12-1 12 Statement of Cash Flows Kimmel ● Weygandt ● Kieso Financial Accounting, Eighth Edition 12-2 CHAPTER OUTLINE LEARNING OBJECTIVES 12-3 Discuss the usefulness and format of the statement of cash flows Prepare a statement of cash flows using the indirect method Use the statement of cash flows to evaluate a company LEARNING OBJECTIVE Discuss the usefulness and format of the statement of cash flows USEFULNESS OF THE STATEMENT OF CASH FLOWS Provides information to help assess: 12-4 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 CLASSIFICATION OF CASH FLOWS Investing Activities Financing Activities Operating Activities Income Statement Items Changes in Investments Changes in Long-Term and Long-Term Assets Liabilities and Stockholders’ Equity 12-5 LO CLASSIFICATION OF CASH FLOWS Operating activities—Income statement items Cash inflows: ILLUSTRATION 12-1 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 12-6 LO CLASSIFICATION OF CASH FLOWS Investing activities—Changes in investments and long-term assets Cash inflows: ILLUSTRATION 12-1 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 12-7 LO CLASSIFICATION OF CASH FLOWS Financing activities—Changes in long-term liabilities and stockholders’ equity Cash inflows: ILLUSTRATION 12-1 Typical receipt and payment classifications From sale of common stock From issuance of debt (bonds and notes) Cash outflows: To stockholders as dividends To redeem long-term debt or reacquire capital stock (treasury stock) 12-8 LO SIGNIFICANT NONCASH ACTIVITIES Direct issuance of common stock to purchase assets Conversion of bonds into common stock Issuance of debt to purchase assets Exchanges of plant assets Companies report noncash activities in either a 12-9 separate schedule (bottom of the statement) or separate note to the financial statements LO ACCOUNTING ACROSS THE ORGANIZATION Net What? 12-10 LO STEP 2: INVESTING AND FINANCING ACTIVITIES Increase in Common Stock Increase in Common Stock of $20,000 Increase resulted from the issuance of new shares of Financing transaction stock Increase in Retained Earnings The $116,000 net increase in Retained Earnings resulted from net income of $145,000 and the Financing transaction (cash declaration and payment of a cash dividend dividend) of $29,000 12-71 LO Illustration 12A-16 Statement of cash flows, 2017—direct method 12-72 LO STEP 3: NET CHANGE IN CASH Compare the net change in cash on the Statement of Cash Flows with the change in the cash account reported on the Balance Sheet to make sure the amounts agree ILLUSTRATION 12A-1 Comparative balance sheets (partial) for Computer Services Company 12-73 LO LEARNING OBJECTIVE APPENDIX 12B: Use the T-account approach to prepare a statement of cash flows The change in cash is equal to the change in all of the other balance sheet accounts If we analyze the changes in all of the noncash balance sheet accounts, we will explain the change in the cash account 12-74 LO Illustration 12B-1 T-account approach 12-75 LO A Look at IFRS LEARNING OBJECTIVE Compare the procedures for the statement of cash flows under GAAP and IFRS KEY POINTS Similarities Companies preparing financial statements under 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 12-76 LO A Look at IFRS Similarities Similar to GAAP, the cash flow statement can be prepared using either the indirect or direct method under IFRS In both U.S and international settings, companies choose for the most part to use the indirect method for reporting net cash flows from operating activities The definition of cash equivalents used in IFRS is similar to that used in GAAP 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 balance sheet 12-77 LO A Look at IFRS Differences IFRS requires that noncash 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 noncash 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 12-78 LO A Look at IFRS 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 12-79 LO A Look at IFRS 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 12-80 LO A Look at IFRS 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 balance sheet would adopt headings similar to those of the statement of cash flows That is, the income statement and balance sheet would be broken into operating, investing, and financing sections 12-81 LO A Look at IFRS IFRS Practice Under IFRS, interest paid can be reported as: 12-82 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 IFRS IFRS Practice IFRS requires that noncash items: a) be reported in the section to which they relate, that is, a noncash investing activity would be reported in the investing section 12-83 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 IFRS IFRS Practice In the future, it appears likely that: a) the income statement and balance sheet will have headings of operating, investing, and financing, much like the statement of cash flows 12-84 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 “Copyright © 2016 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.” 12-85 ... information for Computer Services Company 12- 20 LO Change in 2017 2016 Account Balance Additional information for 2017: 12- 21 ILLUSTRATION 12- 4 Depreciation expense was comprised of $6,000 for. . .12 Statement of Cash Flows Kimmel ● Weygandt ● Kieso Financial Accounting, Eighth Edition 12- 2 CHAPTER OUTLINE LEARNING OBJECTIVES 12- 3 Discuss the usefulness and format of the... dividends received Cash outflows: To suppliers for inventory To employees for wages To government for taxes To lenders for interest To others for expenses 12- 6 LO CLASSIFICATION OF CASH FLOWS Investing