Question

Could you elaborate more on why it would be permissible for a financial institution like an investment or commercial bank to sell treasury securities as part of their business activity compared to a manufacturing company? Are there any specific regulations or accounting standards that make this distinction, or is it purely based on industry norms? Additionally, do you think that including the sale of treasury securities in the cash flow from operational activities could potentially misrepresent the company's financial performance? If so, how can this be addressed to ensure that the cash flow statement accurately reflects the company's operational activities?

Answer 1

Financial institutions, such as banks, can sell treasury securities as part of their business activity due to their role as financial intermediaries. This distinction is based on both specific regulations and accounting standards, in addition to industry norms. Including the sale of treasury securities in the operational cash flow could potentially misrepresent the company's financial performance, therefore, it should be classified as a cash flow from investing activities.

Step-by-step explanation:

A financial institution like a bank can sell treasury securities as part of their business activity because it aligns with their role as financial intermediaries. Banks accept deposits from savers and use that money to provide loans to borrowers. Selling treasury securities allows banks to invest their funds and manage their assets.

This distinction between financial institutions and manufacturing companies is not solely based on industry norms but is also driven by specific regulations and accounting standards. For example, banks are regulated by entities like the Federal Reserve and are subject to guidelines such as the Basel III framework.

Including the sale of treasury securities in the cash flow from operational activities on the cash flow statement might misrepresent the company's financial performance, as it is an investing activity rather than an operational one. To ensure accurate representation, the sale of treasury securities should be classified as a cash flow from investing activities on the cash flow statement.