CHAPTER 23 Statement of Cash Flows ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics Questions Brief Exercises Exercises Concepts Problems for Analysis Format, objectives purpose, and source of statement 1, 2, 7, 8, 12 Classifying investing, financing, and operating activities 3, 4, 5, 6, 16, 17, 19 1, 2, 3, 6, 7, 8, 12 1, 2, 10, 16 1, 3, 4, Direct vs indirect methods of preparing operating activities 9, 20 4, 5, 9, 10, 11 3, Statement of cash flows— direct method 11, 13, 14 4, 5, 7, 9, 12, 13 3, 4, 6, 7, Statement of cash flows— indirect method 10, 13, 15, 16 3, 6, 8, 11, 14, 15, 16, 17, 18 1, 2, 5, 6, 7, 8, Preparing schedule of noncash investing and financing activities 18 12 5, 7, 8, Worksheet adjustments 21 13 Copyright © 2011 John Wiley & Sons, Inc 1, 2, 5, 19, 20, 21 Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only) 23-1 ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE) Learning Objectives Brief Exercises Exercises Problems Describe the purpose of the statement of cash flows Identify the major classifications of cash flows 1, 2, 10, 16 Differentiate between net income and net cash flows from operating activities 4, 5, 9, 10, 11 2, 3, 4, 5, 6, 7, 8, 16 6, Contrast the direct and indirect methods of calculating net cash flow from operating activities 4, 5, 6, 7, 3, 4, 5, 6, 7, 6, Determine net cash flows from investing and financing activities 1, 16 Prepare a statement of cash flows 9, 11, 12, 13, 14, 15, 17, 18 Identify sources of information for a statement of cash flows Discuss special problems in preparing a statement of cash flows 12 10, 18 Explain the use of a worksheet in preparing a statement of cash flows 13 19, 20, 21 23-2 Copyright © 2011 John Wiley & Sons, Inc 1, 2, 3, 4, 5, 6, 7, 8, 1, 2, 4, 5, 8, Kieso, Intermediate Accounting, 14/e, Solutions Manual 1, 2, 4, 5, 6, 7, 8, (For Instructor Use Only) ASSIGNMENT CHARACTERISTICS TABLE Level of Difficulty Time (minutes) Simple Moderate Simple 10–15 20–30 15–25 Simple Simple Simple Simple Moderate 20–30 20–30 15–20 15–20 20–30 Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate 20–30 25–35 30–35 20–30 30–40 30–40 25–35 30–40 Moderate Moderate Moderate Moderate Moderate 30–40 25–30 20–25 20–25 45–55 Moderate Moderate Complex Moderate Complex Moderate 40–45 50–60 50–60 45–60 50–65 40–50 Moderate 30–40 P23-8 P23-9 SCF—indirect method SCF—indirect method SCF—direct method SCF—direct method SCF—indirect method SCF—indirect method, and net cash flow from operating activities, direct method SCF—direct and indirect methods from comparative financial statements SCF—direct and indirect methods Indirect SCF Moderate Moderate 30–40 30–40 CA23-1 CA23-2 CA23-3 CA23-4 CA23-5 CA23-6 Analysis of improper SCF SCF theory and analysis of improper SCF SCF theory and analysis of transactions Analysis of transactions’ effect on SCF Purpose and elements of SCF Cash flow reporting, ethics Moderate Moderate Moderate Moderate Complex Moderate 30–35 30–35 30–35 20–30 30–40 20–30 Item Description E23-1 E23-2 E23-3 Classification of transactions Statement presentation of transactions—indirect method Preparation of operating activities section—indirect method, periodic inventory Preparation of operating activities section—direct method Preparation of operating activities section—direct method Preparation of operating activities section—indirect method Computation of operating activities—direct method Schedule of net cash flow from operating activities— indirect method SCF—direct method Classification of transactions SCF—indirect method SCF—direct method SCF—direct method SCF—indirect method SCF—indirect method Cash provided by operating, investing, and financing activities SCF—indirect method and balance sheet Partial SCF—indirect method Worksheet analysis of selected accounts Worksheet analysis of selected transactions Worksheet preparation E23-4 E23-5 E23-6 E23-7 E23-8 E23-9 E23-10 E23-11 E23-12 E23-13 E23-14 E23-15 E23-16 E23-17 E23-18 E23-19 E23-20 E23-21 P23-1 P23-2 P23-3 P23-4 P23-5 P23-6 P23-7 Copyright © 2011 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only) 23-3 SOLUTIONS TO CODIFICATION EXERCISES CE23-1 Master Glossary (a) Cash equivalents are short-term, highly liquid investments that have both of the following characteristics: Readily convertible to known amounts of cash So near their maturity that they present insignificant risk of changes in value because of changes in interest rates Generally, only investments with original maturities of three months or less qualify under that definition Original maturity means original maturity to the entity holding the investment For example, both a three-month U.S Treasury bill and a three-year Treasury note purchased three months from maturity qualify as cash equivalents However, a Treasury note purchased three years ago does not become a cash equivalent when its remaining maturity is three months Examples of items commonly considered to be cash equivalents are Treasury bills, commercial paper, money market funds, and federal funds sold (for an entity with banking operations) (b) Financing