1. Chapter 5 Financial Position and Cash Flows
Prepared by:
Patricia Zima, CA Mohawk College of Applied Arts and Technology
Updated for IFRS by:
Anupma Goel, CA
Seneca College of Applied Arts and Technology

2. Financial Position and Cash Flows
Balance Sheet
Usefulness
Limitations
Classification
Format
Additional information
Techniques of disclosure
Terminology
Statement of Cash Flows
Purpose
Content and format
Preparation of the statement of cash flows
Usefulness
Perspectives
International
Appendix 5A Ratio Analysis-
A Reference
Using ratios to analyse financial performance
Appendix 5B Specimen Financial Statements
Stantec Inc.

3. Section 1
Balance Sheet

4. Balance Sheet: Usefulness
Also known as Statement of Financial Position
The balance sheet provides information
for evaluating the capital structure and
for computing rates of return on invested assets
It is also useful for assessing an enterprise’s
Liquidity (ability to pay current and maturing liabilities)
Solvency (ability to pay debt and related interest)
Financial flexibility (ability to respond to unexpected needs and opportunities)

5. Balance Sheet: Limitations
Many assets and liabilities are stated at historical cost
Information presented is reliable, however
Reporting at current fair value would result in more relevant information
2. Judgement and estimates are used in determining many of the items reported on the Balance Sheet
Many “soft” numbers (estimates) are included which may be uncertain
3. The balance sheet does not report items that cannot be recorded objectively (e.g. internally generated goodwill)

6. Balance Sheet: Classification
Similar items are grouped together, with sub-total
Items with different characteristics are separated
Individual balance sheet items should be:
Reported separately, and in
Sufficient detail in order to:
Allow users to assess amounts, timing, and uncertainty of future cash flows
Allow users to evaluate liquidity, financial flexibility, profitability, and risk
Helps to calculate important ratios (e.g. current ratio to assess liquidity)
More choice and flexibility is permitted under IFRS with respect to the format of the balance sheet (reverse order liquidity is more common).

7. Balance Sheet: Classification
Considerations for reporting items separately:
Assets that differ in their type or expected function in the central operations (e.g. inventory vs. capital assets)
2. Liabilities with different implications for the entity’s financial flexibility (e.g. long term debt vs. current debt)
3. Assets and liabilities with different general liquidity characteristics (e.g. cash vs. receivables)
4. Assets, liabilities, and equities with characteristics that allow for easy measurement or valuation
IFRS
Information to be Presented :
Caption line items that are sufficiently different based on size, function, nature and liquidity, nature, timing
Different measurement bases
Specific items are required to be presented separately
May present relevant subcategories
Details required about share capital

8. Elements Of The Balance Sheet
Assets: Probable future economic benefits as a result of past transactions or events and controlled by an entity
Liabilities: Probable future sacrifices of economic benefits that presently exist as a result of past transactions or events, and cannot be avoided
Equity (or net assets): The residual interest in assets after liabilities are deducted

9. Balance Sheet: Classification
Current liabilities
Long-term debt
Shareholders’ equity
Capital shares
Contributed surplus
Retained earnings
Accumulated other comprehensive income
Current assets
Long-term investments
Property, plant, and equipment
Intangible assets
Other assets
Liabilities and Equity
Assets
Both IFRS and Canadian GAAP require classification of the balance sheet to distinguish working capital items from other assets and liabilities. IFRS allows the use of both labels – current/non-current and short-term/long-term. Generally, though, the current/non-current is used to classify items on the face of the financial statement and the short/long-term description is used to indicate recognition and measurement of items (e.g. short-term provisions) within the current/non-current sections of the statement.

10. Current Assets
Current assets are cash and other assets expected to be realized:
within one year from the balance sheet date or
within the normal operating cycle, whichever is longer
Presented in order of liquidity (normally: cash, short-term investments, receivables, inventory, and prepaid expense)

11. Current Assets–Cash Often includes cash and cash equivalents
Defined as:
Cash, demand deposits, short-term liquid investments convertible to a known cash amount, and not subject to material value changes
Any known restrictions to cash must be disclosed

12. Current Assets– Temporary Investments
Investments are categorized for valuation and presentation purposes
Held-to-maturity
Held-for-trading
Available-for-sale
Trading and available-for-sale measured and reported at fair value
Held-to-maturity measured and reported at amortized cost
Held-for-trading is normally a current asset, while the other categories can be either current or non-current

