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23-1 Prepared by Coby Harmon University of California, Santa Barbara Intermedi ate Accountin g

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Intermediate Accounting Fall 2011

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Page 1: Chapter 23 Lecture

23-1

Prepared by Coby Harmon

University of California, Santa Barbara

Intermediate Accounting

Page 2: Chapter 23 Lecture

23-2

Intermediate Accounting

14th Edition

23 Statement of Cash Flows

Kieso, Weygandt, and Warfield

Page 3: Chapter 23 Lecture

23-3

1. Describe the purpose of the statement of cash flows.

2. Identify the major classifications of cash flows.

3. Differentiate between net income and net cash flow from operating

activities.

4. Contrast the direct and indirect methods of calculating net cash flow

from operating activities.

5. Determine net cash flows from investing and financing activities.

6. Prepare a statement of cash flows.

7. Identify sources of information for a statement of cash flows.

8. Discuss special problems in preparing a statement of cash flows.

9. Explain the use of a worksheet in preparing a statement of cash flows.

Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

Page 4: Chapter 23 Lecture

23-4

Preparation of the Statement

Special Problems in Statement

PreparationUse of a Worksheet

Usefulness

Classification of cash flows

Format of statement

Steps in preparation

Examples

Sources of information

Indirect vs. direct method

Adjustments to net income

Accounts receivable (net)

Other working capital changes

Net losses

Significant noncash transactions

Preparation of worksheet

Analysis of transactions

Preparation of final statement

Statement of Cash FlowsStatement of Cash FlowsStatement of Cash FlowsStatement of Cash Flows

Page 5: Chapter 23 Lecture

23-5 LO 1 Describe the purpose of the statement of cash flows.

Primary purpose:

To provide information about a company’s cash receipts

and cash payments during a period.

Secondary objective:

To provide cash-basis information about the company’s

operating, investing, and financing activities.

Section 1 - Preparation of the Section 1 - Preparation of the Statement of Cash FlowsStatement of Cash Flows

Section 1 - Preparation of the Section 1 - Preparation of the Statement of Cash FlowsStatement of Cash Flows

Page 6: Chapter 23 Lecture

23-6 LO 1 Describe the purpose of the statement of cash flows.

Provides information to help assess:

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 flow from operating activities.

4. Cash and noncash investing and financing transactions.

Usefulness of the Statement of Cash FlowsUsefulness of the Statement of Cash FlowsUsefulness of the Statement of Cash FlowsUsefulness of the Statement of Cash Flows

Page 7: Chapter 23 Lecture

23-7

Income

Statement

Transactions

Operating Activities

Changes in Investments and

Long-Term Asset Items

Investing Activities

Changes in Long-Term

Liabilities and Stockholders’

Equity

Financing Activities

Classification of Cash FlowsClassification of Cash FlowsClassification of Cash FlowsClassification of Cash Flows

LO 2 Identify the major classifications of cash flows.

Page 8: Chapter 23 Lecture

23-8

Illustration 23-1 Classification of Typical Cash Inflows and Outflows

Classification of Cash FlowsClassification of Cash FlowsClassification of Cash FlowsClassification of Cash Flows

LO 2 Identify the major classifications of cash flows.

Page 9: Chapter 23 Lecture

23-9

Illustration 23-1 Classification of Typical Cash Inflows and Outflows

Classification of Cash FlowsClassification of Cash FlowsClassification of Cash FlowsClassification of Cash Flows

LO 2 Identify the major classifications of cash flows.

Page 10: Chapter 23 Lecture

23-10

The basis recommended by the FASB for the statement of

cash flows is actually “cash and cash equivalents.” Cash

equivalents are short-term, highly liquid investments that are

both:

Readily convertible to known amounts of cash, and

So near their maturity that they present insignificant risk of

changes in value (e.g., due to changes in interest rates).

Generally, only investments with original maturities of three

months or less qualify under this definition.

LO 2 Identify the major classifications of cash flows.

Classification of Cash FlowsClassification of Cash FlowsClassification of Cash FlowsClassification of Cash Flows

Page 11: Chapter 23 Lecture

23-11

Typical Company

Product Life Cycle

Classification of Cash FlowsClassification of Cash FlowsClassification of Cash FlowsClassification of Cash Flows

LO 2 Identify the major classifications of cash flows.