activities include obtaining resources from owners and providing them with a return on, and a return of, their investment; receiving restricted resources that by donor stipulation must be used for long-term purposes; borrowing money and repaying amounts borrowed, or otherwise settling the obligation; and obtaining and paying for other resources obtained from creditors on long-term credit (c) Investing activities include making and collecting loans and acquiring and disposing of debt or equity instruments and property, plant, and equipment and other productive assets, that is, assets held for or used in the production of goods or services by the entity (other than materials that are part of the entity’s inventory) Investing activities exclude acquiring and disposing of certain loans or other debt or equity instruments that are acquired specifically for resale, as discussed in paragraphs 230-10-45-12 and 230-10-45-21 (d) Operating activities include all transactions and other events that are not defined as investing or financing activities (see paragraphs 230-10-45-12 through 45-15) Operating activities generally involve producing and delivering goods and providing services Cash flows from operating activities are generally the cash effects of transactions and other events that enter into the determination of net income CE23-2 According to FASB ASC 230-10-45-14 (Statement of Cash Flow—Other Presentation Matters—Cash Flows from Financing Activities): All of the following are cash inflows from financing activities: (a) Proceeds from issuing equity instruments (b) Proceeds from issuing bonds, mortgages, notes, and from other short- or long-term borrowing 23-4 Copyright © 2011 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only) CE23-2 (Continued) (c) Receipts from contributions and investment income that by donor stipulation are restricted for the purposes of acquiring, constructing, or improving property, plant, equipment, or other long-lived assets or establishing or increasing a permanent endowment or term endowment (d) Proceeds received from derivative instruments that include financing elements at inception, whether the proceeds were received at inception or over the term of the derivative instrument, other than a financing element inherently included in an at-the-market derivative instrument with no prepayments (e) Cash retained as a result of the tax deductibility of increases in the value of equity instruments issued under share-based payment arrangements that are not included in the cost of goods or services that is recognizable for financial reporting purposes For this purpose, excess tax benefits shall be determined on an individual award (or portion thereof) basis CE23-3 According to FASB ASC 230-10-45-11 (Statement of Cash Flows—Other Presentation Matters—Cash Flows from Investing Activities): Cash flows from purchases, sales, and maturities of available-for-sale securities shall be classified as cash flows from investing activities and reported gross in the statement of cash flows CE23-4 According to FASB ASC 230-10-50-3 (Statement of Cash Flows—Disclosure—Noncash Investing and Financing Activities): Information about all investing and financing activities of an entity during a period that affect recognized assets or liabilities but that not result in cash receipts or cash payments in the period shall be disclosed Those disclosures may be either narrative or summarized in a schedule, and they shall clearly relate the cash and noncash aspects of transactions involving similar items Copyright © 2011 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only) 23-5 ANSWERS TO QUESTIONS The main purpose of the statement of cash flows is to show the change in cash of a company from one period to the next The statement of cash flows provides information about a company’s operating, financing, and investing activities More precisely, it provides information about the company’s cash inflows and outflows for the period Some uses of this statement are: Assessing future cash flows: Income data when augmented with current cash flow data provide a better basis for assessing future cash flows Assessing quality of income: Some believe that cash flow information is more reliable than income information because income involves a number of assumptions, estimates and valuations Assessing operating capability: Whether an enterprise is able to maintain its operating capability, provide for future growth, and distribute dividends to the owners depends on whether adequate cash is being or will be generated Assessing financial flexibility and liquidity: Cash flow data indicate whether a company should be able to survive adverse operating problems and whether a company might have difficulty in meeting obligations as they become due, paying dividends, or meeting other recurring costs Providing information on financing and investing activities: Cash flows are classified by their effect on balance sheet items; investing activities affect assets while financing activities affect liabilities and stockholders’ equity