23-1 Prepared by Coby Harmon University of California, Santa Barbara Intermediat e Accounting Prepared by Coby Harmon University of California, Santa Barbara.

23-1 Prepared by Coby Harmon University of California, Santa Barbara Intermediat e Accounting Prepared by Coby Harmon University of California, Santa Barbara Westmont College INTERMEDIATE ACCOUNTING F I F T E E N T H E D I T I O N Prepared by Coby Harmon University of California, Santa Barbara Westmont College kieso weygandt warfield team for success

23-2 PREVIEW OF CHAPTER Intermediate Accounting 15th Edition Kieso Weygandt Warfield 23 FAS 95 (ASC 230) requires a “Statement of Cash Flows” Not covered Demonstration Problem

23-3 6.Identify sources of information for a statement of cash flows. 7.Contrast the direct and indirect methods of calculating net cash flow from operating activities. 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. After studying this chapter, you should be able to: LEARNING OBJECTIVES 1. 1.Describe the purpose of the statement of cash flows. 2. 2.Identify the major classifications of cash flows. 3. 3.Prepare a statement of cash flows. 4. 4.Differentiate between net income and net cash flow from operating activities. 5. 5.Determine net cash flows from investing and financing activities. Statement of Cash Flows 23

23-4 Primary purpose (FAS 95): To provide information about a company’s cash receipts and cash payments during a period. Secondary objective (FAS 95): To provide information about noncash investing and financing transactions. LO 1 Preparation of Statement of Cash Flows

23-5 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. LO 1 Usefulness of the Statement of Cash Flows Preparation of Statement of Cash Flows

23-7 Changes in Income Statement Items Operating Activities Changes in Investments and Long-Term Asset Items Investing Activities Changes in Long-Term Liabilities and Stockholders’ Equity Financing Activities LO 2 Classification of Cash Flows Preparation of Statement of Cash Flows

23-8 LO 2 Classification of Cash Flows  Illustration 23-1 Classification of Typical Cash Inflows and Outflows

23-9 Illustration 23-1 Classification of Typical Cash Inflows and Outflows LO 2 Classification of Cash Flows  

23-10 Current AssetsCurrent LiabilitiesOperating Activities Long-term AssetsLong-term Liabilities and Equity Investing ActivitiesFinancing Activities LO 2 Classification of Cash Flows Income Statement Operating Activities Balance Sheet

23-11 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 interest rates. Generally, only investments with original maturities of three months or less qualify under this definition. Examples of cash equivalents are Treasury bills, commercial paper, and money market funds. (Working capital cannot be used as a basis of the SCF.) LO 2 Classification of Cash Flows

23-12 Format 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 operating, investing, and financing activities in separate sections.) LO 2 Preparation of Statement of Cash Flows 4. Report noncash financing and investing activities in a supplemental disclosure below the statement or in the notes. Two methods:

23-13 Format of the Statement of Cash Flows Illustration 23-2 LO 2 (Indirect Method) See separate handout for examples of adjustments to net income.

23-14 a) Redemption of bonds payable Financing b) Sale of building at book value Investing c) Depreciation Operating – Add to NI d) Exchange of equipment for furniture Noncash Inv. and Fin. e) Issuance of capital stock Financing f) Amortization of intangible assets Operating – Add to NI g) Purchase of treasury stock Financing h) Issuance of bonds for land Noncash Inv. and Fin. i) Payment of dividends Financing j) Increase in interest receivable on N/R Operating – Deduct f/NI k) Purchase of equipment Investing Exercise 23-1: Classify as Op.-A, Op.-D, Inv., Fin., or Noncash Classification of Transactions LO 2

23-15 Three Sources of Information: 1.Comparative balance sheets. 2.Current income statement data. 3.Selected transaction data. 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 Steps in Preparation Preparation of Statement of Cash Flows

23-17 Illustration: Norman Company’s financial statements for the year ended December 31, 2014, contained the following condensed information. Operating Activities — Indirect Method LO 5

23-18 Prepare the operating activities section of the statement of cash flows using the indirect method (Step 2). Advance slide to uncover solution Operating Activities — Indirect Method LO 5

23-19 Norman Company’s financial statements for the year ended December 31, 2014, contained the following condensed information. Assume accounts payable relates to operating expenses. Operating Activities — Direct Method LO 5