Page 12: Chapter 23 Lecture

23-12

Format of the Statement of Cash FlowsFormat of the Statement of Cash FlowsFormat of the Statement of Cash FlowsFormat of the Statement of Cash Flows

Presentation:

1. Operating activities.

2. Investing activities.

3. Financing activities.

Direct Method

Indirect Method

Report inflows and outflows from investing and financing

activities separately.

LO 2 Identify the major classifications of cash flows.

Page 13: Chapter 23 Lecture

23-13

Format of the Statement of Cash FlowsFormat of the Statement of Cash FlowsFormat of the Statement of Cash FlowsFormat of the Statement of Cash Flows

Illustration 23-2

LO 2 Identify the major classifications of cash flows.

Page 14: Chapter 23 Lecture

23-14

Three Sources of Information:

1. Comparative balance sheets.

2. Current income statement.

3. Selected transaction data.

Steps in PreparationSteps in PreparationSteps in PreparationSteps in Preparation

Three Major Steps:

Step 1. Determine change in cash.

Step 2. Determine net cash flow from

operating activities.

Step 3. Determine net cash flows from

investing and financing activities.LO 2 Identify the major classifications of cash flows.

Page 15: Chapter 23 Lecture

23-15

First Example - 2011First Example - 2011First Example - 2011First Example - 2011

Illustration: Tax Consultants Inc. started on January 1, 2011,

when it issued 60,000 shares of $1 par value common stock

for $60,000 cash. The company rented its office space,

furniture, and equipment, and performed tax consulting

services throughout the first year.

The comparative statements of financial position at the

beginning and end of the year 2011 appear in Illustration 23-3.

Illustration 23-4 shows the income statement and additional

information for Tax Consultants.

LO 2 Identify the major classifications of cash flows.

Page 16: Chapter 23 Lecture

23-16

First Example - 2011First Example - 2011First Example - 2011First Example - 2011

Illustration 23-3Illustration 23-3Comparative Balance Sheets, Tax Consultants Inc., Year 1

Illustration 23-4Income Statement, Tax Consultants Inc., Year 1

Page 17: Chapter 23 Lecture

23-17

First Example - 2011First Example - 2011First Example - 2011First Example - 2011

Step 1: Determine the Change in CashIllustration 23-3

LO 2 Identify the major classifications of cash flows.

Page 18: Chapter 23 Lecture

23-18

First Example - 2011First Example - 2011First Example - 2011First Example - 2011

Company must determine revenues and expenses on a

cash basis.

Eliminate the effects of income statement transactions

that do not result in an increase or decrease in cash.

Convert net income to net cash flow from operating

activities through either a direct method or an indirect

method.

Step 2: Determine the Net Cash Flow from Operating Activities

LO 3 Differentiate between net income and net cash flow from operating activities.

Page 19: Chapter 23 Lecture

23-19

First Example - 2011First Example - 2011First Example - 2011First Example - 2011

Step 2: Determine the Net Cash Flow from Operating Activities Illustration 23-5

Net Income versus Net Cash Flow from Operating Activities

LO 3 Differentiate between net income and net cash flow from operating activities.

Page 20: Chapter 23 Lecture

23-20

Deducts operating cash disbursements from operating cash receipts.

LO 4 Contrast the direct and indirect methods of calculating net cash flow from operating activities.

“Net cash provided by operating activities” is the equivalent of cash basis net income.

Illustration 23-6

First Example - 2011First Example - 2011First Example - 2011First Example - 2011

Direct Method

Page 21: Chapter 23 Lecture

23-21 LO 4

First Example - 2011First Example - 2011First Example - 2011First Example - 2011

Accounts Receivable

1/1/11 Balance

0Revenues

125,000

Receipts from customers

89,00012/31/11 Balance

36,000

Direct Method

Illustration 23-7

Illustration 23-6

Page 22: Chapter 23 Lecture

23-22

First Example - 2011First Example - 2011First Example - 2011First Example - 2011

Accounts Payable

1/1/11 Balance

0Operating expenses

85,00012/31/11 Balance

5,000

Payments for expenses

80,000

Direct Method

LO 4

Illustration 23-6

Page 23: Chapter 23 Lecture

23-23

First Example - 2011First Example - 2011First Example - 2011First Example - 2011

Income Tax Payable

1/1/11 Balance

0Tax expense

6,00012/31/11 Balance

0

Payments for taxes

6,000

Direct Method

LO 4

Illustration 23-6

Page 24: Chapter 23 Lecture

23-24

First Example - 2011First Example - 2011First Example - 2011First Example - 2011

Indirect Method

LO 4

Illustration 23-8Computation of Net CashFlow from Operating Activities, Year 1—Indirect Method

Common adjustments to Net Income (Loss):

Depreciation and amortization expense.

