ch13

advertisement
WILEY
IFRS EDITION
Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
13-1
PREVIEW OF CHAPTER 13
Financial Accounting
IFRS 3rd Edition
Weygandt ● Kimmel ● Kieso
13-2
CHAPTER
13
Statement of Cash Flows
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.
13-3
Statement of Cash Flows: Usefulness and
Format
Learning Objective 1
Provides information to help assess:
Indicate the usefulness of
the statement of cash flows.
1. Entity’s ability to generate future cash flows.
2. Entity’s ability to pay dividends and meet 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.
13-4
LO 1
Statement of Cash Flows
Question
Which of the following is incorrect about the statement of
cash flows?
a. It is a fourth basic financial statement.
b. It provides information about cash receipts and cash
payments of an entity during a period.
c. It reconciles the ending Cash account balance to the
balance per the bank statement.
d. It provides information about the operating, investing,
and financing activities of the business.
13-5
LO 1
Classification of Cash Flows
Distinguish among
operating, investing, and
financing activities.
Operating
Activities
Investing
Activities
Financing
Activities
Income
Changes in
Investments and
Non-current
Assets
Changes in
Non-current
Liabilities and
Equity
Statement Items
13-6
Learning Objective 2
LO 2
Classification of Cash Flows
Operating activities—Income statement items
Cash inflows:
From sale of goods or services.
Illustration 13-1
Typical receipt and payment
classifications
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.
13-7
LO 2
Classification of Cash Flows
Investing activities—Changes in investments and noncurrent assets
Illustration 13-1
Cash inflows:
Typical receipt and payment
classifications
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.
13-8
LO 2
Classification of Cash Flows
Financing activities—Changes in non-current liabilities
and equity
Illustration 13-1
Cash inflows:
Typical receipt and payment
classifications
From sale of ordinary shares.
From issuance of long-debt (bonds and notes).
Cash outflows:
To shareholders as dividends.
To redeem long-term debt or reacquire
ordinary shares (treasury shares).
13-9
LO 2
Significant Non-Cash Activities
1. Direct issuance of ordinary shares to purchase assets.
2. Conversion of bonds into ordinary shares.
3. Issuance of debt to purchase assets.
4. Exchanges of plant assets.
Companies report non-cash activities in either a
13-10

separate schedule (bottom of the statement) or

separate note to the financial statements.
LO 2
Accounting Across the Organization
Net What?
Net income is not the same as net cash provided by operating
activities. Below are some results from recent annual reports
(currencies in millions). Note the wide disparity among these
companies, all of which engage in retail merchandising.
13-11
LO 2
Format of the Statement of Cash Flows
Order of Presentation:
1. Operating activities.
2. Investing activities.
Direct Method
Indirect Method
3. Financing activities.
13-12
LO 2
Illustration 13-3
Format of statement of cash flows
13-13
LO 2
>
DO IT!
Illustration: Classify each of these transactions by type of cash
flow activity.
1. Issued 100,000 HK$50 par value ordinary
shares for HK$8,000,000 cash.
Financing
2. Borrowed HK$2,000,000 from Castle Bank,
signing a 5-year note bearing 8% interest.
Financing
3. Purchased two semi-trailer trucks for
HK$1,700,000 cash.
Investing
4. Paid employees HK$120,000 for salaries and
wages.
Operating
5. Collected HK$200,000 cash for services
performed.
Operating
13-14
LO 2
Preparing the Statement of Cash Flows
Three sources of information:
1. Comparative statements of financial position
2. Current income statement
3. Additional information
13-15
LO 2
Preparing the Statement of Cash Flows
Three Major Steps:
Illustration 13-4
Three major steps in preparing
the statement of cash flows
13-16
LO 2
Preparing the Statement of Cash Flows
Three Major Steps:
Illustration 13-4
Three major steps in preparing
the statement of cash flows
13-17
LO 2
Preparing the Statement of Cash Flows
Three Major Steps:
Illustration 13-4
Three major steps in preparing
the statement of cash flows
13-18
LO 2
Indirect And Direct Methods
Companies favor the indirect method for two reasons:
1. Easier and less costly to prepare.
2. Focuses on differences between net income and net cash
flow from operating activities.
