Financial Reports: What You Should Know about Special Line Items on the Statement of Cash Flows
Sometimes you see line items on the statement of cash flows that appear unique to a specific company. For financial reporting, businesses use these line items in special circumstances, such as the discontinuation of operations. Companies that have international operations use a line item that relates to exchanging cash among different countries, which is called foreign exchange.
If a company discontinues operations (stops the activities of a part of its business), you usually see a special line item on the statement of cash flows that shows whether the discontinued operations have increased or decreased the amount of cash the company takes in or distributes. Sometimes discontinued operations increase cash because the firm no longer has to pay the salaries and other costs related to that operation.
Other times, discontinued operations can be a one-time hit to profits because the company has to make significant severance payments to laid-off employees and has to continue paying manufacturing and other costs related to those operations. For example, if a company leases space for the discontinued operations, it’s contractually obligated to continue paying for that space until the contract is up or the company finds someone to sublease the space.
Foreign currency exchange
Whenever a company has global operations, it’s certain to have some costs related to moving currency from one country to another. The U.S. dollar, as well as currencies from other countries, experiences changes in currency exchange rates — sometimes 100 times a day or more.
Each time the dollar exchange rate between two countries changes, moving currency between those countries can result in a loss or a gain. Any losses or gains related to foreign currency exchanges appear on a special line item on the statement of cash flows called Effect of currency exchange rate changes on cash.