Gain or loss on disposition of long-term assets.

Change in current assets and current liabilities.

Page 25: Chapter 23 Lecture

23-25

First Example - 2011First Example - 2011First Example - 2011First Example - 2011

Step 3: Determine Net Cash Flows from Investing and Financing Activities

Illustration 23-3

No long-term assets, thus no investing activities.

LO 5 Determine net cash flows from investing and financing activities.

Page 26: Chapter 23 Lecture

23-26

First Example - 2011First Example - 2011First Example - 2011First Example - 2011

Step 3: Determine Net Cash Flows from Investing and Financing Activities

Illustration 23-3

LO 5 Determine net cash flows from investing and financing activities.

Purchase of common stock for $60,000 (Financing).

Page 27: Chapter 23 Lecture

23-27

First Example - 2011First Example - 2011First Example - 2011First Example - 2011

Net income of $34,000 (Operating).

Dividends paid of $(14,000) (Financing). LO 5

Step 3: Determine Net Cash Flows from Investing and Financing Activities

Illustration 23-3

Page 28: Chapter 23 Lecture

23-28

First Example - 2011First Example - 2011First Example - 2011First Example - 2011

Statement of Cash Flows - 2011Illustration 23-9

LO 6 Prepare a statement of cash flows.

Page 29: Chapter 23 Lecture

23-29

E23-6: Norman Company’s financial statements for the year ended

December 31, 2012, contained the following condensed information.

Operating Activities — Indirect MethodOperating Activities — Indirect MethodOperating Activities — Indirect MethodOperating Activities — Indirect Method

2012 2011 Change

Service revenue 840,000$ Operating expenses 624,000 Depreciation expense 60,000 Loss on sale of equipment 26,000

Income before income tax 130,000 Income tax 40,000

Net income 90,000$

Accounts receivable 37,000$ 59,000$ (22,000)$ Accounts payable 46,000 31,000 15,000 Income taxes payable 4,000 8,500 (4,500)

LO 4

Page 30: Chapter 23 Lecture

23-30

Cash flows from operating activities

Net income 90,000$

Adjustment to reconcile net income

to net cash provided by operating activities:

Depreciation expense 60,000

Loss on sale of equipment 26,000

Decrease in accounts receivable 22,000

Increase in accounts payable 15,000

Decrease in income taxes payable (4,500)

Net cash provided by operating activities 208,500

E23-6: Prepare the operating activities section of the statement of cash

flows using the indirect method (Step 2).

Operating Activities — Indirect MethodOperating Activities — Indirect MethodOperating Activities — Indirect MethodOperating Activities — Indirect Method

LO 4 Advance slide to uncover solution

Page 31: Chapter 23 Lecture

23-31

2012 2011 Change

Service revenue 840,000$ Operating expenses 624,000 Depreciation expense 60,000 Loss on sale of equipment 26,000

Income before income tax 130,000 Income tax 40,000

Net income 90,000$

Accounts receivable 37,000$ 59,000$ (22,000)$ Accounts payable 46,000 31,000 15,000 Income taxes payable 4,000 8,500 (4,500)

E23-5: Norman Company’s financial statements for the year ended

December 31, 2012, contained the following condensed information.

Operating Activities — Direct MethodOperating Activities — Direct MethodOperating Activities — Direct MethodOperating Activities — Direct Method

Assume accounts payable relates to

operating expenses.

LO 4

Page 32: Chapter 23 Lecture

23-32

E23-5: Prepare the operating activities section of the statement of

cash flows using the Direct method (Step 2).

LO 4 Contrast the direct and indirect methods of calculating net cash flow from operating activities.

Illustration 23-22

Operating Activities — Direct MethodOperating Activities — Direct MethodOperating Activities — Direct MethodOperating Activities — Direct Method

Accounts Receivable

1/1/12 Balance

59,000Revenues

840,000

Receipts from customers

862,00012/31/12 Balance

37,000

Page 33: Chapter 23 Lecture

23-33

Accounts Payable

1/1/12 Balance

31,000Operating expenses

624,00012/31/12 Balance

46,000

Illustration 23-24

Operating Activities — Direct MethodOperating Activities — Direct MethodOperating Activities — Direct MethodOperating Activities — Direct Method

Payments to suppliers

609,000

E23-5: Prepare the operating activities section of the statement of

cash flows using the Direct method (Step 2).

