statement of cash flow by kieso

7/24/2019 Statement of cash flow by Kieso

1/85

13-1

Prepared by

Coby Harmon

University of California, Santa Barbara

Westmont College

WILEY

IFRS EDITION


2/85

13-2

PREVIEW OF CHAPTER 13

Financial Accounting

IFRS 3rd Edition

Weygandt Kiel Kie!o


3/85

13-3

13"EAR#I#$ O%&ECTIVESAfter studying this chapter, you should be able to:

! "ndicate the usefulness of the statement of cash flo#s!

$! %istinguish among operating, investing, and financing activities!

&! Prepare a statement of cash flo#s using the indirect method!

'! Analy(e the statement of cash flo#s!

CHAPTER

Stateent o' Ca!(

Flo)!


4/85

13-4

Provides information to help assess:

! )ntity*s ability to generate future cash flo#s!

$! )ntity*s ability to pay dividends and meet obligations!

&! +easons for difference bet#een net income and net cash

provided used- by operating activities!

'! Cash investing and financing transactions during theperiod!

LO 1

Stateent o' Ca!( Flo)!* +!e'ulne!!

and Forat"earning O,-ecti.e 1Indicate t(e u!e'ulne!! o'

t(e !tateent o' ca!(

'lo)!/


5/85

13-5

Which of the follo#ing is incorrect about the statement of

cash flo#s.

a! "t is a fourth basic financial statement!

b! "t provides information about cash receipts and cash

payments of an entity during a period!

c! "t reconciles the ending Cash account balance to thebalance per the ban/ statement!

d! "t provides information about the operating, investing,

and financing activities of the business!

0ue!tion

Stateent o' Ca!( Flo)!

LO 1


6/85

13-6

IncoeStateent Ite!

Oerating

Activities

C(ange! inIn.e!tent!

and #on2

current

A!!et!

In.e!ting

Activities

C(ange! in#on2current

"ia,ilitie! and

Euity

Financing

Activities

Cla!!i'ication o' Ca!( Flo)!

LO 2

"earning O,-ecti.e

45i!tingui!( aong

oerating6 in.e!ting6 and

'inancing acti.itie!/


7/85

13-7

Oerating acti.itie!7Incoe !tateent ite!Ca!( in'lo)!*

0rom sale of goods or services!

0rom interest received and dividends received!

Ca!( out'lo)!*

1o suppliers for inventory!

1o employees for #ages!

1o government for ta2es!1o lenders for interest!

1o others for e2penses!

LO 2

Illu!tration 1321

1ypical receipt and payment

classifications



8/85

13-8

In.e!tingacti.itie!7C(ange! in in.e!tent! and non2current a!!et!

Ca!( in'lo)!*

0rom sale of property, plant, and e3uipment!

0rom sale of investments in debt or e3uity securities ofother entities!

0rom collection of principal on loans to other entities!

Ca!( out'lo)!*

1o purchase property, plant, and e3uipment!

1o purchase investments in debt or e3uity securities of

other entities!

1o ma/e loans to other entities!LO 2

Illu!tration 1321


classifications



9/85

13-9

Financing acti.itie!7C(ange! in non2currentlia,ilitie! and euity

Ca!( in'lo)!*

0rom sale of ordinary shares!

0rom issuance of long4debt bonds and notes-!

Ca!( out'lo)!*

1o shareholders as dividends!

1o redeem long4term debt or reac3uire

ordinary shares treasury shares-!

LO 2

Illu!tration 1321


classifications



10/85

13-10

! %irect issuance of ordinary shares to purchase assets!$! Conversion of bonds into ordinary shares!

&! "ssuance of debt to purchase assets!

'! )2changes of plant assets!

Companies report non4cash activities in either a

!earate !c(edulebottom of the statement- or

!earate noteto the financial statements!

Signi'icant #on2Ca!( Acti.itie!

LO 2


11/85

13-11

Accounting Acro!! t(e Organi8ation

#et W(at9

5et income is not the same as net cash provided by operatingactivities! Belo# are some results from recent annual reports

currencies in millions-! 5ote the #ide disparity among these

companies, all of #hich engage in retail merchandising!

LO 2


12/85

13-12

Order o' Pre!entation*

! 6perating activities!

$! "nvesting activities!

&! 0inancing activities!

5irect :et(od

Indirect :et(od

Forat o' t(e Stateent o' Ca!( Flo)!

