INTERMEDIATE ACCOUNTING 3 FINALS REVIEWER
CHAPTER 6: STATEMENT OF CASH FLOW
Cash flow – information about sources & utilization of C
& CE.
-Cash equivalent can qualify ONLY debt instruments
acquired 3 months or less before maturity.
-In flows (sources) and outflows (uses)
-Can ONLY prepared on cash basis
-Enhances inter-comparability it eliminates diff.
accounting treatment to same transaction.
PURPOSE: helps assess
-ability of entity to general C & CE
-timing & certainty in generation of cash flows
-the need to utilize those cash flow
CLASSIFICATION
OPERATING ACTIVITIES (affect P&L)
-revenue-producing activities of entity
-include cash inflows & outflows on items income
and expenses.
Example;
Cash Receipts (+)
Cash Payments (-)
Sales
of
goods,
rendering services &
other form of income
From contracts held for dealing or trading
purposes
From customers
For
purchases
of
goods/services
For operating exp.
(employee
benefits,
insurance,
payments/refunds of
income taxes)
Cash flows in held for trading securities (FA/FL)
Those manu. Or acquire items of PPE to held
for rental and subsequently transfer to asset
inventories when they actually rented & held for
sale
Loans transactions (etc. banks)
Cash flow relating to taxes, unless noted w/
investing or financing
INVESTING ACTIVITIES (affect NCA & inv’t)
-acquisition and disposal of NCA and investments.
-exclusion – expenditures that did not result in
capitalized asset
Example;
Cash Receipts
Of
PPE,
investment
property,
Cash Payments
Of PPE, investment property,
intangible assets & other NCA
intangible assets
& other NCA
Sale of equity or
debt instruments
Derivatives
assets
and
liabilities
Sale of equity or debt
instruments except those
already classified as CE and
held for trading
Derivatives assets and liabilities
except those already held for
trading
/
classified
as
financing
Loans to other
parties
and
collection
except, loans
made
by
financial insti.
(banks)
FINANCING ACTIVITIES
-affects entity capita equity and borrowings
Example;
Cash Receipts
from
issuing
shares / other
equity
instruments
From
issuing
notes,
loans,
bonds
and
mortgage
payable & other
short/long-term
borrowings
Cash Payments
To redeem them
Their repayments
Lessee for reduction
outstanding liability
of
Note: only non-operating or non-trade liabilities
are included in financing activities.
Interest and Dividends
Cash flows
Option 1
Interest
inc. Operating
received
Activities
Interest exp. Operating
paid
Activities
Dividend inc. Operating
received
Activities
Dividend paid Financing
to owners
Activities
Option 2
Investing
Activities
Financing
activities
Investing
activities
Operating
Activities
Note: Option 1
-O/A = they enter into the determination of P&L
-F/A = the transaction w/ owners alter equity structure
Option 2
-I/A = result from investment
INTERMEDIATE ACCOUNTING 3 FINALS REVIEWER
-F/A = results from borrowing
-O/A = entity ability to pay dividends out of operating cash
flows
Prepaid exp. Beg
Cash paid for exps
(squeeze)
Accrued Exp, end
Accrued exp. Beg
Exps (accrual basis)
Prepaid exp, end
PRESENTATION
Operating Activities
-
PAS 7 encourages the DM because useful in
estimating future cash flows
In practice, IDM is more commonly used
a.Direct Method – shows gross cash receipts and
gross cash payments. Such gross may obtained
either from acctg. Records or by adjusting income
statement.
Cash flows from O/A
Cash receipts from customers 500
(200)
Cash paid to suppliers
(100)
Cash paid to employees
(120)
Cash paid for O/Expenses
Cash
generated
from 80
operations
(10)
Interest paid
(20)
Income taxes paid
50
Net cash from O/A
a.a T-account method
Computation of Receipts from customers
Trade accounts & N/R
T/A and N/R beg.
Write offs
Collection of T/A
and N/R (squeeze)
Sales (accrual basis)
T/A and N/R -end
Computation of Write offs
Allowance for doubtful accounts
Write
offs Beg.