Investing activities generally involve noncurrent assets and include (1) lending money and collecting on those loans and (2) acquiring and disposing of investments and productive long-lived assets Financing activities, on the other hand, involve liability and owners’ equity items and include (1) obtaining cash from creditors and repaying the amounts borrowed and (2) obtaining capital from owners and providing them with a return on their investment Operating activities include all transactions and events that are not investing and financing activities Operating activities involve the cash effects of transactions that enter into the determination of net income Examples of sources of cash in a statement of cash flows include cash from operating activities, issuance of debt, issuance of capital stock, sale of investments, and the sale of property, plant, and equipment Examples of uses of cash include cash used in operating activities, payment of cash dividends, redemption of debt, purchase of investments, redemption of capital stock, and the purchase of property, plant, and equipment Preparing the statement of cash flows involves three major steps: (1) Determine the change in cash This is simply the difference between the beginning and ending cash balances (2) Determine the net cash flow from operating activities This involves analyzing the current year’s income statement, comparative balance sheets and selected transaction data (3) Determine cash flows from investing and financing activities All other changes in balance sheet accounts are analyzed to determine their effect on cash Purchase of land—investing; Payment of dividends—financing; Cash sales—operating; Purchase of treasury stock—financing Comparative balance sheets, a current income statement, and certain transaction data all provide information necessary for preparation of the statement of cash flows Comparative balance sheets indicate how assets, liabilities, and equities have changed during the period A current income statement provides information about the amount of cash provided from operating activities Certain transactions provide additional detailed information needed to determine whether cash was provided or used during the period 23-6 Copyright © 2011 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only) Questions Chapter 23 (Continued) It is necessary to convert accrual-based net income to a cash basis because net income includes items that not provide or use cash An example would be an increase in accounts receivable If accounts receivable increased during the period, revenues reported on the accrual basis would be higher than the actual cash revenues received Thus, accrual basis net income must be adjusted to reflect the net cash flow from operating activities Net cash flow from operating activities under the direct method is the difference between cash revenues and cash expenses The direct method adjusts the revenues and expenses directly to reflect the cash basis This results in cash net income, which is equal to “net cash flow from operating activities.” The indirect method involves adjusting accrual net income This is done by starting with accrual net income and adding or subtracting noncash items included in net income Examples of adjustments include depreciation and other noncash expenses and changes in the balances of current asset and current liability accounts from one period to the next 10 Net cash flow from operating activities is $3,820,000 Using the indirect method, the solution is: Net income $3,500,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense $ 520,000 Accounts receivable increase (500,000) Accounts payable increase 300,000 320,000 Net cash provided by operating activities $3,820,000 11 Accrual basis sales Less: Increase in accounts receivable Less: Write-off of accounts receivable Cash sales $100,000 30,000 70,000 2,000 $ 68,000 12 A number of factors could have caused an increase in cash despite the net loss These are: (1) high cash revenues relative to low cash expenses, (2) sales of property, plant, and equipment, (3) sales of investments, and (4) issuance of debt or capital stock 13 Declared dividends Add: Dividends payable (beginning of year) Deduct: Dividends payable (end of year) Cash paid in dividends during the year $260,000 85,000 345,000 90,000 $255,000 14 To determine cash payments to suppliers, it is first necessary to find purchases for the year To find purchases, cost of goods sold is adjusted for the change in inventory (increased when inventory increases or decreased when inventory decreases) After purchases are computed, cash payments to suppliers are determined by adjusting purchases for the change in accounts payable An increase (decrease) in accounts payable is deducted from (added to) purchases to determine cash payments to suppliers 15 Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense Amortization of patent Loss on sale of plant assets Net cash provided by operating activities Copyright © 2011 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 14/e, Solutions Manual $320,000 $124,000 40,000 21,000 (For Instructor Use Only) 185,000 $505,000 23-7 Questions Chapter 23 (Continued) 16 (a) Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Loss on sale of plant assets [($18,000 ÷ 10) x 31/2 ] – $4,000 Cash flows from investing activities Sale of plant assets (b) (c) XXXX Cash flows from financing activities Issuance of common stock $ 2,300 $ 4,000 $410,000 No effect on cash; not shown in the statement of cash flows or in any related schedules or notes Note to instructor: The change in net accounts receivable is an adjustment to net income under the indirect method (d) Cash flows from operating activities Net loss Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation expense Gain on sale of available-for-sale securities Cash flows from investing activities Sale of available-for-sale securities 17 (a) Operating activity (b) Financing activity (c) Investing activity (d) Operating activity (e) Significant noncash investing and financing activities (f) Financing activity $(50,000) $22,000 (9,000) $ 38,000 (g) Operating activity (h) Financing activity (i) Significant noncash investing and financing activities (j) Financing activity (k) Investing activity (l) Operating activity 18 Examples of noncash transactions are: (1) issuance of stock for noncash assets, (2) issuance of stock to liquidate debt, (3) issuance of bonds or notes for noncash assets, and (4) noncash exchanges of property, plant, and equipment 19 Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Gain on redemption of bonds payable Cash flows from financing activities Redemption of bonds payable XXXX $ (120,000) $(1,880,000) 20 Arguments for the indirect or reconciliation method are: (a) By providing a reconciliation between net income and cash provided by operations, the differences are highlighted (b) The direct method is nothing more than a cash basis income statement which will confuse and create uncertainty for financial statement users who are familiar with the accrual-based income statements 23-8 Copyright © 2011 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only) Questions Chapter 23 (Continued) (c) There is some question as to whether the direct method is cost/benefit-justified as this method would probably lead to additional preparation cost because the financial records are not maintained on a cash basis 21 A worksheet is desirable because it allows the orderly accumulation and classification of data that will appear on the statement of cash flows It is an optional but efficient device that aids in the preparation of the statement of cash flows Copyright © 2011 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only) 23-9 SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 23-1 Cash flow from investing activities Sale of land Purchase of equipment Purchase of available-for-sale securities Net cash used by investing activities $ 180,000 (415,000) (59,000) $(294,000) BRIEF EXERCISE 23-2 Cash flow from financing activities Issuance of common stock Issuance of bonds payable Payment of dividends Purchase of treasury stock Net cash provided by financing activities $ 250,000 510,000 (350,000) (46,000) $ 364,000 BRIEF EXERCISE 23-3 (a) (b) (c) (d) (e) (f) P-I A R-F A R-I R-I, D (g) (h) (i) (j) (k) (l) P-F D P-I A D R-F (m) (n) (o) (p) (q) (r) N D R-F P-F R-I, A P-F BRIEF EXERCISE 23-4 Cash flows from operating activities Cash received from customers ($200,000 – $12,000) Cash payments: To suppliers ($120,000 + $11,000 – $13,000) For operating expenses ($50,000 – $21,000) Net cash provided by operating activities 23-10 Copyright © 2011 John Wiley & Sons, Inc $188,000 $118,000 29,000 Kieso, Intermediate Accounting, 14/e, Solutions Manual 147,000 $ 41,000 (For Instructor Use Only) ACCOUNTING, ANALYSIS, AND PRINCIPLES Accounting LASKOWSKI COMPANY Statement of Cash Flows For the Year Ended December 31, 2012 Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense Loss on sale of machinery Increase in accounts receivable Decrease in inventory Increase in accounts payable Net cash provided by operating activities Cash flows from investing activities Sale of machinery Purchase of machinery Net cash used by investing activities $ 430,000 $ 880,000 24,000 (165,000) 33,000 20,000 792,000 1,222,000 270,000 (750,000) Cash flows from financing activities Payment of cash dividends Net increase in cash Cash at beginning of period Cash at end of period (480,000) (200,000) 542,000 130,000 $ 672,000 Analysis Laskowski’s free cash flow is: Net cash provided by operating activities $1,222,000 Less: Purchase of machinery 750,000 Dividends 200,000 Free cash flow $ 272,000 23-70 Copyright © 2011 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only) ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued) Laskowski’s free cash flow for the current year ($272,000) is less than the amount needed for expansion next year ($500,000) Thus, assuming operations at roughly the same level in future periods, Laskowski’s free cash flow will not be sufficient to fund the expansion plan The company might explore reducing the