23-20 Prepare the operating activities section of the statement of cash flows using the Direct method (Step 2). Illustration 23-22 Accounts Receivable 1/1/14Balance59,000 Revenues840,000 Receipts from customers862,000 12/31/14Balance37,000 Operating Activities — Direct Method LO 5

23-21 Accounts Payable 1/1/14Balance31,000 Operating expenses624,000 12/31/14Balance46,000 Illustration 23-24 Payments to suppliers609,000 Operating Activities — Direct Method Prepare the operating activities section of the statement of cash flows using the Direct method (Step 2). LO 5

23-22 Income Tax Payable 1/1/14Balance8,500 Income tax expense40,000 12/31/14Balance4,000 Payments for income tax44,500 Illustration 23-24 Operating Activities — Direct Method Prepare the operating activities section of the statement of cash flows using the Direct method (Step 2). LO 5

23-23 Operating Activities — Direct Method Prepare the operating activities section of the statement of cash flows using the Direct method (Step 2). LO 5

23-24 Illustration: (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. Step 3: Determine Net Cash Flow from Investing and Financing Activities LO 5

23-25 Illustration: (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. Step 3: Determine Net Cash Flow from Investing and Financing Activities LO 5 Think about the original journal entry: Cash 5,300 A/D15,000 Loss on sale 4,700 Plant assets25,000

23-26 Investing and Financing Activities O I F

23-27 (b): During the year, 10,000 shares of common stock with a stated value of $10 a share were issued for $33 a share. Investing and Financing Activities LO 5

23-28 (b): During the year, 10,000 shares of common stock with a stated value of $10 a share were issued for $33 a share. Investing and Financing Activities LO 5 Think about the original journal entry: Cash330,000 Common stock 100,000 PIC in excess of stated value 230,000

23-29 O I F Investing and Financing Activities

23-30 (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. Investing and Financing Activities LO 5 Think about the original journal entry on the sale of land: Cash 39,000 Land30,000 Gain on sale of land 9,000

23-32 (h): During the year, treasury stock costing $47,000 was purchased. Investing and Financing Activities LO 5 Think about the original journal entry: Treasury stock 47,000 Cash47,000

23-35 Sources of Information for the Statement of Cash Flows 1.Comparative balance sheets. 2.An analysis of the Retained Earnings account. 3.Write-downs, amortization charges, and similar “book” entries, such as depreciation, because they have no effect on cash. LO 6

23-37 Net Cash Flow from Operating Activities—Indirect Versus Direct Method Adjustments Needed to Determine Net Cash Flow from Operating Activities. Indirect Method Illustration 23-18 LO 7

23-38 Illustration 23-21 Companies adjust each item in the income statement from the accrual basis to the cash basis. Direct Method LO 7 Net Cash Flow from Operating Activities—Indirect Versus Direct Method

23-40 Common noncash transactions that a company should report or disclose: 1.Acquisition of assets by assuming liabilities (including capital lease obligations) or by issuing equity securities. 2.Exchanges of nonmonetary assets. 3.Refinancing of long-term debt. 4.Conversion of debt or preferred stock to common stock. 5.Issuance of equity securities to retire debt. LO 8 Special Problems Significant Noncash Transactions

23-41 LO 8 Special Problems FAS 95 states that companies must not disclose cash flow per share anywhere on the statement of cash flows.

23-43 LO 8 Demonstration Problem E23-11 on Moodle. This exercise will be worked using the problem and SCF template posted on Moodle.

23-44 RELEVANT FACTS - Similarities  Both GAAP and IFRS require that companies prepare a statement of cash flows.  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.  The definition of cash equivalents used in IFRS is similar to that used in GAAP. LO 10 Compare the statement of cash flows under GAAP and IFRS.

23-45 RELEVANT FACTS - Differences  A major difference in the definition of cash and cash equivalents 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 below the cash flow statement or in the notes. LO 10

23-46 RELEVANT FACTS - Differences  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.  To summarize, under IFRS, report:  Interest and dividends received as: Operating or investing  Interest and dividends paid as: Operating or financing  Must choose a classification method and report consistently from period to period LO 10

23-47 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 LO 11

23-48 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 LO 11

23-49 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 LO 11

23-50 Copyright © 2013 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The 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. Copyright

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23-1 Prepared by Coby Harmon University of California, Santa Barbara Intermediat e Accounting Prepared by Coby Harmon University of California, Santa Barbara.

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