overdrafts comprise 55.5% of the company's reported cash balance. Here again, a
review of the footnotes is necessary to reveal the effect of the overdraft balance on reported cash.
As reported in the notes (in millions):
Accounts Payable and Other Liabilities
Accounts payable includes $351 and $441 as of December 31, 2001 and 2000,
attributable to checks written but not yet cleared by the bank.
Hershey Foods Corp.s cash overdrafts comprise 70.4% of its reported cash balance, as revealed
in the footnotes to its financial statements:
Short-term debt
As a result of maintaining a consolidated cash management system, the Corporation
maintains overdraft positions at certain banks. Such overdrafts, which were included in
accounts payable, were $22.5 million and $20.4 million as of December 31, 2000 and
1999, respectively.
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"Registrants are reminded to evaluate the criteria in SFAS 95 for classifying each cash
receipt and payment in the appropriate category . . . Cash overdrafts should be reported as
financing activities."1
In some instances, companies may use funds transferred from company-owned investment
accounts to cover overdrafts. In such cases, an investing cash-flow classification for changes in
overdrafts, though importantly, not an operating designation would appear to be in order.
Such guidance notwithstanding, not all companies report changes in overdrafts outside the
operating section of the cash flow statement. In fact, among our sample of companies reporting
the existence of overdrafts, 16% included changes in overdrafts as operating cash flow while
61% reported overdrafts in the financing section. The remainder, 23% of our sample, did not
provide sufficient information to determine where overdrafts had been classified in the statement
of cash flows.
______________________________
American Institute of Certified Public Accountants 1996 Twenty-Third Annual National Conference on Current
SEC Developments, taken from http://www.sec.gov/news/speech/speecharchive/1996/spch080.txt (accessed
10/28/02).
2001
2002
2000
$ 122,634
$ 74,876
$ 43,606
9,453
-(6,613)
12,235
9,253
1,202
(7,906)
3,837
6,852
-(3,792)
--
(13,601)
(152,990)
15,611
23,481
48,300
-954
$ 59,464
(15,814)
(153,668)
(1,023)
(26,676)
65,397
20,095
4,849
$ (25,578)
(1,671)
(97,104)
4,589
28,571
11,083
(11,219)
359
$ (18,726)
Other companies were less forthcoming in their disclosures of the effects of overdrafts on
operating cash flow. Consider, for example, Aviall, Inc.
In 2000, Aviall, Inc. reported that it generated $7.7 million in operating cash flow. The cash
flow statement did not, however, provide direct evidence of the effects of overdrafts. The
company did disclose in a note that overdrafts were included in accounts payable. According to
the note, during 2000, those overdrafts increased $15.2 million, providing that amount of
operating cash flow. The note is reproduced below:
Cash and cash equivalents
The Company considers all highly liquid, interest-bearing instruments with an original
maturity of three months or less to be cash equivalents. The Company reclassifies cash
overdrafts to accounts payable. Cash overdrafts included in accounts payable were $19.7
million and $4.5 million at December 31, 2000 and 1999, respectively.
To confirm the inclusion of overdrafts in operating cash flow, we tied the change in accounts
payable from the balance sheet, which, according to the company, included cash overdrafts, to its
change in the operating section of the cash flow statement.
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In 2001, Aviall reported that it used $93.4 million in operating cash flow. That year, overdrafts
declined from $19.7 million to $7.5 million, consuming $12.2 million in cash from operations.
The company made the following disclosure in the notes to its financial statements for 2001:
Cash and cash equivalents
The Company considers all highly liquid, interest-bearing instruments with an original
maturity of three months or less to be cash equivalents. The Company reclassifies cash
overdrafts to accounts payable. Cash overdrafts included in accounts payable were $7.5
million and $19.7 million at December 31, 2001 and 2000, respectively.
As is common for quarterly filings, the company provided no disclosure of overdrafts in the
quarterly statements for the period ended September 30, 2002.