LO 2


13/85

13-13 LO 2

Illu!tration 1323

0ormat of statement of cash flo#s


14/85

13-14

Illu!tration*Classify each of these transactions by type of cash

flo# activity!

! "ssued 77,777 H897 par value ordinary

shares for H89;,777,777 cash!

$! Borro#ed H89$,777,777 from Castle Ban/,signing a 4year note bearing ;< interest!

&! Purchased t#o semi4trailer truc/s for

H89,=77,777 cash!

'! Paid employees H89$7,777 for salaries and#ages!

! Collected H89$77,777 cash for services

performed!

Financing

Financing

In.e!ting

Oerating

Oerating

LO 2

; 5O ITor steps in preparing

the statement of cash flo#s


17/85

13-17 LO 2

T(ree :a-or Ste!*

Prearing t(e Stateent o' Ca!( Flo)!

Illu!tration 132=

1hree ma>or steps in preparing



18/85

13-18 LO 2

T(ree :a-or Ste!*


Illu!tration 132=

1hree ma>or steps in preparing



19/85

13-19

Companies 'a.or t(e indirect et(odfor t#o reasons:

! )asier and less costly to prepare!

$! 0ocuses on differences bet#een net income and net cash

flo# from operating activities!

Indirect And 5irect :et(od!

LO 2


20/85

13-20

1he statement of cash flo#s classifies cash receipts and

cash payments by these activities:

a! operating and non4operating!

b! investing, financing, and operating!

c! financing, operating, and non4operating!

d! investing, financing, and non4operating!

0ue!tion

LO 2



21/85

13-21

Illu!tration 132>

Comparative statements of financial position, income statement,

and additional information for Computer Services Company

Stateent o' Ca!( Flo)!*

7Indirect :et(od

"earning O,-ecti.e 3Preare a !tateent o'

ca!( 'lo)! u!ing t(e

indirect et(od/

LO 3


22/85

13-22 LO 3

Illu!tration 132>




23/85

13-23

Additional in'oration 'or 4?1@*

! %epreciation e2pense #as comprised of ?@,777 for building and ?&,777 for

e3uipment!

$! 1he company sold e3uipment #ith a boo/ value of ?=,777 cost ?;,777, less

accumulated depreciation ?,777- for ?',777 cash!

&! "ssued ?7,777 of long4term bonds in direct e2change for land!

'! A building costing ?$7,777 #as purchased for cash! )3uipment costing ?$,777

#as also purchased for cash!

! "ssued ordinary shares for ?$7,777 cash!

@! 1he company declared and paid a ?$,777 cash dividend!

Illu!tration 132>

Change in

2017 2016 Account Balance

LO 3


24/85

13-24

5ETER:I#E #ET CASH PROVI5E5+SE5 %BOPERATI#$ ACTIVITIES %B CO#VERTI#$ #ET

I#CO:E FRO: ACCR+A" %ASIS TO CASH

%ASIS/

Coon ad-u!tent! to #et Incoe "o!!D*

Add ,ac non2ca!( een!e! depreciation,

amorti(ation, or depletion e2pense-!

5eductgain!andaddlo!!e!!

Analy8ec(ange!to non4cash current asset and current

liability accounts!

Ste 1* Oerating Acti.itie!

LO 3


25/85

13-25

Which is an e2ample of a cash flo# from an operating

activity.

a! Payment of cash to lenders for interest!

b! +eceipt of cash from the issuance of ordinary

shares!

c! Payment of cash dividends to the company*sshareholders!

d! 5one of the above!

0ue!tion


LO 3


26/85

13-26

5ereciation Een!eAlthough depreciation e2pense reduces net income, it does

not reduce cash! 1he company must add it bac/ to net

income!

Illu!tration 132@


LO 3


27/85

13-27

"OSS O# 5ISPOSA" OF P"A#T ASSETSCompanies should report cash received from the sale

disposal- of plant assets in the investing activities section!

Because of this,

any lo!!on sale is addedto net income in the

operating section!

any gainon sale is deductedfrom net income in the

operating section!


LO 3


28/85

13-28

Illu!tration 132G

"OSS O# 5ISPOSA" OF P"A#T ASSETS


LO 3


29/85

13-29

CHA#$ES TO #O#2CASH C+RRE#T ASSETACCO+#TS

When the Account! Recei.a,le balancedecrea!e!, cash

receipts are higher than revenue earned under the accrual

basis!

