Financial accounting 3e IFRS edtion willey chapter 13

WILEY

IFRS EDITION
Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont
College
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PREVIEW OF CHAPTER 13

Financial Accounting
IFRS 3rd Edition
Weygandt ● Kimmel ● Kieso
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CHAPTER

13

Statement of Cash Flows

LEARNING OBJECTIVES
After studying this chapter, you should be able to:

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1.

Indicate the usefulness of the statement of cash flows.

2.

Distinguish among operating, investing, and financing activities.

3.

Prepare a statement of cash flows using the indirect method.

4.

Analyze the statement of cash flows.


Statement of Cash Flows: Usefulness and Format
Learning Objective 1
Indicate the usefulness of the statement of

Provides information to help assess:

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cash flows.

1.

Entity’s ability to generate future cash flows.

2.

Entity’s ability to pay dividends and meet obligations.

3.

Reasons for difference between net income and net cash provided (used) by operating activities.

4.

Cash investing and financing transactions during the period.

LO 1


Statement of Cash Flows

Question
Which of the following is incorrect about the statement of cash flows?

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a.

It is a fourth basic financial statement.

b.

It provides information about cash receipts and cash payments of an entity during a period.

c.

It reconciles the ending Cash account balance to the balance per the bank statement.

d.

It provides information about the operating, investing, and financing activities of the business.

LO 1


Classification of Cash Flows

Learning Objective 2
Distinguish among operating, investing,
and financing activities.

Investing Activities

Financing Activities

Operating Activities

Income Statement Items

Changes in Investments

Changes in Non-current

and Non-current

Liabilities and Equity

Assets

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LO 2


Classification of Cash Flows

Operating activities—Income statement items
Cash inflows:

Illustration 13-1
Typical receipt and payment classifications

From sale of goods or services.
From interest received and dividends received.
Cash outflows:
To suppliers for inventory.
To employees for wages.
To government for taxes.
To lenders for interest.
To others for expenses.

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LO 2

Classification of Cash Flows

Investing activities—Changes in investments and non-current assets
Cash inflows:

Illustration 13-1
Typical receipt and payment classifications

From sale of property, plant, and equipment.
From sale of investments in debt or equity securities of other entities.
From collection of principal on loans to other entities.
Cash outflows:
To purchase property, plant, and equipment.
To purchase investments in debt or equity securities of other entities.
To make loans to other entities.

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LO 2


Classification of Cash Flows

Financing activities—Changes in non-current liabilities and equity
Cash inflows:

Illustration 13-1
Typical receipt and payment classifications

From sale of ordinary shares.
From issuance of long-debt (bonds and notes).
Cash outflows:
To shareholders as dividends.
To redeem long-term debt or reacquire
ordinary shares (treasury shares).

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LO 2


Significant Non-Cash Activities

1.

Direct issuance of ordinary shares to purchase assets.

2.

Conversion of bonds into ordinary shares.

3.

Issuance of debt to purchase assets.

4.

Exchanges of plant assets.

Companies report non-cash activities in either a

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

separate schedule (bottom of the statement) or



separate note to the financial statements.

LO 2


Accounting Across the Organization
Net What?
Net income is not the same as net cash provided by operating activities. Below are some results from recent annual
reports (currencies in millions). Note the wide disparity among these companies, all of which engage in retail
merchandising.

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LO 2


Format of the Statement of Cash Flows

Order of Presentation:

Direct Method

1.

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Operating activities.
Indirect Method

2.

Investing activities.

3.

Financing activities.

LO 2


Illustration 13-3
Format of statement of cash flows

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LO 2


>

DO IT!

Illustration: Classify each of these transactions by type of cash flow activity.

1.

Issued 100,000 HK$50 par value ordinary shares for HK$8,000,000 cash.

2.

Borrowed HK$2,000,000 from Castle Bank, signing a 5-year note bearing 8%
interest.

3.

Purchased two semi-trailer trucks for HK$1,700,000 cash.

4.

Paid employees HK$120,000 for salaries and wages.

5.

Collected HK$200,000 cash for services performed.

Financing

Financing

Investing

Operating

Operating

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LO 2


Preparing the Statement of Cash Flows

Three sources of information:

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1.

Comparative statements of financial position

2.

Current income statement

3.

Additional information

LO 2

Preparing the Statement of Cash Flows

Three Major Steps:

Illustration 13-4
Three major steps in preparing
the statement of cash flows

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LO 2


Preparing the Statement of Cash Flows

Three Major Steps:

Illustration 13-4
Three major steps in preparing
the statement of cash flows

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LO 2


Preparing the Statement of Cash Flows

Three Major Steps:

Illustration 13-4
Three major steps in preparing
the statement of cash flows

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LO 2


Indirect And Direct Methods

Companies favor the indirect method for two reasons:

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1.

Easier and less costly to prepare.

2.

Focuses on differences between net income and net cash flow from operating activities.

LO 2


Preparing the Statement of Cash Flows

Question

The statement of cash flows classifies cash receipts and cash payments by these activities:

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a.

operating and non-operating.

b.

investing, financing, and operating.

c.

financing, operating, and non-operating.

d.

investing, financing, and non-operating.

LO 2


Learning Objective 3

Statement of Cash Flows:

Prepare a statement of cash flows using the
indirect method.

—Indirect Method

Illustration 13-5
Comparative statements of financial position, income statement, and additional information for Computer Services
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Company

LO 3


Illustration 13-5
Comparative statements of financial position, income statement, and additional information for Computer Services
Company

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LO 3


Change in
2017

2016

Account Balance

Illustration 13-5

Additional information for 2017:

1.
2.
3.
4.
5.
6.

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Depreciation expense was comprised of €6,000 for building and €3,000 for equipment.
The company sold equipment with a book value of €7,000 (cost €8,000, less accumulated depreciation €1,000) for €4,000 cash.
Issued €110,000 of long-term bonds in direct exchange for land.
A building costing €120,000 was purchased for cash. Equipment costing €25,000 was also purchased for cash.
Issued ordinary shares for €20,000 cash.
The company declared and paid a €29,000 cash dividend.

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Step 1: Operating Activities

DETERMINE NET CASH PROVIDED/USED BY OPERATING ACTIVITIES BY
CONVERTING NET INCOME FROM ACCRUAL BASIS TO CASH BASIS.

Common adjustments to Net Income (Loss):

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

Add back non-cash expenses (depreciation, amortization, or depletion expense).



Deduct gains and add losses.



Analyze changes to non-cash current asset and current liability accounts.

LO 3


Step 1: Operating Activities

Question
Which is an example of a cash flow from an operating activity?

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a.

Payment of cash to lenders for interest.

b.

Receipt of cash from the issuance of ordinary shares.

c.

Payment of cash dividends to the company’s shareholders.

d.

None of the above.

LO 3