13-19
LO 2
Preparing the Statement of Cash Flows
Question
The statement of cash flows classifies cash receipts and
cash payments by these activities:
a. operating and non-operating.
b.
investing, financing, and operating.
c. financing, operating, and non-operating.
d. investing, financing, and non-operating.
13-20
LO 2
Statement of Cash Flows:
—Indirect Method
13-21
Illustration 13-5
Comparative statements of financial position, income statement,
and additional information for Computer Services Company
Learning Objective 3
Prepare a statement of cash
flows using the indirect
method.
LO 3
Illustration 13-5
Comparative statements of financial position, income statement,
and additional information for Computer Services Company
13-22
LO 3
2017
2016
Change in
Account Balance
Illustration 13-5
Additional information for 2017:
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 ordinary shares for €20,000 cash.
6. The company declared and paid a €29,000 cash dividend.
13-23
LO 3
Step 1: Operating Activities
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.

Analyze changes to non-cash current asset and current
liability accounts.
13-24
LO 3
Step 1: Operating Activities
Question
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 issuance of ordinary shares.
c. Payment of cash dividends to the company’s
shareholders.
d. None of the above.
13-25
LO 3
Step 1: Operating Activities
Depreciation Expense
Although depreciation expense reduces net income, it does
not reduce cash. The company must add it back to net
income.
Illustration 13-7
Cash flows from operating activities:
Net income
€ 145,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense
Net cash provided by operating activities
13-26
9,000
€ 154,000
LO 3
Step 1: Operating Activities
LOSS ON DISPOSAL OF PLANT ASSETS
Companies should report cash received from the sale
(disposal) of plant assets in the investing activities section.
Because of this,

any loss on sale is added to net income in the
operating section.

any gain on sale is deducted from net income in the
operating section.
13-27
LO 3
Step 1: Operating Activities
LOSS ON DISPOSAL OF PLANT ASSETS
Illustration 13-8
Cash flows from operating activities:
Net income
€ 145,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense
Loss on disposal of plant assets
Net cash provided by operating activities
13-28
9,000
3,000
€ 157,000
LO 3
Step 1: Operating Activities
CHANGES TO NON-CASH CURRENT ASSET
ACCOUNTS
When the Accounts Receivable balance decreases, cash
receipts are higher than revenue earned under the accrual
basis.
Accounts Receivable
1/1/017
Balance
Sales revenue
12/31/17 Balance
30,000
507,000
Receipts from customers
Illustration 13-9
517,000
20,000
Company adds to net income the amount of the decrease in
accounts receivable.
13-29
LO 3
Step 1: Operating Activities
CHANGES TO NON-CASH CURRENT ASSET
ACCOUNTS
Illustration 13-10
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense
9,000
Loss on disposal of plant assets
Decrease in accounts receivable
3,000
10,000
Net cash provided by operating activities
13-30
€ 145,000
€ 167,000
LO 3
Step 1: Operating Activities
CHANGES TO NON-CASH CURRENT ASSET
ACCOUNTS
When the Inventory balance increases, the cost of merchandise
purchased exceeds the cost of goods sold.
Inventory
1/1/17
Balance
Purchases
12/31/17 Balance
10,000
155,000
Cost of goods sold
150,000
15,000
Cost of goods sold does not reflect cash payments made for
merchandise. The company deducts from net income this
inventory increase.
