17-1
Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College

17-2
17
Learning Objectives
After studying this chapter, you should be able to:
[1] Indicate the usefulness of the statement of cash flows.
[2] Distinguish among operating, investing, and financing activities.
[3] Prepare a statement of cash flows using the indirect method.
[4] Analyze the statement of cash flows.

17-3
Accounting Principles
Eleventh Edition
Weygandt Kimmel Kieso

17-4
Usefulness and Format
1.
Entity’s ability to generate future cash flows.
2.
Entity’s ability to pay dividends and obligations.
3. Reasons for difference between net income and net cash provided (used) by operating activities.
4. Cash investing and financing transactions during the period.
LO 1 Indicate the usefulness of the statement of cash flows.

17-5
Usefulness and Format
LO 2 Distinguish among operating, investing, and financing activities.

17-6
Usefulness and Format
Operating activities —Income statement items
Cash inflows:
From sale of goods or services.
From interest received and dividends received.
Cash outflows:
To suppliers for inventory.
To employees for wages.
To government for taxes.
To lenders for interest.
To others for expenses.
Illustration 17-1
Typical receipt and payment classifications
LO 2 Distinguish among operating, investing, and financing activities.

17-7
Usefulness and Format
Illustration 17-1
Typical receipt and payment classifications
Investing activities — Changes in investments and long-term assets
Cash inflows:
From sale of property, plant, and equipment.
From sale of investments in debt or equity securities of other entities.
From collection of principal on loans to other entities.
Cash outflows:
To purchase property, plant, and equipment.
To purchase investments in debt or equity securities of other entities.
To make loans to other entities.
LO 2 Distinguish among operating, investing, and financing activities.

17-8
Usefulness and Format
Illustration 17-1
Typical receipt and payment classifications
Financing activities — Changes in long-term liabilities and stockholders’ equity
Cash inflows:
From sale of common stock.
From issuance of debt (bonds and notes).
Cash outflows:
To stockholders as dividends.
To redeem long-term debt or reacquire capital stock (treasury stock).
LO 2 Distinguish among operating, investing, and financing activities.

17-9
Usefulness and Format
1. Direct issuance of common stock to purchase assets.
2. Conversion of bonds into common stock.
3. Issuance of debt to purchase assets.
4. Exchanges of plant assets.
Companies report noncash activities in either a
 separate schedule (bottom of the statement) or
 separate note to the financial statements.
LO 2 Distinguish among operating, investing, and financing activities.

17-10

Usefulness and Format
17-11 LO 2 Distinguish among operating, investing, and financing activities.

Format of the Statement of Cash Flows
Illustration 17-2
17-12 LO 2 Distinguish among operating, investing, and financing activities.

17-13
>
Illustration: Classify each of these transactions by type of cash flow activity.
1. Issued 100,000 shares of $5 par value common stock for $800,000 cash.
2. Borrowed $200,000, signing a 5-year note bearing 8% interest.
3. Purchased two semi-trailer trucks for $170,000 cash.
4. Paid employees $12,000 for salaries and wages.
5. Collected $20,000 cash for services performed.
Financing
Financing
Investing
Operating
Operating
LO 2 Distinguish among operating, investing, and financing activities.

Usefulness and Format
1.
2.
3.
17-14 LO 2 Distinguish among operating, investing, and financing activities.

Usefulness and Format
Illustration 17-3
17-15 LO 2 Distinguish among operating, investing, and financing activities.

Usefulness and Format
Illustration 17-3
17-16 LO 2 Distinguish among operating, investing, and financing activities.

Usefulness and Format
Illustration 17-3
17-17 LO 2 Distinguish among operating, investing, and financing activities.

17-18
Usefulness and Format
1. Easier and less costly to prepare.
2. Focuses on differences between net income and net cash flow from operating activities.
LO 2 Distinguish among operating, investing, and financing activities.

Preparing the Statement of Cash Flows
Illustration
Illustration 17-4
17-19 LO 3 Prepare a statement of cash flows using the indirect method.

Preparing the Statement of Cash Flows
Illustration 17-4
17-20 LO 3 Prepare a statement of cash flows using the indirect method.