LO 4 Contrast the direct and indirect methods of calculating net cash flow from operating activities.

Page 34: Chapter 23 Lecture

23-34

Income Tax Payable

1/1/12 Balance

8,500Income tax expense

40,00012/31/12 Balance

4,000

Operating Activities — Direct MethodOperating Activities — Direct MethodOperating Activities — Direct MethodOperating Activities — Direct Method

Payments for income tax

44,500

Illustration 23-24

E23-5: Prepare the operating activities section of the statement of

cash flows using the Direct method (Step 2).

LO 4 Contrast the direct and indirect methods of calculating net cash flow from operating activities.

Page 35: Chapter 23 Lecture

23-35

Cash flows from operating activities

Cash receipts from customers $ 862,000

Cash paid for operating expenses (609,000)

Cash paid for income taxes (44,500)

Net cash provided by operating activities $ 208,500

Operating Activities — Direct MethodOperating Activities — Direct MethodOperating Activities — Direct MethodOperating Activities — Direct Method

E23-5: Prepare the operating activities section of the statement of

cash flows using the Direct method (Step 2).

LO 4 Contrast the direct and indirect methods of calculating net cash flow from operating activities.

Page 36: Chapter 23 Lecture

23-36

E23-2 (a): Plant assets that had cost $25,000 6 years before

and were being depreciated on a straight-line basis over 10

years with no estimated scrap value were sold for $5,300.

LO 5 Determine net cash flows from investing and financing activities.

Step 3: Determine Net Cash Flow from Step 3: Determine Net Cash Flow from Investing and Financing ActivitiesInvesting and Financing Activities

Step 3: Determine Net Cash Flow from Step 3: Determine Net Cash Flow from Investing and Financing ActivitiesInvesting and Financing Activities

Plant assets (cost) 25,000$

Accumulated depreciation ([$25,000 / 10] x 6) 15,000

Book value at date of sale 10,000

Sale proceeds (5,300)

Loss on sale 2,700$

Page 37: Chapter 23 Lecture

23-37

Statement of Cash Flows

Cash flow from operating activities

Net income (loss) (50,000)$

Adjustment to reconcile net income to cash:

Loss on sale 2,700

Depreciation expense 22,000

Gain on sale (9,000)

Cash from operations (34,300)

Cash flow from investing activities

Sale of plant assets 5,300

Sale of land 39,000

Cash from investing activities 44,300

Cash flow from financing activities

Sale of common stock 330,000

Purchase of company stock (47,000)

Cash from financing activities 283,000

Net Change in Cash 293,000$

Statement of Cash Flows (a,b,d,h)Statement of Cash Flows (a,b,d,h)Statement of Cash Flows (a,b,d,h)Statement of Cash Flows (a,b,d,h)

OO

II

FF

Page 38: Chapter 23 Lecture

23-38

E23-2 (b): During the year, 10,000 shares of common stock

with a stated value of $10 a share were issued for $33 a

share.

E23-2 (b)E23-2 (b)E23-2 (b)E23-2 (b)

Shares sold 10,000

Market value per share 33$

Value of shares 330,000$

LO 5 Determine net cash flows from investing and financing activities.

Page 39: Chapter 23 Lecture

23-39

Statement of Cash Flows

Cash flow from operating activities

Net income (loss) (50,000)$

Adjustment to reconcile net income to cash:

Loss on sale 2,700

Depreciation expense 22,000

Gain on sale (9,000)

Cash from operations (34,300)

Cash flow from investing activities

Sale of plant assets 5,300

Sale of land 39,000

Cash from investing activities 44,300

Cash flow from financing activities

Sale of common stock 330,000

Purchase of company stock (47,000)

Cash from financing activities 283,000

Net Change in Cash 293,000$

Statement of Cash Flows (a,b,d,h)Statement of Cash Flows (a,b,d,h)Statement of Cash Flows (a,b,d,h)Statement of Cash Flows (a,b,d,h)

OO

II

FF

Page 40: Chapter 23 Lecture

23-40

E23-2 (d): The company sustained a net loss for the year of

$50,000. Depreciation amounted to $22,000, and a gain of

$9,000 was realized on the sale of land for $39,000 cash.

