WILEY IFRS EDITION Prepared by Coby Harmon University of California, Santa Barbara Westmont College 13-1 PREVIEW OF CHAPTER 13 Financial Accounting IFRS 3rd Edition Weygandt ● Kimmel ● Kieso 13-2 CHAPTER 13 Statement of Cash Flows LEARNING OBJECTIVES After studying this chapter, you should be able to: 13-3 Indicate the usefulness of the statement of cash flows Distinguish among operating, investing, and financing activities Prepare a statement of cash flows using the indirect method Analyze the statement of cash flows Statement of Cash Flows: Usefulness and Format Learning Objective Indicate the usefulness of the statement of Provides information to help assess: 13-4 cash flows Entity’s ability to generate future cash flows Entity’s ability to pay dividends and meet obligations Reasons for difference between net income and net cash provided (used) by operating activities Cash investing and financing transactions during the period LO Statement of Cash Flows Question Which of the following is incorrect about the statement of cash flows? 13-5 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 Classification of Cash Flows Learning Objective 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 13-6 LO 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 13-7 LO 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 13-8 LO 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) 13-9 LO Significant Non-Cash Activities Direct issuance of ordinary shares to purchase assets Conversion of bonds into ordinary shares Issuance of debt to purchase assets Exchanges of plant assets Companies report non-cash activities in either a 13-10  separate schedule (bottom of the statement) or  separate note to the financial statements LO Step 3: Net Change in Cash Illustration 13A-1 COMPARE THE NET CHANGE IN CASH ON THE STATEMENT OF CASH FLOWS WITH THE CHANGE IN THE CASH ACCOUNT REPORTED ON THE STATEMENT OF FINANCIAL POSITIONS TO MAKE SURE THE AMOUNTS AGREE 13-71 LO APPENDIX 13B Using a Worksheet to Prepare the Statement of Cash Flows—Indirect Method Learning Objective Explain how to use a worksheet to prepare the statement of cash flows using the indirect method Illustration 13B-1 13-72 Format of worksheet LO Preparing a Worksheet Enter in the statement of financial position accounts section the statement of financial position accounts and their beginning and ending balances 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 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 13-73 LO Preparing a Worksheet Illustration 13B-3 Completed worksheet— indirect method 13-74 LO APPENDIX 13C Statement of Cash Flows— T-Account Approach Learning Objective The change in cash is equal to the change Use the T-account approach to prepare a statement of cash flows in all of the other statement of financial position accounts If we analyze the changes in all of the non-cash statement of financial position accounts, we will explain the change in the Cash account 13-75 LO Illustration 13C-1 T-account approach 13-76 A Look at U.S GAAP Learning Objective Compare the accounting for statement of cash flows under IFRS and U.S GAAP Key Points Similarities  Companies preparing financial statements under both GAAP and IFRS must prepare a statement of cash flows as an integral part of the financial statements  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 IFRS, the statement of cash flows 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 flows from operating activities 13-77 LO A Look at U.S GAAP Key Points Differences  The definition of cash equivalents used in GAAP is similar to that used in IFRS A major difference 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 in the statement of cash flows and are reported as liabilities on the statement of financial position  IFRS requires that non-cash investing and financing activities be excluded from the statement of cash flows Instead, these noncash 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 on the face of the statement of cash flows 13-78 LO A Look at U.S GAAP Key Points Differences  One area where there can be substantial differences between IFRS and GAAP relates to the classification of interest, dividends, and taxes The following table indicates the differences between the two approaches 13-79 LO A Look at U.S GAAP Key Points Differences  Under IFRS, some companies present the operating section in a single line item, with a full reconciliation provided in the notes to the financial statements This presentation is not seen under GAAP  Similar to IFRS, under GAAP companies must disclose the amount of taxes and interest paid Under GAAP, companies disclose this in the notes to the financial statements Under IFRS, some companies disclose this information in the notes, but others provide individual line items on the face of the statement In order to provide this information on the face of the statement, companies first add back the amount of interest expense and tax expense (similar to adding back depreciation expense) and then further down the statement they subtract the cash amount paid for interest and taxes This treatment can be seen in the statement of cash flows provided for Petra Foods in Appendix C 13-80 LO A Look at U.S GAAP Looking to the Future Presently, the FASB and the IASB are involved in a joint project on the presentation and organization of information in the financial statements One interesting approach, revealed in a published proposal from that project, is that in the future the income statement and statement of financial position (balance sheet) would adopt headings similar to those of the statement of cash flows That is, the income statement and statement of financial position would be broken into operating, investing, and financing sections With respect to the cash flow statement specifically, the notion of cash equivalents will probably not be retained That is, cash equivalents will not be combined with cash but instead will be reported as a form of highly liquid, low-risk investment The definition of cash in the existing literature would be retained, and the statement of cash flows would present information on changes in cash only In addition, the FASB favors presentation of operating cash flows using the direct method only However, the majority of IASB members express a preference for not requiring use of the direct method of reporting operating cash flows 13-81 LO A Look at U.S GAAP A Look at IFRS GAAP Self-Test Questions Under GAAP interest paid can be reported as: 13-82 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 LO A Look at U.S GAAP A Look at IFRS GAAP Self-Test Questions IFRS requires that non-cash items: a) be reported in the section to which they relate, that is, a non-cash investing activity would be reported in the investing section 13-83 b) be disclosed in the notes to the financial statements c) not need to be reported d) be treated in a fashion similar to cash equivalents LO A Look at U.S GAAP A Look at IFRS GAAP Self-Test Questions In the future, it appears likely that: a) the income statement and statement of financial position (balance sheet) will have headings of operating, investing, and financing, much like the statement of cash flows 13-84 b) cash and cash equivalents will be combined in a single line item c) the IASB will not allow companies to use the direct approach to the statement of cash flows d) None of the above LO Copyright 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OF CHAPTER 13 Financial Accounting IFRS 3rd Edition Weygandt ● Kimmel ● Kieso 13- 2 CHAPTER 13 Statement of Cash Flows LEARNING OBJECTIVES After studying this chapter, you should be able to: 13- 3... Illustration 13- 5 Comparative statements of financial position, income statement, and additional information for Computer Services 13- 21 Company LO Illustration 13- 5 Comparative statements of financial. .. merchandising 13- 11 LO Format of the Statement of Cash Flows Order of Presentation: Direct Method 13- 12 Operating activities Indirect Method Investing activities Financing activities LO Illustration 13- 3