Preparing the Statement of Cash Flows
Illustration 17-4
17-21
Additional information for 2014:
1. Depreciation expense was comprised of $6,000 for building and $3,000 for equipment.
2. The company sold equipment with a book value of $7,000 (cost $8,000, less accumulated depreciation $1,000) for $4,000 cash.
3. Issued $110,000 of long-term bonds in direct exchange for land.
4. A building costing $120,000 was purchased for cash. Equipment costing $25,000 was also purchased for cash.
5. Issued common stock for $20,000 cash.
6. The company declared and paid a $29,000 cash dividend.
LO 3

17-22
Preparing the Statement of Cash Flows
Determine net cash provided/used by operating activities by converting net income from accrual basis to cash basis.
Common adjustments to Net Income (Loss):
 Add back non-cash expenses (depreciation, amortization, or depletion expense).
 Deduct gains and add losses.
 Changes in noncash current assets and current liabilities.
LO 3 Prepare a statement of cash flows using the indirect method.

17-23
Step 1: Operating Activities
Which is an example of a cash flow from an operating activity?
a. Payment of cash to lenders for interest.
b. Receipt of cash from the sale of capital stock.
c.
Payment of cash dividends to the company’s stockholders.
d. None of the above.
LO 3 Prepare a statement of cash flows using the indirect method.

17-24
Step 1: Operating Activities
Although depreciation expense reduces net income, it does not reduce cash. The company must add it back to net income.
Illustration 17-6
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense
Net cash provided by operating activities
$ 145,000
9,000
$ 154,000
LO 3 Prepare a statement of cash flows using the indirect method.

17-25
Step 1: Operating Activities
Companies report as a source of cash in the investing activities section the actual amount of cash received from the sale.
 Any loss on disposal is added to net income in the operating section.
 Any gain on disposal is deducted from net income in the operating section.
LO 3 Prepare a statement of cash flows using the indirect method.

17-26
Step 1: Operating Activities
Illustration 17-7
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense
Loss on disposal of equipment
Net cash provided by operating activities
$ 145,000
9,000
3,000
$ 157,000
LO 3 Prepare a statement of cash flows using the indirect method.

17-27
Step 1: Operating Activities
When the Accounts Receivable balance decreases , cash receipts are higher than revenue earned under the accrual basis.
1/1/014 Balance
Revenues
12/31/14 Balance
Illustration 17-8
Accounts Receivable
30,000
507,000
20,000
Receipts from customers 517,000
Company adds to net income the amount of the decrease in accounts receivable.
LO 3 Prepare a statement of cash flows using the indirect method.

17-28
Step 1: Operating Activities
Illustration 17-9
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense
Loss on disposal of equipment
Decrease in accounts receivable
Net cash provided by operating activities
$ 145,000
9,000
3,000
10,000
$ 167,000
LO 3 Prepare a statement of cash flows using the indirect method.

Step 1: Operating Activities
17-29
When the Inventory balance increases , the cost of merchandise purchased exceeds the cost of goods sold.
1/1/14 Balance
Purchases
12/31/14 Balance
Inventory
10,000
155,000
15,000
Cost of goods sold 150,000
Cost of goods sold does not reflect cash payments made for merchandise. The company deducts from net income this inventory increase.
LO 3 Prepare a statement of cash flows using the indirect method.

17-30
Step 1: Operating Activities
Illustration 17-9
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense
Loss on disposal of equipment
Decrease in accounts receivable
Increase in inventory
Net cash provided by operating activities
$ 145,000
9,000
3,000
10,000
(5,000)
$ 162,000
LO 3 Prepare a statement of cash flows using the indirect method.

17-31
Step 1: Operating Activities
When the Prepaid Expense balance increases , cash paid for expenses is higher than expenses reported on an accrual basis.
The company deducts the decrease from net income to arrive at net cash provided by operating activities.
If prepaid expenses decrease , reported expenses are higher than the expenses paid.
LO 3 Prepare a statement of cash flows using the indirect method.