Company adds to net income the amount of the decrease in

accounts receivable!

Account! Recei.a,le

11?1@ %alance 3?6???

Sale! re.enue >?@6???

Receit! 'ro cu!toer! >1@6???

14311@ %alance 4?6???

Illu!tration 132


LO 3


30/85

13-30

Illu!tration 1321?



LO 3


31/85

13-31

When the In.entory balanceincrea!e!, the cost of

merchandise purchased e2ceeds the cost of goods sold!


In.entory

111@ %alance 1?6???

Purc(a!e! 1>>6???

Co!t o' good! !old 1>?6???

14311@ %alance 1>6???

Cost of goods sold does not reflect cash payments made for

merchandise! 1he company deducts from net income this

inventory increase!


LO 3


32/85

13-32

Illu!tration 1321?



LO 3


33/85

13-33

When the Preaid Een!e balanceincrea!e!, cash paid for

e2penses is higher than e2penses reported on an accrual

basis! 1he company deduct! t(e increa!efrom net income to

arrive at net cash provided by operating activities!

"f reaid een!e! decrea!e, reported e2penses are higher

than the e2penses paid!



LO 3


34/85

13-34

Illu!tration 1321?



LO 3


35/85

13-35

CHA#$ES TO #O#2CASH C+RRE#T "IA%I"ITBACCO+#TS

When Account! Paya,le increa!e!, the company received more

in goods than it actually paid for! 1he increa!e i! addedto net

income to determine net cash provided by operating activities!

When Incoe Tae! Paya,le decrea!e!, the income ta2

e2pense reported on the income statement #as less than the

amount of ta2es paid during the period! 1he decrea!e i!

!u,tractedfrom net income to determine net cash provided by

operating activities!


LO 3


36/85

13-36

Illu!tration 13211

CHA#$ES TO #O#2CASH C+RRE#T "IA%I"ITBACCO+#TS


LO 3


37/85

13-37

Suary o' Con.er!ion to #et Ca!( Pro.ided,y Oerating Acti.itie!7Indirect :et(od


LO 3

Illu!tration 13214

Ad>ustments re3uired to convert net income to net cash provided by operating activities


38/85

13-38

Et(ic! In!ig(t

Ca!( Flo) I!nt Al)ay! W(at It See!

Some managers have ta/en actions that artificially increase cash flo#from operating activities! 1hey do this by moving negative amounts out of

the operating section and into the investing or financing section! 0or

e2ample, WorldCo6 Inc/ USA- disclosed that it had improperly

capitali(ed e2penses: "t had moved 9&!; billion of cash outflo#s from the

Cash from operating activities section of the statement of cash flo#s tothe "nvesting activities section, thereby greatly enhancing cash provided

by operating activities! Similarly, 5ynegy6 Inc/ USA- restated its

statement of cash flo#s because it had improperly included in operating

activities, instead of in financing activities, 9&77 million from natural gas

trading! 1he restatement resulted in a drop of &=< in cash flo# from

operating activities!

Source: Henny Sender, Sadly, 1hese %ays )ven Cash 0lo# "sn*t Al#ays What "t

Seems to Be, Wall Street Journal Day ;, $77$-!

LO 3


39/85

13-39

Company purchased landof ?7,777 by issuing long2ter

,ond!! 1his is a significant non4cash investing and financing

activity that merits disclosure in a separate schedule!

"and

111@ %alance 4?6???

I!!ued ,ond! 11?6???

14311@ %alance 13?6???

%ond! Paya,le111@ %alance 4?6???

For land 11?6???

14311@ %alance 13?6???

Ste 4* In.e!ting and Financing Acti.itie!

LO 3


40/85

13-40

Illu!tration 1321=Partial !tateent


LO 3


41/85

13-41

0rom the additional information, the company ac3uired an

o''ice ,uildingfor ?$7,777 cash! 1his is a cash outflo#

reported in the investing section!

111@ %alance =?6???

O''ice ,uilding 14?6???

14311@ %alance 1J?6???

%uilding


LO 3


42/85

13-42



LO 3


43/85

13-43

1he additional information e2plains that the e3uipment increase

resulted from t#o transactions: - a purchase of e3uipment of

?$,777, and $- the sale for ?',777 of e3uipment costing ?;,777!