(squeeze)
Recoveries
Bad dept expenses
End
Computation of cash paid for suppliers
Inventories
Inventory, Beg
Net
purchases
(squeeze)
Cost of sales
Inventory, end
Trade accounts and N/P
T/A and N/P – beg
Payment for T/A
and N/P (squeeze)
Net purchases
T/A and N/P – end
Computation of cash paid for expenses
Prepaid expense / Accrued Expense
Computation of cash receipt from other items of
income
Accrued income / Unearned income
Accrued inc. beg
Unearned inc. beg
Other
items
of
income (accrual b)
Unearned inc. end
Cash receipt from OII
(squeeze)
Accrued inc. end
Computation of cash paid for interest exp.
Interest exp. (accrual b)
Xx
Add: Amort. Discount on B/N Xx
payable
Less: Amort. Premium on B/N Xx
payable
Interest exp. (cash basis)
Xx
Computation of cash receipt from interest inc.
Interest income (accrual b)
xx
Add: Amort. Premium on inv’t Xx
in bonds
Less: Amort. Discount on inv’t Xx
in bonds
Interest
income
(cash Xx
basis)
NOTE:
Investment in bonds = PADD
Bonds/notes payable = PDDA
Computation of cash paid for income taxes
Xx
Interest tax exp. (accrual)
Xx
Less: increase in DTL
Xx
Add: increase in DTA
current tax expense
Xx
Income tax payable
Inc. tax payable,
Cash paid for income beg.
taxes (squeeze)
Current tax exp.
Inc. tax payable, end
OVERALL PRESENTATION
Net cash provided by O/A
Net cash Provided by I/A
Net cash provided by F/A
Net increase(decrease) in C&CE
Add: Beg. Cash & Cash equivalent
End. Cash and Cash equivalent
Xx
Xx
Xx
Xx
Xx
Xxx
b. Indirect Method – accrual basis P&L will be
adjusted by
in working capital (CA-CL) and other
INTERMEDIATE ACCOUNTING 3 FINALS REVIEWER
non-cash items. Beg and end balance of balance
sheet accts. And detailed income statement or merely
amt of P&L
Presentation 1: foundation
Profit or loss
Add:expenses, losses/adjustmens
that The P&L but under I or F/A
Less:income, gains/adjustments
that The P&L but under I or F/A
Working capital adj:
Add: in CA(exp. C&CE)
in CL
Less:
in CA
in CL
Net cash provided by Operating
activities
Presentation 2: book base
Profit before tax
Adjustments for:
Depreciation
Foreign exchange loss
Investment income
Interest expense
in T&O/R
in inventory
in trade payables
Cash generated from operations
Interest paid
Income taxes paid
Net cash from O/A
Dividends paid
End
x
xx
Dividends declared x
Non-cash transactions
-Cash flow prepared using cash basis (income is
recog only when collected and exp are recog only
when paid)
-only those transaction that affected C&CE are
reported in SCF.
-non-cash transactions are excluded and disclosed
only
Xx
Xx
Xx
Xx
Examples of NCT that are excluded
a. Acquisition of non-cash asset (NCA) by
issuance of N/P or disposal of NCA
exchange for receivable
b. Acquisition of NCA in exchange of another
NCA or by issuance of equity instrument
c. Declaration and issuance of property/stock
dividends
d. Declaration of cash dividends but paid in
subsequent year
e. Receipt of subscriptions for equity
instruments but collected in succeeding yr.
Xx
Xx
Xx
Xx
Xx
(Xx)
Xx
(xx)
Xx
xx
Xxx
(xx)
(xx)
Xx
When preparing SCF
Include only those transactions that have affected
C&CE (purchase of assets by paying cash)
Exclude transactions that have not affected C&CE
(purchase assets by issuing N/P or shares of stocks and
conversion of debt to equity)
The net cash flows from O/A is computed by adjusting
the accrual basis P&L as follows:
1. Non-cash exp – added
2. Non-cash inc – deducted
3.
in operating CA – deducted (inverse rs)
4.
in operating CL – added (direct rs)
Investing and Financing Activities
-Gross receipts and gross cash payments for the
related transaction area presented separately
T – Account analyses
PPE
Beginning
x
Acquisition
x
Disposals
x
End
xx
Accumulated depreciation
Beg
x
Depreciation x
Disposals
x
End
xx
Retained Earnings
Beg
x
Dividends declared x Profit or Loss x
End
xx
Dividends payable
Beg
x