13-31
LO 3
Step 1: Operating Activities
CHANGES TO NON-CASH CURRENT ASSET
ACCOUNTS
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
€ 145,000
Depreciation expense
Loss on disposal of plant assets
9,000
3,000
Decrease in accounts receivable
Increase in inventory
10,000
(5,000)
Net cash provided by operating activities
13-32
Illustration 13-10
€ 162,000
LO 3
Step 1: Operating Activities
CHANGES TO NON-CASH CURRENT ASSET
ACCOUNTS
When the Prepaid Expense balance increases, cash paid for
expenses is higher than expenses reported on an accrual
basis. The company deducts the increase from net income to
arrive at net cash provided by operating activities.
If prepaid expenses decrease, reported expenses are higher
than the expenses paid.
13-33
LO 3
Step 1: Operating Activities
CHANGES TO NON-CASH CURRENT ASSET
ACCOUNTS
Illustration 13-10
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 plant assets
Decrease in accounts receivable
Increase in inventory
Increase in prepaid expenses
Net cash provided by operating activities
13-34
€ 145,000
9,000
3,000
10,000
(5,000)
(4,000)
€ 158,000
LO 3
Step 1: Operating Activities
CHANGES TO NON-CASH CURRENT LIABILITY
ACCOUNTS
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 Taxes 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.
13-35
LO 3
Step 1: Operating Activities
CHANGES TO NON-CASH CURRENT LIABILITY
ACCOUNTS
Illustration 13-11
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 plant assets
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
13-36
€ 145,000
9,000
3,000
10,000
(5,000)
(4,000)
16,000
(2,000)
€ 172,000
LO 3
Step 1: Operating Activities
Summary of Conversion to Net Cash Provided by
Operating Activities—Indirect Method
Illustration 13-12
Adjustments required to convert net income to net cash provided by operating activities
13-37
LO 3
Ethics Insight
Cash Flow Isn’t Always What It Seems
Some managers have taken actions that artificially increase cash flow
from operating activities. They do this by moving negative amounts out of
the operating section and into the investing or financing section. For
example, WorldCom, Inc. (USA) disclosed that it had improperly
capitalized expenses: It had moved $3.8 billion of cash outflows from the
“Cash from operating activities” section of the statement of cash flows to
the “Investing activities” section, thereby greatly enhancing cash provided
by operating activities. Similarly, Dynegy, Inc. (USA) restated its statement
of cash flows because it had improperly included in operating activities,
instead of in financing activities, $300 million from natural gas trading. The
restatement resulted in a drop of 37% in cash flow from operating
activities.
Source: Henny Sender, “Sadly, These Days Even Cash Flow Isn’t Always What It
Seems to Be,” Wall Street Journal (May 8, 2002).
13-38
LO 3
Step 2: Investing and Financing Activities
Company purchased land of €110,000 by issuing long-term
bonds. This is a significant non-cash investing and financing
activity that merits disclosure in a separate schedule.
Land
1/1/17
Balance
Issued bonds
12/31/17 Balance
20,000
110,000
130,000
Bonds Payable
1/1/17
13-39
Balance
For land
20,000
110,000
12/31/17 Balance
130,000
LO 3
Step 2: Investing and Financing Activities
Partial statement
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of building
Purchase of equipment
Disposal of plant assets
Net cash used by investing activities
Cash flows from financing activities:
Issuance of ordinary shares
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
13-40
Illustration 13-14
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
1/1/17
Balance
Office building
12/31/17 Balance
13-41
40,000
120,000
160,000
LO 3
Step 2: Investing and Financing Activities
Partial statement
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of building
Purchase of equipment
Disposal of plant assets
Net cash used by investing activities
Cash flows from financing activities:
Issuance of ordinary shares
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
13-42
Illustration 13-14
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
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 13-13
Equipment
1/1/17
Balance
Purchase
12/31/17 Balance
Journal
Entry
13-43
10,000
25,000
Cost of equipment sold
8,000
27,000
Cash
Accumulated Depreciation
Loss on Disposal of Plant Assets
Equipment
4,000
1,000
3,000
8,000
LO 3
Statement
of Cash
Flows
Indirect
Method
13-44
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 plant assets
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
Disposal of plant assets
Net cash used by investing activities
Cash flows from financing activities:
Issuance of ordinary shares
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 13-14
€ 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
Step 2: Investing and Financing Activities
The increase in ordinary shares resulted from the issuance of
new shares.