13. Current Assets–Receivables
Amounts should be reported separately based on the nature of their origin:
Ordinary trade accounts
Amounts owing by related parties
Other (substantial) unusual items
Separate disclosure required for:
Anticipated losses (uncollectibles)
Amount and nature of nontrade receivables
Receivables pledged as collateral
Accounts receivable valued at net realizable value

14. Current Assets–Inventories
Valuation basis (lower of cost and net realizable value) disclosed
Cost flow assumption method (e.g. FIFO, weighted average) must be disclosed
Manufacturing enterprise will disclose completion stage of inventories:
Raw materials
Work in progress
Finished goods

15. Current Assets– Prepaid Expenses
Defined as: expenditures already made for benefits to be received within one year or the operating cycle (whichever is longer)
Most common examples include:
Insurance
Rent
Advertising
Supplies
Current practice is to report some prepaid amounts where the benefit extends beyond one year (or operating cycle)

16. Long-Term Investments
Long-term investments normally consist of one of the following:
Debt securities
Equity securities
Sinking funds, tangible assets held as investments, other
Investments are intended to be held for an extended period of time
Valuation Securities:
Fair value if available for sale
Amortized cost if held to maturity
Equity method if significant influence

17. Property, Plant, and Equipment
Physical (tangible) assets used in ongoing business operations of the business to generate income
Reported at cost or amortized cost
Most assets are depreciable, except for land
Disclosure requirements include:
Basis of valuation
Nature of any liens held against the asset
Accumulated amortization

18. Intangible Assets
Capital assets without physical substance, held to generate revenue
High degree of uncertainty regarding future benefits
Include (most common):
patents
copyrights
franchises
goodwill
trademarks, and trade names
Intangibles are grouped into two categories:
Those with finite life – amortized over useful life
Those with indefinite life – not amortized
Both are tested for impairment

19. Other Assets Some of the items included are: Assets in special funds
Non-current receivables
Future income taxes
Property held for sale
Advances to subsidiaries
Sufficient information to be disclosed to inform users of the nature of the asset

20. Current Liabilities
Obligations due within one year (from balance sheet date) or within the operating cycle, whichever is longer
Examples of current liabilities include:
Payables resulting from acquisitions of goods and services
Collections received in advance of delivery of goods or performance of services
Other liabilities to be paid in the short term
Short-term financing payable on demand (e.g. line of credit)
Accounts payable normally listed first; however, current liabilities not reported in any specific order

21. Working Capital = –
Working Capital
Current Liabilities
Current Assets
A key indicator of the company’s short-term liquidity
Not usually disclosed on the balance sheet
Often calculated by bankers and other creditors

22. Long-Term Liabilities
Long-term obligations are those not expected to be paid within the normal operating cycle
Three types:
Obligations arising from specific financing situations (e.g. bonds)
Obligations from ordinary operations of the enterprise (e.g. pension obligations)
Obligations arising from ordinary business operations that are contingent on future events (e.g. product warranty)
Balance sheet presentation requires reporting the portion due within the next year as a current liability

23. Shareholders’ Equity Capital Shares
Number of authorized and issued shares
Outstanding amounts
Contributed Surplus
Usually reported as one amount
Includes issued share premiums
Retained Earnings
The amount of undistributed earnings
Presented as one item
Accumulated Other Comprehensive Income
Includes unrealized gains and losses on available-for-sale securities, certain types of donations etc.

24. Balance Sheet: Additional Information Reported
Additional information may include:
Information not presented elsewhere, or
Information that qualifies items in the balance sheet
Five main types of additional information
Contingencies
Accounting Policies
Contractual Situations
Additional Detail
Subsequent Events

25. Balance Sheet: Techniques of Disclosure
Parenthetical explanations (following the items in the balance sheet)
Notes (to the balance sheet)
Cross references and contra items (where assets and liabilities may be cross referenced)
Supporting schedules (as for capital assets’ depreciation)

26. IFRS Selected Statements – reverse order liquidity

27. IFRS Samples of and Excerpts from Selected Statements

28. Statement of Cash Flows
Section 2
Statement of Cash Flows

29. Statement of Cash Flows
To assess the firm’s ability to generate cash and cash equivalents and
To assess the firm’s cash requirements
Statement of Cash Flows shows:
Where the cash came from
What the cash was used for
What was the change in the cash balance