dividend or securing additional funds for the expansion through a borrowing Principles According to Statement of Financial Accounting Concepts No 1, paragraph 37, “Financial reporting should provide information to help present and potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts from dividends or interest and the proceeds from the sale, redemption, or maturity of securities or loans The prospects for those cash receipts are affected by an enterprise’s ability to generate enough cash to meet its obligations when due and its other cash operating needs, to reinvest in operations, and to pay cash dividends and may also be affected by perceptions of investors and creditors generally about that ability, which affect market prices of the enterprise’s securities Thus, financial reporting should provide information to help investors, creditors, and others assess the amounts, timing, and uncertainty of prospective net cash inflows to the related enterprise.” By reporting cash provided by operations, and the inflows and outflows of cash from investing and financing decisions, the statement of cash flows provides information relevant to assessing a company’s future cash flows Copyright © 2011 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only) 23-71 PROFESSIONAL RESEARCH (a) According to FASB ASC 230-10-10 (Statement of Cash Flows/Overall/ Objectives): 10-1 The primary objective of a statement of cash flows is to provide relevant information about the cash receipts and cash payments of an entity during a period As indicated in the glossary at this same section (230-10-20), cash includes not only currency on hand but demand deposits with banks or other financial institutions Cash also includes other kinds of accounts that have the general characteristics of demand deposits in that the customer may deposit additional funds at any time and also effectively may withdraw funds at any time without prior notice or penalty All charges and credits to those accounts are cash receipts or payments to both the entity owning the account and the bank holding it For example, a bank’s granting of a loan by crediting the proceeds to a customer’s demand deposit account is a cash payment by the bank and a cash receipt of the customer when the entry is made Thus, the basis for the statement of cash flows is cash, not broader measures of liquidity, like working capital (b) See FASB ASC 230-10-10 (Statement of Cash Flows—Objectives) 10-2 The information provided in a statement of cash flows, if used with related disclosures and information in the other financial statements, should help investors, creditors, and others (including donors) to all of the following: a Assess the entity’s ability to generate positive future net cash flows b Assess the entity’s ability to meet its obligations, its ability to pay dividends, and its needs for external financing c Assess the reasons for differences between net income and associated cash receipts and payments 23-72 Copyright © 2011 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only) PROFESSIONAL RESEARCH (Continued) d Assess the effects on an entity’s financial position of both its cash and noncash investing and financing transactions during the period (c) According to FASB ASC 230-10-45-16 to 17: 45-16 All of the following are cash inflows for operating activities: a Cash receipts from sales of goods or services, including receipts from collection or sale of accounts and both shortand long-term notes receivable from customers arising from those sales The term goods includes certain loans and other debt and equity instruments of other entities that are acquired specifically for resale, as discussed in paragraph 230-10-45-21 b Cash receipts from returns on loans, other debt instruments of other entities, and equity securities—interest and dividends c All other cash receipts that not stem from transactions defined as investing or financing activities, such as amounts received to settle lawsuits; proceeds of insurance settlements excepts for those that are directly related to investing or financing activities, such as from destruction of a building; and refunds from suppliers 45-17 All of the following are cash outflows for operating activities: a Cash payments to acquire materials for manufacture or goods for resale, including principal payments on accounts and both short- and long-term notes payable to suppliers for those materials or goods [FAS 095, paragraph 23, sequence 101] [The term goods includes certain loans and other debt and equity instruments of other entities that are acquired specifically for resale, as discussed in paragraph 230-10-4521, and securities that are classified as trading securities, as discussed in Topic 320.] b Cash payments to other suppliers and employees for other goods or services Copyright © 2011 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only) 23-73 PROFESSIONAL RESEARCH (Continued) c Cash payments to governments for taxes, duties, fines, and other fees or penalties and the cash that would have been paid for income taxes if increases