Share Capital - Ordinary
1/1/17
Balance
Shares sold
12/31/17 Balance
13-45
50,000
20,000
70,000
LO 3
Step 2: Investing and Financing Activities
Partial statement
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of building
Purchase of equipment
Disposal of plant assets
Net cash used by investing activities
Cash flows from financing activities:
Issuance of ordinary shares
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
13-46
Illustration 13-14
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
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.
Retained Earnings
Dividends
29,000
1/1/17
Balance
Net income
12/31/17 Balance
13-47
48,000
145,000
164,000
LO 3
Step 2: Investing and Financing Activities
Question
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 ordinary
shares.
c. Receipt of cash from the sale of equipment.
d. Payment of cash to suppliers for inventory.
13-48
LO 3
Statement
of Cash
Flows
Indirect
Method
13-49
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 plant assets
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
Disposal of plant assets
Net cash used by investing activities
Cash flows from financing activities:
Issuance of ordinary shares
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 13-14
€ 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
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 $4.8 billion account in the
Cayman Islands), documents were created on scanners, with signatures that were
cut and pasted from other documents. These were then passed through a fax
machine numerous times to make them look real (if difficult to read). Similarly,
fictitious bills were created in order to divert funds to other businesses owned by the
Tanzi family (who controlled Parmalat).
Total take: Billions of dollars
The Missing Control
Independent internal verification. Internal auditors at the company should have
independently verified bank accounts and major transfers of cash to outside
companies that were controlled by the Tanzi family.
13-50
LO 3
Step 3: Net Change in Cash
Illustration 13-5
COMPARE THE NET CHANGE IN CASH ON THE STATEMENT OF CASH
FLOWS WITH THE CHANGE IN THE CASH ACCOUNT REPORTED ON
THE STATEMENT OF FINANCIAL POSITIONS TO MAKE SURE THE
AMOUNTS AGREE.
13-51
LO 3
Using Cash Flow to Evaluate a Company
Free cash flow describes the cash
remaining from operations after adjustment
Learning Objective 4
Analyze the statement of
cash flows.
for capital expenditures and dividends.
Illustration 13-15
Free cash flow
13-52
LO 4
Free Cash Flow
Illustration 13-16
Anheuser-Busch InBev cash
flow information ($ in millions)
Required:
Calculate
free cash
flow.
Cash provided by operating activities
Less: Expenditures on property and equipment
Dividends paid
Free cash flow
13-53
Illustration 13-17
Calculation of Anheuser-Busch InBev’s free cash flow ($ in millions)
$17,451
3,869
6,253
$7,329
LO 4
APPENDIX 13A
Consolidated Financial Statements
Learning Objective 5
Prepare a statement of cash
1. Compute net cash provided by
flows using the direct method.
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.
13-54
LO 5
Step 1: Operating Activities
13-55
Illustration 13A-2
Major classes of cash receipts and payments
LO 5
Direct Method
Illustration 13A-1
Comparative statements of financial position, income statement,
and additional information for Computer Services Company
13-56
LO 5
Illustration 13A-1
Comparative statements of financial position, income statement,
and additional information for Computer Services Company
13-57
LO 5
2017
2016
Change in
Account Balance
Additional information for 2017:
Illustration 13A-1
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 ordinary shares for €20,000 cash.
6. The company declared and paid a €29,000 cash dividend.
13-58
LO 5
Step 1: Operating Activities
CASH RECEIPTS FROM CUSTOMERS
For Computer Services, accounts receivable decreased
€10,000.