17-32
Step 1: Operating Activities
Illustration 17-9
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense
Loss on disposal of equipment
Decrease in accounts receivable
Increase in inventory
Increase in prepaid expenses
Net cash provided by operating activities
$ 145,000
9,000
3,000
10,000
(5,000)
(4,000)
$ 158,000
LO 3 Prepare a statement of cash flows using the indirect method.

17-33
Step 1: Operating Activities
When Accounts Payable increases , the company received more in goods than it actually paid for. The increase is added to net income to determine net cash provided by operating activities.
When Income Tax Payable decreases , the income tax expense reported on the income statement was less than the amount of taxes paid during the period. The decrease is subtracted from net income to determine net cash provided by operating activities.
LO 3 Prepare a statement of cash flows using the indirect method.

Step 1: Operating Activities
17-34
Illustration 17-10
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense
Loss on disposal of equipment
Decrease in accounts receivable
Increase in inventory
Increase in prepaid expenses
Increase in accounts payable
Decrease in income taxes payable
Net cash provided by operating activities
$ 145,000
9,000
3,000
10,000
(5,000)
(4,000)
16,000
(2,000)
$ 172,000
LO 3

17-35
Step 1: Operating Activities
Illustration 17-11
LO 3

ANATOMY OF A FRAUD
For more than a decade, the top executives at the Italian dairy products company Parmalat engaged in multiple frauds that overstated cash and other assets by more than $1 billion while understating liabilities by between $8 and $12 billion. Much of the fraud involved creating fictitious sources and uses of cash. Some of these activities incorporated sophisticated financial transactions with subsidiaries created with the help of large international financial institutions. However, much of the fraud employed very basic, even sloppy, forgery of documents. For example, when outside auditors requested confirmation of bank accounts
(such as a fake $4.8 billion account in the Cayman Islands), documents were created on scanners, with signatures that were cut and pasted from other documents. These were then passed through a fax machine numerous times to make them look real (if difficult to read).
Similarly, fictitious bills were created in order to divert funds to other businesses owned by the
Tanzi family (who controlled Parmalat).
Total take: Billions of dollars
THE MISSING CONTROLS
Independent internal verification. Internal auditors at the company should have independently verified bank accounts and major transfers of cash to outside companies that were controlled by the Tanzi family.
17-36 Advance slide in presentation mode to reveal answer.

Step 2: Investing and Financing Activities
17-37
Company purchased land of $110,000 by issuing long-term bonds .
This is a significant noncash investing and financing activity that merits disclosure in a separate schedule.
Land
1/1/14 Balance 20,000
Issued bonds 110,000
12/31/14 Balance 130,000
Bonds Payable
1/1/14 Balance
For land
12/31/14 Balance
20,000
110,000
130,000
LO 3 Prepare a statement of cash flows using the indirect method.

Step 2: Investing and Financing Activities
17-38
Partial statement
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of building
Purchase of equipment
Sale of equipment
Net cash used by investing activities
Cash flows from financing activities:
Issuance of common stock
Payment of cash dividends
Net cash used by financing activities
Net increase in cash
Cash at beginning of period
Cash at end of period
Disclosure: Issuance of bonds to purchase land
Illustration 17-13
172,000
(120,000)
(25,000)
4,000
(141,000)
20,000
(29,000)
(9,000)
22,000
33,000
$ 55,000
$ 110,000
LO 3

Step 2: Investing and Financing Activities
From the additional information, the company acquired an office building for $120,000 cash. This is a cash outflow reported in the investing section.
Building
1/1/14 Balance 40,000
Office building 120,000
12/31/14 Balance 160,000
17-39 LO 3 Prepare a statement of cash flows using the indirect method.