111@ %alance 1?6???

Purc(a!e 4>6???

14311@ %alance 4@6???

Co!t o' euient !old G6???

Ca!( =6???Accuulated 5ereciation 16???

"o!! on 5i!o!al o' Plant A!!et! 36???

Euient G6???

&ournal

Entry

Euient

Illu!tration 13213


LO 3


44/85

13-44

Stateent

o' Ca!(

Flo)!

Illu!tration 1321=

Indirect

:et(od


45/85

13-45

1he increase in ordinary shares resulted from the issuance of

ne# shares!

111@ %alance >?6???

S(are! !old 4?6???

14311@ %alance @?6???

S(are Caital 2 Ordinary


LO 3


46/85

13-46



LO 3


47/85

13-47

+etained earnings increased ?@,777 during the year! 1his

increase can be e2plained by t#o factors: - 5et income of

?',777 increased retained earnings, and $- %ividends of

?$,777 decreased retained earnings!

111@ %alance =G6???

#et incoe 1=>6???

14311@ %alance 1J=6???

5i.idend! 46???

Retained Earning!


LO 3


48/85

13-48

Which is an e2ample of a cash flo# from an investing

activity.

a! +eceipt of cash from the issuance of bonds payable!

b! Payment of cash to repurchase outstanding ordinary

shares!

c! +eceipt of cash from the sale of e3uipment!

d! Payment of cash to suppliers for inventory!

0ue!tion


LO 3


49/85

13-49

Illu!tration 1321=

LO 3

Indirect

:et(od

Stateent

o' Ca!(

Flo)!


50/85

13-50

T(e :i!!ing Control

Independent internal verification/ "nternal auditors at the company should have

independently verified ban/ accounts and ma>or transfers of cash to outside

companies that #ere controlled by the 1an(i family!

Total tae* %illion! o' dollar!

A#ATO:B OF A FRA+5

0or more than a decade, the top e2ecutives at the "talian dairy products company

Paralatengaged in multiple frauds that overstated cash and other assets by more

than 9 billion #hile understating liabilities by bet#een 9; and 9$ billion! Duch of thefraud involved creating fictitious sources and uses of cash! Some of these activities

incorporated sophisticated financial transactions #ith subsidiaries created #ith the

help of large international financial institutions! Ho#ever, much of the fraud employed

very basic, even sloppy, forgery of documents! 0or e2ample, #hen outside auditors

re3uested confirmation of ban/ accounts such as a fa/e 9'!; billion account in the

Cayman "slands-, documents #ere created on scanners, #ith signatures that #ere cutand pasted from other documents! 1hese #ere then passed through a fa2 machine

numerous times to ma/e them loo/ real if difficult to read-! Similarly, fictitious bills

#ere created in order to divert funds to other businesses o#ned by the 1an(i family

#ho controlled Parmalat-!

LO 3


51/85

13-51

CO:PARE THE #ET CHA#$E I# CASH O# THE STATE:E#T OF CASH

F"OWS WITH THE CHA#$E I# THE CASH ACCO+#T REPORTE5 O#

THE STATE:E#T OF FI#A#CIA" POSITIO#S TO :AKE S+RE THE

A:O+#TS A$REE/

Ste 3* #et C(ange in Ca!(Illu!tration 132>

LO 3

+!ing Ca!( Flo) to E.aluate a


52/85

13-52

Free ca!( 'lo)describes the cash

remaining from operations after ad>ustment

for capital e2penditures and dividends!

LO 4

Illu!tration 1321>

0ree cash flo#

+!ing Ca!( Flo) to E.aluate a

Coany"earning O,-ecti.e

=Analy8e t(e !tateent o'ca!( 'lo)!/


53/85

13-53

9=,'Eess: )2penditures on property and e3uipment &,;@

%ividends paid @,$&

@634

Reuired*

Calculate

free cash

flo#!

Cash provided by operating activities

Free ca!( 'lo)

LO 4

Illu!tration 1321J

Anheuser4Busch "nBev cash

flo# information 9 in millions-

Free Ca!( Flo)

Illu!tration 1321@

Calculation of Anheuser4Busch "nBev*s free cash flo# 9 in millions-

C lid t d Fi i l


54/85

13-54

! Compute net cash provided by

operating activities by ad>usting

each item in the income statement from the accrual

basis to the cash basis!