Accounts Receivable
1/1/017
Balance
Sales revenue
12/31/17
Balance
30,000
507,000
Illustration 13A-4
Analysis of accounts receivable
Receipts from customers
517,000
20,000
Illustration 13A-5
Formula to compute cash receipts from customers—direct method
13-59
LO 5
Step 1: Operating Activities
CASH PAYMENTS TO SUPPLIERS
In 2017, Computer Services Company’s inventory increased
€5,000 and cash payments to suppliers were €139,000.
Inventory
1/1/17
Balance
Purchases
12/31/17
Balance
10,000
155,000
Cost of goods sold
150,000
15,000
Accounts Payable
Payment to suppliers
139,000
1/1/17
Balance
Purchases
12/31/17
13-60
Illustration 13A-8
Analysis of accounts payable
Balance
12,000
155,000
28,000
LO 5
Step 1: Operating Activities
CASH PAYMENTS TO SUPPLIERS
In 2017, Computer Services Company’s inventory increased
€5,000 and cash payments to suppliers were €139,000.
Illustration 13A-9
Formula to compute cash payments to suppliers—direct method
13-61
LO 5
Step 1: Operating Activities
CASH PAYMENTS FOR OPERATING EXPENSES
Cash payments for operating expenses were €115,000.
Illustration 13A-10
Computation of cash payments for operating expenses
Illustration 13A-11
Formula to compute cash payments for operating expenses—direct method
13-62
LO 5
Step 1: Operating Activities
CASH PAYMENTS FOR INTEREST
In 2017, Computer Services’ had interest expense of €42,000.
Interest Payable
Cash paid for interest
42,000
1/1/17
Balance
Interest expense
12/31/17 Balance
13-63
0
42,000
0
LO 5
Step 1: Operating Activities
CASH PAYMENTS FOR INCOME TAXES
Cash payments for income taxes were €49,000.
Income Tax Payable
Cash paid for taxes
49,000
1/1/17
Balance
Income tax expense
12/31/17 Balance
8,000
47,000
6,000
Illustration 13A-13
Formula to compute cash payments for income taxes—direct method
13-64
LO 5
Step 1: Operating Activities
Illustration 13A-14
Operating activities section of the statement of cash flows
13-65
LO 5
Step 2: Investing and Financing Activities
Increase in Equipment. (1) Equipment purchased for €25,000,
and (2) equipment sold for €4,000, cost €8,000, book value
€7,000.
Illustration 13A-15
Analysis of equipment
Equipment
1/1/17
Balance
Purchases
12/31/17 Balance
10,000
25,000
Cost of equipment sold
8,000
27,000
Accumulated Depreciation
Equipment sold
1,000
1/1/17
Balance
1,000
Depreciation expense
3,000
12/31/17 Balance
13-66
3,000
LO 5
Step 2: Investing and Financing Activities
Increase in Equipment. (1) Equipment purchased for €25,000,
and (2) equipment sold for €4,000, cost €8,000, book value
€7,000.
Cash
4,000
Accumulated Depreciation—Equipment
1,000
Loss on Disposal of Plant Assets
3,000
Equipment
13-67
8,000
LO 5
Step 2: Investing and Financing Activities
Increase in Land. Land increased
€110,000. The company purchased
land of €110,000 by issuing bonds.
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.
13-68
Significant non-cash
investing and financing
transaction.
Investing transaction.
Significant non-cash
investing and financing
transaction.
LO 5
Step 2: Investing and Financing Activities
Increase in Share Capital—Ordinary.
Increase in Share Capital—Ordinary of
€20,000. Increase resulted from the
issuance of new shares.
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.
13-69
Financing
transaction.
Financing
transaction
(cash dividend)
LO 5
Illustration 13A-16
Statement of cash flows,
2017—direct method
13-70
LO 5
Step 3: Net Change in Cash
Illustration 13A-1
COMPARE THE NET CHANGE IN CASH ON THE STATEMENT OF CASH
FLOWS WITH THE CHANGE IN THE CASH ACCOUNT REPORTED ON
THE STATEMENT OF FINANCIAL POSITIONS TO MAKE SURE THE
AMOUNTS AGREE.