E23-2 (d)E23-2 (d)E23-2 (d)E23-2 (d)

LO 5 Determine net cash flows from investing and financing activities.

Page 41: Chapter 23 Lecture

23-41

Statement of Cash Flows

Cash flow from operating activities

Net income (loss) (50,000)$

Adjustment to reconcile net income to cash:

Loss on sale 2,700

Depreciation expense 22,000

Gain on sale (9,000)

Cash from operations (34,300)

Cash flow from investing activities

Sale of plant assets 5,300

Sale of land 39,000

Cash from investing activities 44,300

Cash flow from financing activities

Sale of common stock 330,000

Purchase of company stock (47,000)

Cash from financing activities 283,000

Net Change in Cash 293,000$

Statement of Cash Flows (a,b,d,h)Statement of Cash Flows (a,b,d,h)Statement of Cash Flows (a,b,d,h)Statement of Cash Flows (a,b,d,h)

OO

II

FF

Page 42: Chapter 23 Lecture

23-42

E23-2 (h): During the year, treasury stock costing $47,000

was purchased.

E23-2 (h)E23-2 (h)E23-2 (h)E23-2 (h)

LO 5 Determine net cash flows from investing and financing activities.

Page 43: Chapter 23 Lecture

23-43

Statement of Cash Flows

Cash flow from operating activities

Net income (loss) (50,000.0)$

Adjustment to reconcile net income to cash:

Loss on sale 2,700

Depreciation expense 22,000

Gain on sale (9,000)

Cash from operations (34,300)

Cash flow from investing activities

Sale of plant assets 5,300

Sale of land 39,000

Cash from investing activities 44,300

Cash flow from financing activities

Sale of common stock 330,000

Purchase of company stock (47,000)

Cash from financing activities 283,000

Net Change in Cash 293,000.0$

Statement of Cash Flows (a,b,d,h)Statement of Cash Flows (a,b,d,h)Statement of Cash Flows (a,b,d,h)Statement of Cash Flows (a,b,d,h)

OO

II

FF

Page 44: Chapter 23 Lecture

23-44 LO 7 Identify sources of information for a statement of cash flows.

Sources of Information for the Sources of Information for the Statement of Cash FlowsStatement of Cash Flows

Sources of Information for the Sources of Information for the Statement of Cash FlowsStatement of Cash Flows

1. Comparative balance sheets.

2. An analysis of the Retained Earnings account.

3. Writedowns, amortization charges, and similar “book”

entries, such as depreciation, because they have no

effect on cash.

Page 45: Chapter 23 Lecture

23-45 LO 7

Net Cash Flow from Operating Activities—Net Cash Flow from Operating Activities—Indirect Versus Direct MethodIndirect Versus Direct Method

Net Cash Flow from Operating Activities—Net Cash Flow from Operating Activities—Indirect Versus Direct MethodIndirect Versus Direct Method

Adjustments Needed to Determine Net Cash Flow from Operating Activities.

Indirect Method

Illustration 23-18

Page 46: Chapter 23 Lecture

23-46

Net Cash Flow from Operating Activities—Net Cash Flow from Operating Activities—Indirect Versus Direct MethodIndirect Versus Direct Method

Net Cash Flow from Operating Activities—Net Cash Flow from Operating Activities—Indirect Versus Direct MethodIndirect Versus Direct Method

Illustration 23-21

Companies adjust each item in the income statement from the accrual basis to the cash basis.

Direct Method

LO 7

Page 47: Chapter 23 Lecture

23-47 LO 7 Identify sources of information for a statement of cash flows.

In Favor of the Direct Method

Shows operating cash receipts and payments.

Information about cash receipts and payments is more

revealing of a company’s ability

1. to generate sufficient cash from operating activities to pay

its debts,

2. to reinvest in its operations, and

3. to make distributions to its owners.

Net Cash Flow from Operating Activities—Net Cash Flow from Operating Activities—Indirect Versus Direct MethodIndirect Versus Direct Method

Net Cash Flow from Operating Activities—Net Cash Flow from Operating Activities—Indirect Versus Direct MethodIndirect Versus Direct Method

Direct Versus Indirect Controversy

Page 48: Chapter 23 Lecture

23-48 LO 7 Identify sources of information for a statement of cash flows.