30. Statement of Cash Flows
Cash activities are divided into three main categories:
Operating Activities
Main revenue-producing activities
Investing Activities
Changes in long-term assets and investments
Financing Activities
Changes in equity and non-operating liabilities

31. Cash Inflows and Outflows
Operating Activities
When operating cash receipts > cash expenditures
Investing Activities
Sale of property, plant, and equipment
Sale of debt or equity securities of other entities
Collection of loans to other entities
Financing Activities
Issuance of equity securities
Issuance of debt (bonds and notes)
Cash Pool
Cash Inflows

32. Cash Inflows and Outflows
Cash Outflows
Cash Pool
Operating Activities
When operating cash expenditures > cash receipts
Investing Activities
Purchase of property, plant, and equipment
Purchase of debt or equity securities of other entities
Loans to other entities
Financing Activities
Payment of dividends
Redemption of debt
Reacquisition of capital stock

33. Usefulness of the Statement of Cash Flows
Cash is a “company’s lifeblood”
Provides creditors with useful information about a company, such as:
Company’s ability to generate net cash from operating activities
Net cash flow trends or patterns from operating activities
Major reasons for positive or negative net cash from operating activities
Whether the cash flows are renewable or sustainable

34. Usefulness of the Statement of Cash Flows
Provides insight into the following areas:
Financial Liquidity
Current Cash Debt Coverage Ratio =
Net Cash Provided by Operating Activities Average Current Liabilities
Financial Flexibility
Cash Debt Coverage Ratio =
Net Cash Provided by Operating Activities Average Total Liabilities

35. Usefulness of the Statement of Cash Flows
Cash Flow Patterns
There may be useful patterns identified of cash inflows and outflows from operating, investing and financing activities
Free Cash Flow
Calculated as net cash from operations less capital expenditures and dividends
Indicates discretionary cash flow (cash left to invest or expand) to make additional investments, to retire its debt, or to add to its liquidity

36. Current IFRS GAAP Comparisons
Main differences:
More choice and flexibility is permitted under IFRS with respect to the format of the balance sheet (also known as the statement of financial position under IFRS). IFRS requires additional line item disclosure on the face of the statement for biological assets, investment property, and provisions; there are no equivalent standards in Canadian GAAP for these line items  
IFRS requires additional line items, sub-totals and headings when these would be relevant to the users.

37. Current IFRS GAAP Comparisons
Main differences:
Both IFRS and Canadian GAAP require classification of the balance sheet to distinguish working capital items from other assets and liabilities. IFRS allows the use of both labels – current/non-current and short-term/long-term. Generally, though, the current/non-current is used to classify items on the face of the financial statement and the short/long-term description is used to indicate recognition and measurement of items (e.g. short-term provisions) within the current/non-current sections of the statement.
Under IFRS, all deferred income taxes are classified as non-current.

38. Current IFRS GAAP Comparisons
Main differences (continued):
Under IFRS, if there is a breach of a covenant or long-term agreement that makes the liability due on demand at the balance sheet date, the loan must be classified as current. If there are renegotiations, any new agreement must be in place by the balance sheet date in order to classify the loan as non- current.

39. Current IFRS GAAP Comparisons
Main differences (continued):
Under IFRS, an accounting policy choice is required to classify these cash flows in a consistent manner. These cash flows should be classified as operating, investing or financing depending on the nature of the underlying cash flows. This differs from Canadian GAAP under which these cash flows are classified as operating activities if it the item is included in the income statement; if the cash flow is not included in the income statement, it should be classified according to its nature (e.g. dividends charged to retained earnings would be classified as financing activities).

40. Looking Ahead
The IASB is involved in “Financial Statement Presentation” project which consists of three phases:
Phase A - What constitutes a complete set of financial statements
Phase B - Presentation of information on the face of the statements
Phase C - Interim financial reporting
The three objectives for financial statement presentation are that information should be presented in the financial statements in a manner that:
Portrays a cohesive financial picture of an entity’s activities.
Disaggregates information so that it is useful in predicting an entity’s future cash flows.
Helps users assess an entity’s liquidity and financial flexibility.

41. COPYRIGHT
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