in the value of equity instruments issued under share-based payment arrangements that are not included in the cost of goods or services recognizable for financial reporting purposes also had not been deductible in determining taxable income (This is the same amount reported as a financing cash inflow pursuant to paragraph 230-10-45-14(e).) d Cash payments to lenders and other creditors for interest e Cash payment made to settle an asset retirement obligation f All other cash payments that not stem from transactions defined as investing or financing activities, such as payments to settle lawsuits, cash contributions to charities, and cash refunds to customers 23-74 Copyright © 2011 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only) PROFESSIONAL SIMULATION Financial Statements ELLWOOD HOUSE, INC Statement of Cash Flows For the Year Ended December 31, 2013 Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense (a) Gain on sale of investment (b) Net cash provided by operating activities $42,000 $13,550 (500) Cash flows from investing activities Purchase of land (c) Sale of investments (d) Net cash provided by investing activities (5,500) 15,500 Cash flows from financing activities Payment of dividends (e) Retirement of bonds payable (f) Issuance of common stock (g) Net cash used by financing activities (19,000) (10,000) 20,000 13,050 55,050 10,000 (9,000) Net increase (decrease) in cash Cash, January 1, 2013 Cash, December 31, 2013 56,050 10,000 $66,050 Noncash investing and financing activities Issuance of bonds for equipment $32,000 Copyright © 2011 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only) 23-75 PROFESSIONAL SIMULATION (Continued) Explanation Dear Mr Brauer: Enclosed is your statement of cash flows for the year ending December 31, 2013 I would like to take this opportunity to explain the changes which occurred in your business as a result of cash activities during 2013 (Please refer to the attached statement of cash flows.) The first category shows the net cash flow which resulted from all of your operating activities Operating activities are those engaged in for the routine conduct of business, involving most of the transactions used to determine net income The cash inflow from operations which affects this category is net income However, this figure must be adjusted, first for depreciation (item a)—because this expense did not involve a cash outlay in 2013—and second for the $500 gain on the sale of your investment portfolio (item b) The gain must be subtracted from this section because it was included in net income, but it is not the result of an operating activity—it is an investing activity The second category, cash flows from investing activities, results from the acquisition/disposal of long-term assets including the purchase of another entity’s debt or equity securities Your purchase of land (item c) as well as the sale of your investment portfolio (item d) represent your investing activities during 2013, the purchase being a $5,500 outflow and the sale being a $15,500 inflow Cash flows arising from the issuance and retirement of debt and equity securities are properly classified as “Cash flows from financing activities.” These inflows and outflows generally include the long-term liability and stockholders’ equity items on the balance sheet Examples of your financing activities resulting in cash flows are the payment of dividends (item e), the retirement of your bonds payable (item f), and your issuance of common stock (item g) Note that, although $32,000 worth of bonds were issued for the purchase of heavy equipment, the transaction has no effect on the change in cash from January 1, 2013 to December 31, 2013 I hope this information helps you to better understand the enclosed statement of cash flows If I can further assist you, please let me know Sincerely, 23-76 Copyright © 2011 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only) IFRS CONCEPTS AND APPLICATION IFRS23-1 IAS 7, “Cash Flow Statements,” provides the overall IFRS requirements for cash flow information IFRS23-2 As in U.S GAAP, the statement of cash flows is a required statement for IFRS In addition, the content and presentation of an IFRS statement of cash flows is similar to one used for U.S GAAP However, the disclosure requirements related to the statement of cash flows are more extensive under U.S GAAP Other similarities include: (1) Companies preparing financial statements under IFRS must prepare a statement of cash flows as an integral part; (2) Both IFRS and U.S 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; (3) Similar to U.S 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 Notable differences are (1) IFRS encourages companies to disclose the aggregate amount of cash flows that are attributable to the increase in operating capacity separately from those cash flows that are required to maintain operating capacity; (2) The definition of cash equivalents used in IFRS is not the same to that used in U.S 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 U.S GAAP) Under U.S GAAP, bank