Step 2: Investing and Financing Activities
17-40
Partial statement
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of building
Purchase of equipment
Sale of equipment
Net cash used by investing activities
Cash flows from financing activities:
Issuance of common stock
Payment of cash dividends
Net cash used by financing activities
Net increase in cash
Cash at beginning of period
Cash at end of period
Disclosure: Issuance of bonds to purchase land
Illustration 17-13
172,000
(120,000)
(25,000)
4,000
(141,000)
20,000
(29,000)
(9,000)
22,000
33,000
$ 55,000
$ 110,000
LO 3

Step 2: Investing and Financing Activities
17-41
The additional information explains that the equipment increase resulted from two transactions: (1) a purchase of equipment of
$25,000, and (2) the sale for $4,000 of equipment costing $8,000.
Illustration 17-12
Equipment
1/1/14 Balance
Purchase
10,000
25,000
Equipment sold 8,000
12/31/14 Balance 27,000
Journal
Entry
Cash
Accumulated depreciation
4,000
1,000
Loss on disposal of equipment 3,000
Equipment 8,000
LO 3 Prepare a statement of cash flows using the indirect method.

Statement of Cash
Flows
17-42
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense
Loss on disposal of equipment
Decrease in accounts receivable
Increase in inventory
Increase in prepaid expenses
Increase in accounts payable
Decrease in income taxes payable
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of building
Purchase of equipment
Sale of equipment
Net cash used by investing activities
Cash flows from financing activities:
Issuance of common stock
Payment of cash dividends
Net cash used by financing activities
Net increase in cash
Cash at beginning of period
Cash at end of period
Illustration 17-13
$ 145,000
9,000
3,000
10,000
(5,000)
(4,000)
16,000
(2,000)
172,000
(120,000)
(25,000)
4,000
(141,000)
20,000
(29,000)
(9,000)
22,000
33,000
$ 55,000
LO 3

Step 2: Investing and Financing Activities
The increase in common stock resulted from the issuance of new shares.
1/1/14 Balance
Shares sold
12/31/14 Balance
Common Stock
50,000
20,000
70,000
17-43 LO 3 Prepare a statement of cash flows using the indirect method.

Step 2: Investing and Financing Activities
17-44
Partial statement
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of building
Purchase of equipment
Sale of equipment
Net cash used by investing activities
Cash flows from financing activities:
Issuance of common stock
Payment of cash dividends
Net cash used by financing activities
Net increase in cash
Cash at beginning of period
Cash at end of period
Disclosure: Issuance of bonds to purchase land
Illustration 17-13
172,000
(120,000)
(25,000)
4,000
(141,000)
20,000
(29,000)
(9,000)
22,000
33,000
$ 55,000
$ 110,000
LO 3

17-45
Step 2: Investing and Financing Activities
Retained earnings increased $116,000 during the year. This increase can be explained by two factors: (1) Net income of
$145,000 increased retained earnings, and (2) Dividends of $29,000 decreased retained earnings.
Dividends
Retained Earnings
29,000
1/1/14 Balance 48,000
Net income 145,000
12/31/14 Balance 164,000
LO 3 Prepare a statement of cash flows using the indirect method.

Statement of Cash
Flows
17-46
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense
Loss on disposal of equipment
Decrease in accounts receivable
Increase in inventory
Increase in prepaid expenses
Increase in accounts payable
Decrease in income taxes payable
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of building
Purchase of equipment
Sale of equipment
Net cash used by investing activities
Cash flows from financing activities:
Issuance of common stock
Payment of cash dividends
Net cash used by financing activities
Net increase in cash
Cash at beginning of period
Cash at end of period
Illustration 17-13
$ 145,000
9,000
3,000
10,000
(5,000)
(4,000)
16,000
(2,000)
172,000
(120,000)
(25,000)
4,000
(141,000)
20,000
(29,000)
(9,000)
22,000
33,000
$ 55,000
LO 3

17-47
Step 2: Investing and Financing Activities
Which is an example of a cash flow from an investing activity?
a. Receipt of cash from the issuance of bonds payable.
b. Payment of cash to repurchase outstanding capital stock. c. Receipt of cash from the sale of equipment.
d. Payment of cash to suppliers for inventory.
LO 3 Prepare a statement of cash flows using the indirect method.

Step 3: Net Change in Cash
Compare the net change in cash on the Statement of Cash Flows with the change in the cash account reported on the Balance
Sheet to make sure the amounts agree.
Illustration 17-4
17-48 LO 3 Prepare a statement of cash flows using the indirect method.

17-49

17-50
Using Cash Flows to Evaluate a Company
Illustration 17-14
Free cash flow describes the cash remaining from operations after adjustment for capital expenditures and dividends.
LO 4 Analyze the statement of cash flows.