$! Companies report only ma>or classes of operating

cash receipts and cash payments!

&! 0or these ma>or classes, the difference bet#een

cash receipts and cash payments is the net cashprovided by operating activities!

LO 5

APPE#5IL 13ACon!olidated Financial

Stateent!"earning O,-ecti.e >Preare a !tateent o'

ca!( 'lo)! u!ing t(e directet(od/


55/85

13-55 LO 5


Illu!tration 13A24

Da>or classes of cash receipts and payments

i ( d


56/85

13-56

Illu!tration 13A21

Comparative statements of financial position, income statement,and additional information for Computer Services Company

LO 5

5irect :et(od


57/85

13-57 LO 5

Illu!tration 13A21




58/85

13-58

Additional in'oration 'or 4?1@*

! %epreciation e2pense #as comprised of ?@,777 for building and ?&,777 for

e3uipment!

$! 1he company sold e3uipment #ith a boo/ value of ?=,777 cost ?;,777, less

accumulated depreciation ?,777- for ?',777 cash!

&! "ssued ?7,777 of long4term bonds in direct e2change for land!

'! A building costing ?$7,777 #as purchased for cash! )3uipment costing ?$,777

#as also purchased for cash!

! "ssued ordinary shares for ?$7,777 cash!

@! 1he company declared and paid a ?$,777 cash dividend!

Illu!tration 13A21

Change in

2017 2016 Account Balance

LO 5

S 1 O i A i i i


59/85

13-59

Account! Recei.a,le

11?1@ %alance 3?6???

Sale! re.enue >?@6???

Receit! 'ro cu!toer! >1@6???

14311@ %alance 4?6???

Illu!tration 13A2=

Analysis of accounts receivable

Illu!tration 13A2>

0ormula to compute cash receipts from customersFdirect method

CASH RECEIPTS FRO: C+STO:ERS0or Computer Services, accounts receivable decreased

?7,777!

LO 5


St 1 O ti A ti iti


60/85

13-60

CASH PAB:E#TS TO S+PP"IERS"n $7=, Computer Services Company*s inventory increased

?,777 and cash payments to suppliers #ere ?&,777!

In.entory

111@ %alance 1?6???

Purc(a!e! 1>>6???

Co!t o' good! !old 1>?6???

14311@ %alance 1>6???

Account! Paya,le

Payent to !ulier! 136??? 111@ %alance 146???

14311@ %alance 4G6???

Purc(a!e! 1>>6???

Illu!tration 13A2G

Analysis of accounts payable LO 5


St 1 O ti A ti iti


61/85

13-61

Illu!tration 13A2

0ormula to compute cash payments to suppliersFdirect method

CASH PAB:E#TS TO S+PP"IERS"n $7=, Computer Services Company*s inventory increased

?,777 and cash payments to suppliers #ere ?&,777!

LO 5


St 1 O ti A ti iti


62/85

13-62

CASH PAB:E#TS FOR OPERATI#$ ELPE#SESCash payments for operating e2penses #ere ?,777!

Illu!tration 13A21?

Computation of cash payments for operating e2penses

Illu!tration 13A211

0ormula to compute cash payments for operating e2pensesFdirect method

LO 5


St 1 O ti A ti iti


63/85

13-63

111@ %alance?

14311@ %alance?

Intere!t een!e=46???

CASH PAB:E#TS FOR I#TEREST"n $7=, Computer Services* had interest e2pense of ?'$,777!

Ca!( aid 'or intere!t =46???

Intere!t Paya,le

LO 5


St 1 O ti A ti iti


64/85

13-64

111@ %alanceG6???Incoe ta een!e=@6???

14311@ %alanceJ6???

Ca!( aid 'or tae! =6???

CASH PAB:E#TS FOR I#CO:E TALESCash payments for income ta2es #ere ?',777!

Incoe Ta Paya,le

Illu!tration 13A213

0ormula to compute cash payments for income ta2esFdirect method

LO 5


Ste 1 Oerating Acti itie!


65/85

13-65

Illu!tration 13A21=

6perating activities section of the statement of cash flo#s

LO 5


Ste 4 In.e!ting and Financing Acti.itie!


66/85

13-66

Accuulated 5ereciation

111@ %alance16???

14311@ %alance36???

5ereciation een!e36???

Euient !old 16???

Euient

111@ %alance 1?6???

