17-1 CHAPTER17 Statement of Cash Flows 17-2 PreviewofCHAPTER17 17-3 Usefulness and Format Usefulness of the Statement of Cash Flows Provides information to help assess: Entity’s ability to generate future cash flows Entity’s ability to pay dividends and obligations Reasons for difference between net income and net cash provided (used) by operating activities Cash investing and financing transactions during the period 17-4 SO Indicate the usefulness of the statement of cash flows Usefulness and Format 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 Statement Transactions 17-5 SO Distinguish among operating, investing, and financing activities Usefulness and Format Classification of Cash Flows 17-6 Illustration 17-1 Typical receipt and payment classifications SO Distinguish among operating, investing, and financing activities Usefulness and Format Classification of Cash Flows 17-7 Illustration 17-1 Typical receipt and payment classifications SO Distinguish among operating, investing, and financing activities Usefulness and Format 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 17-8 separate schedule (bottom of the statement) or separate note to the financial statements SO Distinguish among operating, investing, and financing activities 17-9 Usefulness and Format Format of the Statement of Cash Flows Order of Presentation: Operating activities Investing activities Direct Method Indirect Method Financing activities 17-10 SO Distinguish among operating, investing, and financing activities Statement of Cash Flows-Direct Method Step 2: Investing and Financing Activities Increase in Equipment (1) Juarez purchased for cash equipment costing $180,000 And (2) it sold for $17,000 cash equipment costing $20,000, whose book value was $18,000 Illustration 17B-15 17-63 SO Prepare a statement of cash flows using the direct method Statement of Cash Flows-Direct Method Step 2: Investing and Financing Activities Increase in Land Juarez’s land increased $60,000 The additional information section indicates that the company issued common stock to purchase the land Significant noncash investing and financing transaction Increase in Bonds Payable Bonds Payable increased $130,000 The additional information indicated that Juarez issued, for $130,000 cash, bonds with a face value of $130,000 Financing activity 17-64 SO Prepare a statement of cash flows using the direct method Statement of Cash Flows-Direct Method Step 2: Investing and Financing Activities Increase in Common Stock The Common Stock account increased $60,000 The additional information indicated that Juarez acquired land from the issuance of common stock Increase in Retained Earnings The $52,000 net increase in Retained Earnings resulted from net income of $84,000 and the declaration and payment of a cash dividend of $32,000 17-65 Significant noncash investing and financing transaction Financing activity (cash dividend) SO Prepare a statement of cash flows using the direct method Statement of Cash Flows-Direct Method Step 2: Investing and Financing Activities Illustration 17B-16 17-66 Statement of Cash Flows-Direct Method 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 17B-1 17-67 SO Prepare a statement of cash flows using the indirect method Key Points 17-68 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 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 Key Points 17-69 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 Key Points 17-70 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 cash flow statement Key Points 17-71 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 Key Points 17-72 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 GAAP, under IFRS 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 Looking to the Future FASB and the IASB are involved in a joint project on the presentation and organization of information in the financial statements One possible approach is that 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 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 The two Boards will have to resolve their differences in this area in order to issue a converged standard for the statement of cash flows 17-73 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 17-74 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) not need to be reported d) be treated in a fashion similar to cash equivalents 17-75 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 17-76 Copyright “Copyright © 2011 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.” 17-77 .. .CHAPTER1 7 Statement of Cash Flows 17- 2 PreviewofCHAPTER17 17- 3 Usefulness and Format Usefulness of the Statement of Cash Flows... Illustration 17- 3 17- 15 SO Distinguish among operating, investing, and financing activities Usefulness and Format Preparing the Statement of Cash Flows Three Major Steps: Illustration 17- 3 17- 16 SO... operating activities 17- 17 SO Distinguish among operating, investing, and financing activities Preparing the Statement of Cash Flows Illustration – Indirect Method Illustration 17- 4 17- 18 SO Prepare