Using Cash Flows to Evaluate a Company
Illustration 17-15
Required:
Calculate
Microsoft’s free cash flow.
17-51
Cash provided by operating activities
Less: Expenditures on property, plant, and equipment
Dividends paid
Free cash flow
$26,994
2,355
5,180
$19,459
LO 4 Analyze the statement of cash flows.

17-52
APPENDIX 17A
Direct Method
1.
Compute net cash provided by operating activities by adjusting each item in the income statement from the accrual basis to the cash basis.
2.
Companies report only major classes of operating cash receipts and cash payments.
3.
For these major classes, the difference between cash receipts and cash payments is the net cash provided by operating activities.
LO 5 Prepare a statement of cash flows using the direct method.

17-53
APPENDIX 17A
Direct Method
Illustration 17A-2
LO 5

APPENDIX 17A
Direct Method
Illustration
Illustration 17A-1
17-54 LO 5 Prepare a statement of cash flows using the direct method.

APPENDIX 17A
Direct Method
Illustration 17A-1
17-55 LO 5 Prepare a statement of cash flows using the direct method.

APPENDIX 17A
Direct Method
Illustration 17A-1
17-56
Additional information for 2014:
1. Depreciation expense was comprised of $6,000 for building and $3,000 for equipment.
2. The company sold equipment with a book value of $7,000 (cost $8,000, less accumulated depreciation $1,000) for $4,000 cash.
3. Issued $110,000 of long-term bonds in direct exchange for land.
4. A building costing $120,000 was purchased for cash. Equipment costing $25,000 was also purchased for cash.
5. Issued common stock for $20,000 cash.
6. The company declared and paid a $29,000 cash dividend.
LO 5

17-57
APPENDIX 17A
Direct Method
For Computer Services, accounts receivable decreased $10,000.
1/1/014 Balance
Sales revenue
Accounts Receivable
30,000
507,000
Receipts from customers
Illustration 17A-4
517,000
12/31/14 Balance 20,000
Illustration 17A-5
LO 5 Prepare a statement of cash flows using the direct method.

APPENDIX 17A
Direct Method
17-58
In 2014, Computer Services Company’s inventory increased $5,000 and cash payments to suppliers were $139,000.
1/1/14 Balance
Purchases
12/31/14 Balance
Inventory
10,000
155,000
Cost of goods sold
15,000
150,000
Illustration 17A-8
Payment to suppliers
Accounts Payable
139,000 1/1/14 Balance
Purchases
12/31/14 Balance
12,000
155,000
28,000
LO 5 Prepare a statement of cash flows using the direct method.

APPENDIX 17A
Direct Method
In 2014, Computer Services Company’s inventory increased $5,000 and cash payments to suppliers were $139,000.
Illustration 17A-9
17-59 LO 5 Prepare a statement of cash flows using the direct method.

17-60
APPENDIX 17A
Direct Method
Cash payments for operating expenses were $115,000.
Illustration 17A-10
Illustration 17A-11
LO 5 Prepare a statement of cash flows using the direct method.

APPENDIX 17A
Direct Method
In 2014, Computer Services’ had interest expense of $42,000.
Cash paid for interest
Interest Payable
42,000 1/1/14 Balance
Interest expense
12/31/14 Balance
0
42,000
0
17-61 LO 5 Prepare a statement of cash flows using the direct method.

17-62
APPENDIX 17A
Direct Method
Cash payments for income taxes were $49,000.
Cash paid for taxes
Income Tax Payable
49,000 1/1/14 Balance 8,000
Income tax expense 47,000
12/31/14 Balance 6,000
Illustration 17A-13
LO 5 Prepare a statement of cash flows using the direct method.

APPENDIX 17A
Direct Method
Illustration 17A-14
Operating activities section of the statement of cash flows
17-63 LO 5 Prepare a statement of cash flows using the direct method.