14311@ %alance 4@6???

Purc(a!e! 4>6???Co!t o' euient !old G6???

Increa!e in Euient/- )3uipment purchased for ?$,777,

and $- e3uipment sold for ?',777, cost ?;,777, boo/ value

?=,777!Illu!tration 13A21>

Analysis of e3uipment

LO 5




67/85

13-67

Cash ',777

Accumulated %epreciationF)3uipment ,777

Eoss on %isposal of Plant Assets &,777

)3uipment ;,777

Increa!e in Euient/- )3uipment purchased for ?$,777,

and $- e3uipment sold for ?',777, cost ?;,777, boo/ value

?=,777!

LO 5




68/85

13-68

Increa!e in "and/ Eand increased

?7,777! 1he company purchased

land of ?7,777 by issuing bonds!

Signi'icant non2ca!(in.e!ting and 'inancing

tran!action/

Increa!e in %ond! Paya,le/ Bonds

Payable increased ?7,777! 1he

company ac3uired land bye2changing bonds for land!

Signi'icant non2ca!(

in.e!ting and 'inancing

tran!action/

Increa!e in %uilding/ Ac3uired

building for ?$7,777 cash!

In.e!ting

tran!action/

LO 5




69/85

13-69

Increa!e in S(are Caital7

Ordinary/ "ncrease in Share CapitalF

6rdinary of ?$7,777! "ncrease resulted

from the issuance of ne# shares!

Increa!e in Retained Earning!/ 1he?@,777 net increase in +etained

)arnings resulted from net income of

?',777 and the declaration and

payment of a cash dividend of ?$,777!

Financing

tran!action

ca!( di.idendD

Financing

tran!action/

LO 5


Illu!tration 13A21J

St t t f h fl


70/85

13-70 LO 5

Statement of cash flo#s,

$7=Fdirect method

Ste 3* #et C(ange in Ca!(


71/85

13-71

CO:PARE THE #ET CHA#$E I# CASH O# THE STATE:E#T OF CASH

F"OWS WITH THE CHA#$E I# THE CASH ACCO+#T REPORTE5 O#

THE STATE:E#T OF FI#A#CIA" POSITIO#S TO :AKE S+RE THE

A:O+#TS A$REE/

Ste 3* #et C(ange in Ca!(Illu!tration 13A2

1

LO 5

+!ing a Wor!(eet to Preare t(e


72/85

13-72

+!ing a Wor!(eet to Preare t(e

Stateent o' Ca!( Flo)!7Indirect

:et(od

APPE#5IL 13%

"earning O,-ecti.e JElain (o) to u!e a)or!(eet to reare t(e

!tateent o' ca!( 'lo)!

u!ing t(e indirect et(od/

Illu!tration 13%21

0ormat of #or/sheet LO 6

Prearing a Wor!(eet


73/85

13-73

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.

Prearing a Wor!(eet

LO 6

Prearing a


74/85

13-74 LO 6

Illustration 13B-3

Completed worksheet

indirect method

Prearing a

Wor!(eet

St t t ' C ( Fl


75/85

13-75

1he change in cash is e3ual to the change

in all of the other statement of financial

position accounts!

"f #e analy(e the changes in all of the non4cash statement offinancial position accounts, #e #ill e2plain the change in the

Cash account!

LO 7

Stateent o' Ca!( Flo)!7

T2Account Aroac(APPE#5IL 13C

"earning O,-ecti.e @+!e t(e T2accountaroac( to reare a

!tateent o' ca!( 'lo)!/


76/85

13-76

Illu!tration 13C21

14account approach

A "oo at + S $AAP "earning O,-ecti.e G


77/85

13-77

Key Point!

Siilaritie!

Companies preparing financial statements under both GAAP and "0+S must

prepare a statement of cash flo#s as an integral part of the financial

statements!

Both "0+S and GAAP re3uire that the statement of cash flo#s should havethree ma>or sectionsF operating, investing, and financingFalong #ith

changes in cash and cash e3uivalents!

Similar to "0+S, the statement of cash flo#s 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 flo#s from operatingactivities!

A "oo at +/S/ $AAP "earning O,-ecti.e GCoare t(e accounting 'or

!tateent o' ca!( 'lo)!

under IFRS and +/S/ $AAP/

LO 8

A "oo at + S $AAP


78/85

13-78

Key Point!

5i''erence!

