Presentation on theme: "Chapter 5 – Continued The balance sheet and STATEMENT OF CASH FLOWS Sommers – ACCT 3311 Chapter 1: Environment and Theoretical Structure of Financial."— Presentation transcript:
1Chapter 5 – Continued The balance sheet and STATEMENT OF CASH FLOWS Sommers – ACCT 3311 Chapter 1: Environment and Theoretical Structure of Financial Accounting.
3Statement of Cash Flows Purpose of the Statement of Cash FlowsTo provide relevant information about the cash receipts and cash payments of an enterprise during a period.The statement provides answers to the following questions:Where did the cash come from?What was the cash used for?What was the change in the cash balance?
4Focus onPerhaps the most noteworthy item reported on an income statement is net income—the amount by which revenues exceed expenses. The most noteworthy item reported on a statement of cash flows is not the amount of net cash flows.The amount of net cash flows may in fact be the least important number on the statement. The increase or decrease in cash can be seen easily on comparative balance sheets. The purpose of the Statement of Cash Flows is not to report that cash increased or decreased by a certain amount, but why cash increased or decreased by that amount. The individual cash inflows and outflows provide that information.
5Discussion QuestionQ5-24 Differentiate between operating activities, investing activities, and financing activities.
6Classification of Cash Flows Balance SheetCurrent AssetsCurrent LiabilitiesOperatingNoncurrent LiabilitiesNoncurrent AssetsInvestingFinancingEquity
7Classifying Cash Flows Indicate the reporting classification of each transaction by entering the appropriate classification code.+I Investing activity (cash inflow)–I Investing activity (cash outflow)+F Financing activity (cash inflow)–F Financing activity (cash outflow)N Noncash investing and financing activityX Not reported as an investing and/or a financing activitySale of landIssuance of common stock for cashPurchase of treasury stockConversion of bonds payable to common stockLease of equipment by capital leaseSale of patent
8Classifying Cash Flows +I Investing activity (cash inflow)–I Investing activity (cash outflow)+F Financing activity (cash inflow)–F Financing activity (cash outflow)N Noncash investing and financing activityX Not reported as an investing and/or a financing activityAcquisition of building for cashIssuance of common stock for landCollection of note receivable (principal amount)Issuance of bondsPayment of cash dividendsIssuance of short-term note payable for cashIssuance of long-term note payable for cashPurchase of marketable securities (“available for sale”)
9Classifying Cash Flows +I Investing activity (cash inflow)–I Investing activity (cash outflow)+F Financing activity (cash inflow)–F Financing activity (cash outflow)N Noncash investing and financing activityX Not reported as an investing and/or a financing activityPayment of note payableSale of equipmentIssuance of note payable for equipmentRepayment of long-term debt by issuing common stockLoan to another firmSale of inventory to customersPurchase of marketable securities (cash equivalents)
10Reporting Cash Flows from Operating Activities Two Formats for Reporting Operating ActivitiesReports the cash effects of each operating activityDirect MethodStarts with accrual net income and converts to cash basisIndirect MethodNote that no matter which format is used, the same amount of net cash flows operating activities is generated.
11Direct MethodUnder the direct method, the cash effect of each operating activity is reported directly in the statement.
12Indirect MethodBy the indirect method, we arrive at net cash flow from operating activities indirectly by starting with reported net income and working backwards to convert that amount to a cash basis.
13Noncash Investing and Financing Activities Significant investing and financing transactions not involving cash also are reported (usually in a disclosure note).Acquiring an asset by incurring a debt payable to the seller.Acquiring an asset by entering into a capital lease.Converting debt into common stock or other equity securities.Exchanging noncash assets or liabilities for other noncash assets or liabilities.
14Determining Cash Received or Paid When preparing a SCF using direct method, the numbers needed generally are not kept by the accounting systemThere is not an account that is the amount (balance) of cash paid to suppliers for merchandiseMost people get these numbers by backing into them using accounting relations via T-accounts or by using journal entries
15Determining Cash Received or Paid Given: Beginning Endof year of yearInventory $ $ 93Accounts payableCost of goods soldDetermine cash paid to merchandise suppliers.Cash paid to suppliers for merchandise
16Cash from Customers Given: Beginning End of year of year Accounts receivable $ $110Allowance for bad debtsSales revenueBad debt expenseDetermine cash received from customers.Cash received from customers
17Proceeds from SaleOn July 15, 2011, M.W. Morgan Distribution sold land for $35 million that it had purchased in 2006 for $22 million. What would be the amount(s) related to the sale that Morgan would report in its statement of cash flows for the year ended December 31, 2011, using the direct method? The indirect method?
18Red, Inc. Cash Flow Problem ∆ – Dr/(Cr)OperatingInvestingFinancingAcct Rec46Ppd Insur4Inventory110Bldgs & Eq50Acc Depr-B121Acct Pay13Accr Exp5Note pay(50)Bond pay(160)Comm StkRet Earn(53)
20Statement of Cash Flows For year ended December 31, 2011 Red, Inc.Statement of Cash FlowsFor year ended December 31, 2011
21Statement of Cash Flows For year ended December 31, 2011 Red, Inc.Statement of Cash FlowsFor year ended December 31, 2011
22U.S. GAAP vs. IFRS RELEVANT FACTS Both IFRS and GAAP allow the use of title “balance sheet” or “statement of financial position.” IFRS recommends but does not require the use of the title “statement of financial position” rather than balance sheet.Both IFRS and GAAP require disclosures about (1) accounting policies followed, (2) judgments that management has made in the process of applying the entity’s accounting policies, and (3) the key assumptions and estimation uncertainty that could result in a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Comparative prior period information must be presented and financial statements must be prepared annually.IFRS and GAAP require presentation of noncontrolling interests in the equity section of the balance sheet.
23U.S. GAAP vs. IFRS RELEVANT FACTS IFRS requires a classified statement of financial position except in very limited situations. IFRS follows the same guidelines as this textbook for distinguishing between current and noncurrent assets and liabilities. However under GAAP, public companies must follow SEC regulations, which require specific line items.Under IFRS, current assets are usually listed in the reverse order of liquidity. For example, under GAAP cash is listed first, but under IFRS it is listed last.IFRS has many differences in terminology. For example in the equity section common stock is called share capital—ordinary.Use of the term “reserve” is discouraged in GAAP, but there is no such prohibition in IFRS.
24Balance Sheet Classification Cone Corporation is in the process of preparing its December 31, 2009, balance sheet. There are some questions as to the proper classification of the following items:$50,000 in cash set aside in a savings account to pay bonds payable. The bonds mature in 2013.Prepaid rent of $24,000, covering the period January 1, 2010, through December 31, 2011.Note payable of $200,000. The note is payable in annual installments of $20,000 each, with the first installment payable on March 1, 2010.Accrued interest payable of $12,000 related to the note payable.Investment in marketable securities of other corporations, $80, Cone intends to sell one-half of the securities in 2010.Required: Prepare a partial classified balance sheet to show how each of the above items should be reported.