APPENDIX 17A
Direct Method
17-64
Increase in Equipment.
(1) Equipment purchased for $25,000, and
(2) equipment sold for $4,000, cost $8,000, book value $7,000.
1/1/14 Balance
Purchases
12/31/14 Balance
Equipment
10,000
25,000
27,000
Cost of equipment sold
Illustration 17A-15
8,000
Equipment sold
Accumulated Depreciation
1,000 1/1/14 Balance 1,000
Depreciation expense 3,000
12/31/14 Balance 3,000
LO 5 Prepare a statement of cash flows using the direct method.

17-65
APPENDIX 17A
Direct Method
Increase in Equipment.
(1) Equipment purchased for $25,000, and
(2) equipment sold for $4,000, cost $8,000, book value $7,000.
Cash
Accumulated depreciation
Loss on disposal of equipment
Equipment
4,000
1,000
3,000
8,000
LO 5 Prepare a statement of cash flows using the direct method.

APPENDIX 17A
Direct Method
17-66
Increase in Land.
Land increased
$110,000. The company purchased land of $110,000 by issuing bonds.
Significant noncash investing and financing transaction.
Increase in Building.
Acquired building for $120,000 cash.
Increase in Bonds Payable.
Bonds
Payable increased $110,000. The company acquired land by exchanging bonds for land.
Investing transaction.
Significant noncash investing and financing transaction.
LO 5 Prepare a statement of cash flows using the direct method.

17-67
APPENDIX 17A
Direct Method
Increase in Common Stock.
Increase in Common Stock of $20,000. Increase resulted from the issuance of new shares of stock.
Financing transaction.
Increase in Retained Earnings.
The
$116,000 net increase in Retained
Earnings resulted from net income of
$145,000 and the declaration and payment of a cash dividend of $29,000.
Financing transaction
(cash dividend)
LO 5 Prepare a statement of cash flows using the direct method.

APPENDIX 17A
Direct Method
Illustration 17A-16
Statement of cash flows, 2014 —direct method
17-68

APPENDIX 17A
Direct Method
Compare the net change in cash on the Statement of Cash Flows with the change in the cash account reported on the Balance Sheet to make sure the amounts agree.
Illustration 17A-1
17-69 LO 5 Prepare a statement of cash flows using the direct method.

APPENDIX 17B
Worksheet —Indirect Method
Illustration 17B-2
Comparative balance sheets, income statement, and additional information for
Computer Services
Company
17-70

APPENDIX 17B
Worksheet —Indirect Method
Illustration 17B-2
Comparative balance sheets, income statement, and additional information for
Computer Services
Company
17-71
Additional information for 2014:
1. Depreciation expense was comprised of $6,000 for building and $3,000 for equipment.
2. The company sold equipment with a book value of $7,000 (cost $8,000, less accumulated depreciation $1,000) for $4,000 cash.
3. Issued $110,000 of long-term bonds in direct exchange for land.
4. A building costing $120,000 was purchased for cash. Equipment costing $25,000 was also purchased for cash.
5. Issued common stock for $20,000 cash.
6. The company declared and paid a $29,000 cash dividend.
LO 6

17-72
APPENDIX 17B
Worksheet —Indirect Method
1.
Enter in the balance sheet accounts section the balance sheet accounts and their beginning and ending balances.
2.
Enter in the reconciling columns of the worksheet the data that explain the changes in the balance sheet accounts other than cash and their effects on the statement of cash flows.
3.
Enter on the cash line and at the bottom of the worksheet the increase or decrease in cash. This entry should enable the totals of the reconciling columns to be in agreement.
LO 6 Explain how to use a worksheet to prepare the statement of cash flows using the indirect method.

APPENDIX 17B
Worksheet —Indirect Method
Illustration 17B-3
Completed worksheet — indirect method
17-73 LO 6

APPENDIX 17C
T-Account Approach
What this means is that the change in cash is equal to the change in all of the other balance sheet accounts.
Another way to think about this is that if we analyze the changes in all of the noncash balance sheet accounts, we will explain the change in the cash account.
17-74 LO 7 Use the T-account approach to prepare a statement of cash flows.