1he definition of cash e3uivalents used in GAAP is similar to that used in

"0+S! A ma>or difference is that in certain situations, ban/ overdrafts are

considered part of cash and cash e3uivalents under "0+S #hich is not the

case in GAAP-! Under GAAP, ban/ overdrafts are classified as financingactivities in the statement of cash flo#s and are reported as liabilities on the

statement of financial position!

"0+S re3uires that non4cash investing and financing activities be e2cluded

from the statement of cash flo#s! "nstead, these non4cash activities should

be reported else#here! 1his re3uirement is interpreted to mean that non4cash 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

flo#s!

A "oo at +/S/ $AAP

LO 8

A "oo at + S $AAP


79/85

13-79

Key Point!

5i''erence!

6ne area #here there can be substantial differences bet#een "0+S and

GAAP relates to the classification of interest, dividends, and ta2es! 1he

follo#ing table indicates the differences bet#een the t#o approaches!

A "oo at +/S/ $AAP

LO 8

A "oo at + S $AAP


80/85

13-80

Key Point!

5i''erence!

Under "0+S, some companies present the operating section in a single line

item, #ith a full reconciliation provided in the notes to the financial

statements! 1his presentation is not seen under GAAP!

Similar to "0+S, under GAAP companies must disclose the amount of ta2esand interest paid! Under GAAP, companies disclose this in the notes to the

financial statements! Under "0+S, some companies disclose this information

in the notes, but others provide individual line items on the face of the

statement! "n order to provide this information on the face of the statement,

companies first add bac/ the amount of interest e2pense and ta2 e2pense

similar to adding bac/ depreciation e2pense- and then further do#n the

statement they subtract the cash amount paid for interest and ta2es! 1his

treatment can be seen in the statement of cash flo#s provided for Petra

0oods in Appendi2 C!

A "oo at +/S/ $AAP

LO 8

A "oo at + S $AAP


81/85

13-81

"ooing to t(e Future

Presently, the 0ASB and the "ASB are involved in a >oint pro>ect on the

presentation and organi(ation of information in the financial statements! 6ne

interesting approach, revealed in a published proposal from that pro>ect, is

that in the future the income statement and statement of financial position

balance sheet- #ould adopt headings similar to those of the statement of

cash flo#s! 1hat is, the income statement and statement of financial position#ould be bro/en into operating, investing, and financing sections! With

respect to the cash flo# statement specifically, the notion of cash e3uivalents

#ill probably not be retained! 1hat is, cash e3uivalents #ill not be combined

#ith cash but instead #ill be reported as a form of highly li3uid, lo#4ris/

investment! 1he definition of cash in the e2isting literature #ould be retained,

and the statement of cash flo#s #ould present information on changes in

cash only! "n addition, the 0ASB favors presentation of operating cash flo#s

using the direct method only! Ho#ever, the ma>ority of "ASB members e2press

a preference for not re3uiring use of the direct method of reporting operating

cash flo#s!

A "oo at +/S/ $AAP

LO 8

A "oo at IFRSA "oo at + S $AAP


82/85

13-82

$AAP Sel'2Te!t 0ue!tion!

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!

A "oo at IFRSA "oo at +/S/ $AAP

LO 8



83/85

13-83


"0+S re3uires that non4cash items:

a- be reported in the section to #hich they relate, that is, a

non4cash investing activity #ould 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 e3uivalents!


LO 8



84/85

13-84


"n the future, it appears li/ely that:

a- the income statement and statement of financial position

balance sheet- #ill have headings of operating,

investing, and financing, much li/e the statement of cashflo#s!

b- cash and cash e3uivalents #ill be combined in a single

line item!

c- the "ASB #ill not allo# companies to use the direct

approach to the statement of cash flo#s!

d- 5one of the above!


LO 8

Coyrig(t


85/85

Copyright $7@ Iohn Wiley J Sons, "nc! All rights reserved!

+eproduction or translation of this #or/ beyond that permitted in

Section = of the =@ United States Copyright Act #ithout the

e2press #ritten permission of the copyright o#ner is unla#ful!

+e3uest for further information should be addressed to the

Permissions %epartment, Iohn Wiley J Sons, "nc! 1he purchaser may

ma/e bac/4up copies for hisKher o#n use only and not for distribution

or resale! 1he 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!

Coyrig(t

statement of cash flow by kieso

Documents