17 Statement of Cash Flows Learning Objectives 17-1 Discuss the usefulness and format of the statement of cash flows Prepare a statement of cash flows using the indirect method Analyze the statement of cash flows 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: 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 provided (used) by operating activities 4.Cash investing and financing transactions during the period 17-2 LO Classification of Cash Flows Operating Activities Investing Activities Financing Activities Income Changes in Investments and Long-Term Asset Items Changes in Long-Term Liabilities and Stockholders’ Equity Items Statement Items 17-3 LO Classification of Cash Flows Operating activities—Income statement items Cash inflows: From sale of goods or services Illustration 17-1 Typical receipt and payment classifications 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 17-4 LO Classification of Cash Flows Investing activities—Changes in investments and longIllustration 17-1 term assets Cash inflows: 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 17-5 LO Classification of Cash Flows Financing activities—Changes in long-term liabilities Illustration 17-1 and stockholders’ equity Cash inflows: 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) 17-6 LO Significant Noncash Activities 1.Direct issuance of common stock to purchase assets 2.Conversion of bonds into common stock 3.Issuance of debt to purchase assets 4.Exchanges of plant assets Companies report noncash activities in either a 17-7 separate schedule (bottom of the statement) or separate note to the financial statements LO Accounting Across the Organization Net What? 17-8 LO Format of the Statement of Cash Flows Order of Presentation: 1.Operating activities 2.Investing activities Direct Method Indirect Method 3.Financing activities 17-9 LO Illustration 17-2 Format of statement of cash flows 17-10 LO Preparing the Worksheet Illustration 17B-2 Comparative balance sheets, income statement, and additional information for Computer Services Company Additional information for 2017: Depreciation expense was comprised of $6,000 for building and $3,000 for equipment The company sold equipment with a book value of $7,000 (cost $8,000, less accumulated depreciation $1,000) for $4,000 cash Issued $110,000 of long-term bonds in direct exchange for land A building costing $120,000 was purchased for cash Equipment costing $25,000 was also purchased for cash Issued common stock for $20,000 cash The company declared and paid a $29,000 cash dividend 17-70 LO Preparing the Worksheet 1.Enter in the balance sheet accounts section the balance sheet accounts and their beginning and ending balances 2.Enter in the reconciling columns of the worksheet the data that explain the changes in the balance sheet accounts other than cash and their effects on the statement of cash flows 3.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 17-71 LO Preparing the Worksheet Illustration 17B-3 Completed worksheet— indirect method 17-72 LO LEARNING OBJECTIVE APPENDIX 17C: 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 17-73 LO Illustration 17C-1 17-74 LO A Look at IFRS LEARNING OBJECTIVE Compare the procedures for the statement of cash flows under GAAP and IFRS Relevant Facts 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 17-75 LO A Look at IFRS Relevant Facts 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 17-76 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 LO A Look at IFRS Relevant Facts 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 17-77 LO A Look at IFRS Relevant Facts One 17-78 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 LO A Look at IFRS Relevant Facts 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 17-79 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 17-80 LO A Look at IFRS IFRS Self-Test Questions Under IFRS, interest paid can be reported as: 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 17-81 LO A Look at IFRS IFRS Self-Test Questions 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 b)be disclosed in the notes to the financial statements c)do not need to be reported d)be treated in a fashion similar to cash equivalents 17-82 LO A Look at IFRS IFRS Self-Test Questions 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 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 17-83 LO Copyright “Copyright © 2015 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.” 17-84 ... activities 17- 16 LO Indirect Method COMPUTER SERVICES COMPANY Income Statement For the Month Ended December 31, 2 017 Illustration 17- 4 17- 17 LO Indirect Method Illustration 17- 4 2 017 17-18 2016... information 17- 12 LO Preparing the Statement of Cash Flows Three Major Steps: 17- 13 Illustration 17- 3 LO Preparing the Statement of Cash Flows Three Major Steps: 17- 14 Illustration 17- 3 LO Preparing... activities 17- 9 LO Illustration 17- 2 Format of statement of cash flows 17- 10 LO DO IT! Classification of Cash Flows Illustration: Classify each of these transactions by type of cash flow activity 17- 11