Exhibit 3. Financial Statement Excerpts, Aviall, Inc.
Operating Section, Consolidated Statements of Cash Flows (in thousands)
2001
2000
1999
$ 2,759
(322)
9,787
1,026
11,630
$ 11,628
(1,062)
--9,232
437
1,477
--
371
5,684
23
104
2,709
128
7,234
(112,613)
(15,942)
1,054
85
$ (93,388)
(20,643)
(26,319)
31,594
(196)
(2,644)
$ 7,668
(3,395)
(24,880)
3,448
(5,213)
(2,800)
$ (11,980)
9,703
(4,588)
6,029
-6,775
Consider also the effects of overdrafts on the operating cash flow of Mim Corp. as presented in
Exhibit 4.
Fiscal period
Net income
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization
TennCare reserve adjustment
Issuance of stock to employees
Provision for losses on
receivables
Changes in assets and liabilities,
net of acquired assets:
Receivables, net
Inventory
Prepaid expenses and other
current assets
Accounts payable
Claims payable
Cash overdrafts
Payables to plan sponsors
Accrued expenses and other
current liabilities
Non-current liabilities
Net cash provided by operating
activities
Nine Months
Ending
Sept. 30, 2002
$ 14,303
Three Months
Ending
March, 30, 2002
$ 5,207
Three Months
Ending
March, 30, 2001
$ 3,483
4,544
(851)
109
941
1,343
(851)
1,416
(980)
169
305
5,264
(2,268)
(4,463)
(2,185)
(5,479)
(1,296)
(1,305)
56
(2,721)
-2,046
(158)
1,482
4,956
9,698
(1,946)
283
930
8,788
-(3,423)
(1,900)
--
(321)
--
86
(232)
$ 18,218
$ 12,931
$ 3,881
For the fiscal quarter ending March 31, 2002 Mim clearly disclosed the effects of overdrafts on
operating cash flow. That quarter, an increase in cash overdrafts of $9.7 million provided Mim
with 75.0% of its operating cash flow.
For the nine months ending September 30, 2002, however, Mim did not report the effects of cash
overdrafts on operating cash flow. That is, the line item "cash overdrafts" was actually deleted
from the cash flow statement. Such presentation indicates that either cash overdrafts were
covered or effectively repaid in ensuing quarters or the effects of overdrafts were combined with
another line item on the statement of cash flows.
Like so many other companies, Amgen, Inc. includes its bank overdraft balance at year-end in
accounts payable. As reported in the notes to the company's financial statements for the year
ended December 31, 2000:
Cash Flow Reporting in the Presence of Overdrafts, January, 2003.
(c) 2003 by the DuPree College of Management, Georgia Institute of Technology, Atlanta, GA 30332-0520
10
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The company considers cash equivalents to be only those investments that are highly
liquid, readily convertible to cash and which mature within three months from date of
purchase. Under the Companys cash management system, the bank notifies the
Company daily of checks presented for payment against its primary disbursement
accounts. The Company transfers funds from short-term investments to cover the checks
presented for payment. This system results in a book cash overdraft in the primary
disbursement accounts as a result of checks outstanding. The book overdraft, which was
reclassified to accounts payable, was $101.2 million and $43.9 million at December 31,
2000 and 1999, respectively.
At December 31, 2001, Amgen did not disclose the existence of overdrafts. That year, the
company's cash note was amended to the following:
The Company considers cash equivalents to be only those investments which are highly
liquid, readily convertible to cash, and which mature within three months from date of
purchase.
Amgen did not separately report the effects of overdrafts in its cash flow statement. However, in
2000, because the change in accounts payable on Amgens statement of cash flows agreed with
the change in accounts payable reported on the balance sheet, which included overdraft balances,
it is apparent that Amgen had included cash overdraft activity in the operating section of its cash
flow statement. The operating section of Amgen's cash flow statement is provided in Exhibit 5.
Exhibit 5. Financial Statement Excerpts, Amgen, Inc.
