chapter 23 lecture
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23-1
Prepared by Coby Harmon
University of California, Santa Barbara
Intermediate Accounting
23-2
Intermediate Accounting
14th Edition
23 Statement of Cash Flows
Kieso, Weygandt, and Warfield
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
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
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
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
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.
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.
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.
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
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.
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.
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.
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.
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.
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
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.
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.
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.
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
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
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
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
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.
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.
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).
23-27
First Example - 2011First Example - 2011First Example - 2011First Example - 2011
Net income of $34,000 (Operating).
Dividends paid of $(14,000) (Financing). LO 5
Step 3: Determine Net Cash Flows from Investing and Financing Activities
Illustration 23-3
23-28
First Example - 2011First Example - 2011First Example - 2011First Example - 2011
Statement of Cash Flows - 2011Illustration 23-9
LO 6 Prepare a statement of cash flows.
23-29
E23-6: Norman Company’s financial statements for the year ended
December 31, 2012, contained the following condensed information.
Operating Activities — Indirect MethodOperating Activities — Indirect MethodOperating Activities — Indirect MethodOperating Activities — Indirect Method
2012 2011 Change
Service revenue 840,000$ 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
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
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
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
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.
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.
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.
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 ([$25,000 / 10] x 6) 15,000
Book value at date of sale 10,000
Sale proceeds (5,300)
Loss on sale 2,700$
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
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.
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
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 $39,000 cash.
E23-2 (d)E23-2 (d)E23-2 (d)E23-2 (d)
LO 5 Determine net cash flows from investing and financing activities.
23-41
Statement of Cash Flows
Cash flow from operating activities
Net income (loss) (50,000)$
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
23-42
E23-2 (h): During the year, treasury stock costing $47,000
was purchased.
E23-2 (h)E23-2 (h)E23-2 (h)E23-2 (h)
LO 5 Determine net cash flows from investing and financing activities.
23-43
Statement of Cash Flows
Cash flow from operating activities
Net income (loss) (50,000.0)$
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
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.
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
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
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
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.
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.
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.
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
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
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
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.
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
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
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
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
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.
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
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.
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.
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.
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.
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.
23-66
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
23-67
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
23-68
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
23-69
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