Net Cash Flow from Operating Activities—Net Cash Flow from Operating Activities—Indirect Versus Direct MethodIndirect Versus Direct Method

Net Cash Flow from Operating Activities—Net Cash Flow from Operating Activities—Indirect Versus Direct MethodIndirect Versus Direct Method

Direct Versus Indirect Controversy

In Favor of the Indirect Method

Focuses on the differences between net income and net

cash flow from operating activities.

Provides link between the statement of cash flows and the

income statement and statement of financial position.

Page 49: Chapter 23 Lecture

23-49

Adjustments to Net IncomeAdjustments to Net IncomeAdjustments to Net IncomeAdjustments to Net Income

LO 8 Discuss special problems in preparing a statement of cash flows.

Amortization of limited-life intangible assets.

Amortization of bond discount or premium.

Depreciation and Amortization

Postretirement Benefit Costs

Company must adjust net income by the difference

between cash paid and the expense reported.

Page 50: Chapter 23 Lecture

23-50

Adjustments to Net IncomeAdjustments to Net IncomeAdjustments to Net IncomeAdjustments to Net Income

LO 8 Discuss special problems in preparing a statement of cash flows.

Affect net income but have no effect on cash.

Changes in Deferred Income Taxes

Equity Method of Accounting

Net increase in the investment account does not affect

cash flows.

Company must deduct the net increase from net income

to arrive at net cash flow from operating activities.

Page 51: Chapter 23 Lecture

23-51

Adjustments to Net IncomeAdjustments to Net IncomeAdjustments to Net IncomeAdjustments to Net Income

LO 8 Discuss special problems in preparing a statement of cash flows.

A loss is added to net income to compute net cash flow

from operating activities because the loss is a non-cash

charge in the income statement.

Company reports a gain in the statement of cash flows as

part of the cash proceeds from the sale of equipment

under investing activities, thus it deducts the gain from

net income to avoid double-counting—once as part of net

income and again as part of the cash proceeds from the

sale.

Loss and Gains

Page 52: Chapter 23 Lecture

23-52

Adjustments to Net IncomeAdjustments to Net IncomeAdjustments to Net IncomeAdjustments to Net Income

LO 8 Discuss special problems in preparing a statement of cash flows.

Cash is not affected by recording the expense.

The company must increase net income by the amount of

compensation expense from share options in computing

net cash flow from operating activities.

Stock Options

Page 53: Chapter 23 Lecture

23-53

Adjustments to Net IncomeAdjustments to Net IncomeAdjustments to Net IncomeAdjustments to Net Income

LO 8 Discuss special problems in preparing a statement of cash flows.

Companies should report either as investing activities or as

financing activities cash flows from extraordinary

transactions and other events whose effects are included

in net income, but which are not related to operations.

Extraordinary Items

Page 54: Chapter 23 Lecture

23-54

Accounts Receivable (Net)Accounts Receivable (Net)Accounts Receivable (Net)Accounts Receivable (Net)

LO 8 Discuss special problems in preparing a statement of cash flows.

Because an increase in Allowance for Doubtful Accounts results

from a charge to bad debt expense, a company should add

back an increase in Allowance for Doubtful Accounts to net

income to arrive at net cash flow from operating activities.

Indirect Method

Illustration 23-28Accounts ReceivableBalances, Redmark Co.

Page 55: Chapter 23 Lecture

23-55

Accounts Receivable (Net)Accounts Receivable (Net)Accounts Receivable (Net)Accounts Receivable (Net)

LO 8 Discuss special problems in preparing a statement of cash flows.

One method of presenting this information in the statement

of cash flows:

Indirect Method

Illustration 23-29

Page 56: Chapter 23 Lecture

23-56

Accounts Receivable (Net)Accounts Receivable (Net)Accounts Receivable (Net)Accounts Receivable (Net)

LO 8 Discuss special problems in preparing a statement of cash flows.

Alternate method (net approach) of presenting this

information in the statement of cash flows:

Indirect Method

Illustration 23-30

Page 57: Chapter 23 Lecture

23-57

Accounts Receivable (Net)Accounts Receivable (Net)Accounts Receivable (Net)Accounts Receivable (Net)

LO 8 Discuss special problems in preparing a statement of cash flows.

Company should not net Allowance for Doubtful Accounts

against Accounts Receivable.