APPEND I X
17C
17-75
LO 7
Illustration 17C-1
Illustration 12B-1

17-76
A Look at IFRS
Key Points



Companies preparing financial statements under IFRS must prepare a statement of cash flows as an integral part of the financial statements.
Both IFRS and GAAP require that the statement of cash flows should have three major sections
— operating, investing, and financing
— along with changes in cash and cash equivalents.
Similar to GAAP, the cash flow statement can be prepared using either the indirect or direct method under IFRS. In both U.S. and international settings, companies choose for the most part to use the indirect method for reporting net cash flows from operating activities.
LO 8 Discuss the accounting procedures for the statement of cash flows under GAAP and IFRS.

17-77
A Look at IFRS
Key Points
 The definition of cash equivalents used in IFRS is similar to that used in
GAAP. A major difference is that in certain situations, bank overdrafts are considered part of cash and cash equivalents under IFRS (which is not the case in GAAP). Under GAAP, bank overdrafts are classified as financing activities in the statement of cash flows and are reported as liabilities on the balance sheet.
LO 8 Discuss the accounting procedures for the statement of cash flows under GAAP and IFRS.

17-78
A Look at IFRS
Key Points
 IFRS requires that noncash investing and financing activities be excluded from the statement of cash flows. Instead, these noncash activities should be reported elsewhere. This requirement is interpreted to mean that noncash investing and financing activities should be disclosed in the notes to the financial statements instead of in the financial statements. Under GAAP, companies may present this information on the face of the statement of cash flows.
LO 8 Discuss the accounting procedures for the statement of cash flows under GAAP and IFRS.

17-79
A Look at IFRS
Key Points
 One area where there can be substantial differences between IFRS and
GAAP relates to the classification of interest, dividends, and taxes. The following table indicates the differences between the two approaches.
LO 8 Discuss the accounting procedures for the statement of cash flows under GAAP and IFRS.

17-80
A Look at IFRS
Key Points


Under IFRS, some companies present the operating section in a single line item, with a full reconciliation provided in the notes to the financial statements. This presentation is not seen under GAAP.
Similar to GAAP, under IFRS companies must disclose the amount of taxes and interest paid. Under GAAP, companies disclose this in the notes to the financial statements. Under IFRS, some companies disclose this information in the notes, but others provide individual line items on the face of the statement.
LO 8 Discuss the accounting procedures for the statement of cash flows under GAAP and IFRS.

A Look at IFRS
17-81
Looking to the Future
Presently, the FASB and the IASB are involved in a joint project on the presentation and organization of information in the financial statements. One interesting approach, revealed in a published proposal from that project, is that in the future the income statement and balance sheet would adopt headings similar to those of the statement of cash flows. That is, the income statement and balance sheet would be broken into operating, investing, and financing sections. With respect to the statement of cash flows specifically, the notion of cash equivalents will probably not be retained. In addition, the FASB favors presentation of operating cash flows using the direct method only. However, the majority of IASB members express a preference for not requiring use of the direct method of reporting operating cash flows. The two Boards will have to resolve their differences in this area in order to issue a converged standard for the statement of cash flows.
LO 8 Discuss the accounting procedures for the statement of cash flows under GAAP and IFRS.

17-82
A Look at IFRS
Under IFRS, interest paid can be reported as: a) only a financing element.
b) a financing element or an investing element.
c) a financing element or an operating element.
d) only an operating element.
LO 8 Discuss the accounting procedures for the statement of cash flows under GAAP and IFRS.

17-83
A Look at IFRS
IFRS requires that noncash items: a) be reported in the section to which they relate, that is, a noncash investing activity would be reported in the investing section.
b) be disclosed in the notes to the financial statements.
c) do not need to be reported.
d) be treated in a fashion similar to cash equivalents.
LO 8 Discuss the accounting procedures for the statement of cash flows under GAAP and IFRS.

A Look at IFRS
In the future, it appears likely that: a) the income statement and balance sheet will have headings of operating, investing, and financing, much like the statement of cash flows.
17-84 b) cash and cash equivalents will be combined in a single line item.
c) the IASB will not allow companies to use the direct approach to the statement of cash flows.
d) None of the above.
LO 8 Discuss the accounting procedures for the statement of cash flows under GAAP and IFRS.

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