13-71
LO 5
Using a Worksheet to Prepare the
APPENDIX 13B
Statement of Cash Flows—Indirect Method
Learning Objective 6
Explain how to use a
worksheet to prepare the
statement of cash flows
using the indirect method.
13-72
Illustration 13B-1
Format of worksheet
LO 6
Preparing a Worksheet
1. Enter in the statement of financial position accounts section the
statement of financial position accounts and their beginning and
ending balances.
2. Enter in the reconciling columns of the worksheet the data that
explain the changes in the statement of financial position
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.
13-73
LO 6
Preparing a
Worksheet
Illustration 13B-3
Completed worksheet—
indirect method
13-74
LO 6
Statement of Cash Flows—
APPENDIX 13C
T-Account Approach
The change in cash is equal to the change
in all of the other statement of financial
position accounts.
Learning Objective 7
Use the T-account approach
to prepare a statement of
cash flows.
If we analyze the changes in all of the non-cash statement of
financial position accounts, we will explain the change in the
Cash account.
13-75
LO 7
Illustration 13C-1
T-account approach
13-76
A Look at U.S. GAAP
Key Points
Learning Objective 8
Compare the accounting for
statement of cash flows under
IFRS and U.S. GAAP.
Similarities



13-77
Companies preparing financial statements under both GAAP and 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 IFRS, the statement of cash flows can be prepared using either the
indirect or direct method under GAAP. Companies choose for the most part
to use the indirect method for reporting net cash flows from operating
activities.
LO 8
A Look at U.S. GAAP
Key Points
Differences


13-78
The definition of cash equivalents used in GAAP is similar to that used in
IFRS. 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
statement of financial position.
IFRS requires that non-cash investing and financing activities be excluded
from the statement of cash flows. Instead, these non-cash 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
A Look at U.S. GAAP
Key Points
Differences

13-79
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
A Look at U.S. GAAP
Key Points
Differences


13-80
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 IFRS, under GAAP 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. In order to provide this information on the face of the statement,
companies first add back the amount of interest expense and tax expense
(similar to adding back depreciation expense) and then further down the
statement they subtract the cash amount paid for interest and taxes. This
treatment can be seen in the statement of cash flows provided for Petra
Foods in Appendix C.
LO 8
A Look at U.S. GAAP
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 statement of financial position
(balance sheet) would adopt headings similar to those of the statement of
cash flows. That is, the income statement and statement of financial position
would be broken into operating, investing, and financing sections. With
respect to the cash flow statement specifically, the notion of cash equivalents
will probably not be retained. That is, cash equivalents will not be combined
with cash but instead will be reported as a form of highly liquid, low-risk
investment. The definition of cash in the existing literature would be retained,
and the statement of cash flows would present information on changes in
cash only. 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.
13-81
LO 8
A Look atAU.S.
LookGAAP
at IFRS
GAAP Self-Test Questions
Under GAAP 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.
13-82
LO 8
A Look atAU.S.
LookGAAP
at IFRS
GAAP Self-Test Questions
IFRS requires that non-cash items:
a) be reported in the section to which they relate, that is, a
non-cash 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.
13-83
LO 8
A Look atAU.S.
LookGAAP
at IFRS
GAAP Self-Test Questions
In the future, it appears likely that:
a) the income statement and statement of financial position
(balance sheet) will have headings of operating,
investing, and financing, much like the statement of cash
flows.
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.
13-84
LO 8
Copyright
“Copyright © 2016 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser may
make back-up copies for his/her own use only and not for distribution
or resale. The Publisher assumes no responsibility for errors,
omissions, or damages, caused by the use of these programs or from
the use of the information contained herein.”
13-85
Download
Related flashcards
Create Flashcards