Direct Method

Illustration 23-31

Page 58: Chapter 23 Lecture

23-58

Accounts Receivable (Net)Accounts Receivable (Net)Accounts Receivable (Net)Accounts Receivable (Net)

LO 8

Company should not net

Allowance for Doubtful Accounts

against Accounts Receivable.

Direct MethodIllustration 23-31

Cash sales should be reported at $85,000 ($100,000 - 9,000 - 6,000).

Increase in Accounts Receivable

Illustration 23-32

Page 59: Chapter 23 Lecture

23-59

Some changes in working capital, although they affect

cash, do not affect net income.

Purchase of short-term non-trading equity investments.

Issuance of a short-term non-trade note payable for

cash.

Cash dividend payable.

Other Working Capital ChangesOther Working Capital ChangesOther Working Capital ChangesOther Working Capital Changes

LO 8 Discuss special problems in preparing a statement of cash flows.

Page 60: Chapter 23 Lecture

23-60

Illustration: If the net loss is $50,000 and the total amount of

charges to add back is $60,000, then net cash provided by

operating activities is $10,000.

Net LossNet LossNet LossNet Loss

LO 8 Discuss special problems in preparing a statement of cash flows.

Illustration 23-33Computation of Net CashFlow from OperatingActivities—Cash Inflow

Page 61: Chapter 23 Lecture

23-61

Significant Non-Cash TransactionsSignificant Non-Cash TransactionsSignificant Non-Cash TransactionsSignificant Non-Cash Transactions

LO 8 Discuss special problems in preparing a statement of cash flows.

Common non-cash transactions that a company should

disclose:

1. Acquisition of assets by assuming liabilities (including finance

lease obligations) or by issuing equity securities.

2. Exchanges of non-monetary assets.

3. Refinancing of long-term debt.

4. Conversion of debt or preference shares to ordinary shares.

5. Issuance of equity securities to retire debt.

Page 62: Chapter 23 Lecture

23-62

Use of a WorksheetUse of a WorksheetUse of a WorksheetUse of a Worksheet

LO 9 Explain the use of a worksheet in preparing a statement of cash flows.

A worksheet involves the following steps.

Step 1. Enter the balance sheet accounts and their beginning and

ending balances in the balance sheet accounts section.

Step 2. Enter the data that explain the changes in the balance

sheet accounts and their effects on the statement of cash flows in

the reconciling columns of the worksheet.

Step 3. Enter the increase or decrease in cash on the cash line

and at the bottom of the worksheet. This entry should enable the

totals of the reconciling columns to be in agreement.

Page 63: Chapter 23 Lecture

23-63

RELEVANT FACTS

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. For both IFRS and GAAP, most companies use the indirect method for reporting net cash flow from operating activities.

Page 64: Chapter 23 Lecture

23-64

RELEVANT FACTS

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.

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 non-cash 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 in the cash flow statement.

Page 65: Chapter 23 Lecture

23-65

RELEVANT FACTS

One area where there can be substantive differences between IFRS and GAAP relates to the classification of interest, dividends, and taxes. IFRS provides more alternatives for disclosing these items, while GAAP requires that except for dividends paid (which are classified as a financing activity), these items are all reported as operating activities.

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Which of the following is true regarding the statement of cash flows

under IFRS?

a. The statement of cash flows has two major sections—operating

and nonoperating.

b. The statement of cash flows has two major sections—financing

and investing.

c. The statement of cash flows has three major sections—

operating, investing, and financing.

d. The statement of cash flows has three major sections—

operating, non-operating, and financing.

IFRS SELF-TEST QUESTION

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In the case of a bank overdraft:

a. GAAP typically includes the amount in cash and cash

equivalents.

b. IFRS typically includes the amount in cash equivalents but not

in cash.

c. GAAP typically treats the overdraft as a liability, and reports the

amount in the financing section of the statement of cash flows.

d. IFRS typically treats the overdraft as a liability, and reports the

amount in the investing section of the statement of cash flows.

IFRS SELF-TEST QUESTION

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For purposes of the statement of cash flows, under IFRS interest paid

is treated as:

a. an operating activity in all cases.

b. an investing or operating activity, depending on use of the

borrowed funds.

c. either a financing or investing activity.

d. either an operating or financing activity, but treated consistently

from period to period.

IFRS SELF-TEST QUESTION

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