Operating Section, Consolidated Statements of Cash Flows (in thousands)
Year Ended December 31,
Cash flows from operating activities:
Net income
Depreciation and amortization
Tax benefits related to employee stock
Options
Loss / (gain) on equity investments
Other non-cash expenses
Deferred income taxes
Loss of affiliates, net
Cash provided by (used in):
Trade receivables, net
Inventories
Other current assets
Accounts payable
Accrued liabilities
Net cash provided by operating activities
2001
2000
1999
$ 1,119,700
265,900
$ 1,138,500
211,800
$ 1,096,400
176,800
244,500
7,400
87,700
(148,300)
2,700
376,600
(31,800)
29,700
6,600
23,900
151,600
--9,800
16,800
(123,000)
(85,500)
(31,500)
(6,500)
147,100
$ 1,480,200
23,000
(120,900)
(51,400)
59,800
(31,200)
$ 1,634,600
(92,300)
(73,500)
(9,000)
(38,200)
(11,500)
$ 1,226,900
11
At December 31, 2000, 44.7% of Amgens cash balance consisted of cash overdrafts. Further,
an increase in cash overdrafts contributed $57.3 million to Amgens operating cash flow for that
year. Although Amgen may have maintained an overdraft balance at December 31, 2001, the
company did not disclose the details of the amount or the accounts in which the overdrafts were
included. Thus, both the reported cash balance at December 31, 2001 and the operating cash
flow for the year ending December 31, 2001 may be materially affected by the presence of
overdrafts, but such effects cannot be determined from the financial statements alone.
As an example of a company that includes overdrafts in financing cash flow, consider AMC
Entertainment, Inc. The company reports the existence of overdrafts with the following footnote
disclosure:
Under the Company's cash management system, checks issued but not presented to banks
frequently result in overdraft balances for accounting purposes and are classified within
accounts payable in the balance sheet. The amount of these checks included in accounts
payable as of March 28, 2002 and March 29, 2001 was $31,751,000 and $35,157,000,
respectively.
The cash flow statement clearly reports the change in overdrafts in financing cash flow, as seen
in Exhibit 6.
Exhibit 6. Financial Statement Excerpts, AMC Entertainment, Inc.
Condensed Consolidated Statements of Cash Flows (in thousands)
Year Ended March 28, 2002 and March 29, 2001:
Net cash provided by operating activities
Net cash used in investing activities
Cash flows from financing activities:
Net borrowings (repayments) under Credit Facility
Proceeds from issuance of 9 7/8% Senior Subordinated
Notes due 2012
Net proceeds from sale of Common Stock
Net proceeds from Preferred Stock Issuance
Proceeds from financing lease obligations
Principal payments under capital and financing lease
obligations and other
Change in cash overdrafts
Change in construction payables
Deferred financing costs and other
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash and equivalents
March, 2002
$ 100,649
March, 2001
$ 43,458
(144,510)
(91,933)
(270,000)
(60,000)
172,263
100,800
230,022
881
19,135
(2,638)
(3,406)
6,264
(4,865)
229,321
(2,755)
6,520
1,816
(35,284)
(103)
(1,471)
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185,357
34,075
$ 219,432
(85,230)
119,305
$ 34,075
Since AMC Entertainment, Inc. has appropriately reported the effects of overdrafts in its
financing cash flow, operating cash flow results have not been distorted.
Conclusion
The presence of overdraft balances at year-end can affect the presentation of both the balance
sheet and statement of cash flows. Because overdraft balances are typically classified as
liabilities, the reported balance in cash can be misleading. Moreover, if changes in overdraft
balances are improperly reported in the operating section of the cash flow statement, reported
operating cash flow does not clearly reflect sustainable cash flow. Given the number of
companies maintaining overdraft balances and the potentially material effect such overdrafts can
have on cash balances and operating cash flow, a complete financial analysis should consider
their impact. However, because disclosure is somewhat spotty, verification with management of
the existence of cash overdrafts may be in order.
13