overdrafts are classified as financing activities; (3) 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 U.S GAAP, companies may present this information in the cash flow statement IFRS allows interest paid and received to be classified as either operating or investing activities U.S GAAP classifies interest paid and received as an operating activity Copyright © 2011 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only) 23-77 IFRS23-3 Presently, the FASB and the IASB are involved in a joint project on the presentation and organization of information in the financial statements 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 So 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 U.S GAAP rules related to cash flow reporting are less flexible than IFRS, but this is not a major concern IFRS23-4 Examples of non-cash transactions are: (1) issuance of shares for non-cash assets, (2) issuance of shares to liquidate debt, (3) issuance of bonds or notes for non-cash assets, (4) non-cash exchanges of property, plant, and equipment, and (5) refinancing of long-term debt IFRS23-5 (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) 23-78 Operating—add to net income Financing activity Investing activity Operating—add to net income Non-cash investing and financing activity (presented in the notes) Financing activity Operating—add to net income Financing activity Non-cash investing and financing activity (presented in the notes) Financing activity Operating—deduct from net income Investing activity Copyright © 2011 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only) IFRS23-6 The solution can be determined through use of a T-account for property, plant, and equipment Property, Plant & Equipment 12/31/11 Equipment from exchange of B/P Payments for purchase of PP&E 247,000 25,000 ? 12/31/12 277,000 45,000 Equipment sold Payments = $277,000 + $45,000 – $247,000 – $25,000 = $50,000 IFRS states that investing activities include the acquisition and disposition of long-term productive assets Accordingly, the purchase of property, plant, and equipment is an investing activity Note that the acquisition of property, plant, and equipment in exchange for bonds payable would be disclosed in the notes as a non-cash investing and financing activity The solution can be determined through use of a T-account for accumulated depreciation Accumulated Depreciation 167,000 38,000 Equipment sold 12/31/11 Depreciation expense ? 178,000 12/31/12 Accumulated depreciation on equipment sold = $167,000 + $38,000 – $178,000 = $27,000 The entry to reflect the sale of equipment is: Cash (proceeds from sale of equipment) ($45,000 + $14,500 – $27,000) 32,500 Accumulated Depreciation 27,000 Property, Plant, and Equipment Gain on Sale of Equipment Copyright © 2011 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 14/e, Solutions Manual 45,000 14,500 (given) (given) (For Instructor Use Only) 23-79 IFRS23-6 (Continued) The proceeds from the sale of equipment of $32,500 are considered an investing activity Investing activities include the acquisition and disposition of long-term productive assets The cash dividends paid can be determined by analyzing T-accounts for Retained Earnings and Dividends Payable Retained Earnings Dividends declared ? 91,000 31,000 104,000 12/31/11 Net income 12/31/12 Dividends declared = $91,000 + $31,000 – $104,000 = $18,000 Dividends Payable 5,000 18,000 Cash dividends paid 12/31/11 Dividends declared ? 8,000 12/31/12 Cash dividends paid = $5,000 + $18,000 – $8,000 = $15,000 Financing activities include all cash flows involving liabilities and equity other than operating items Payment of cash dividends is thus a financing activity The redemption of bonds payable amount is determined by setting up a T-account for Bonds Payable Bonds Payable Redemption of B/P 46,000 25,000 12/31/11 Issuance of B/P for PP&E 49,000 12/31/12 ? The problem states that there was no amortization of bond premium or discount; thus, the redemption of bonds payable is the only change not accounted for 23-80 Copyright © 2011 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only) IFRS23-6 (Continued) Redemption of bonds payable = $46,000 + $25,000 – $49,000 = $22,000 Financing activities include all cash flows involving liabilities and equity other than operating items Therefore, redemption of bonds payable is considered a financing activity IFRS23-7 DINGEL CORPORATION Statement of Cash Flows For the Year Ended December 31, 2012 Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Loss on sale of equipment Gain from flood damage Depreciation expense Patent amortization Gain on sale of equity investment Increase in accounts receivable (net) Increase in inventory Increase in accounts payable Net cash flow provided by operating activities $14,750(a) $ 4,100(b) (8,250) (c) 1,900(d) 1,250 (1,700) (3,750) (3,000) 2,000 Cash flows from investing activities Sale of equity investments Sale of equipment Purchase of equipment (cash) Proceeds from flood damage to building Net cash provided by investing activities 4,700 2,500 (20,000) 32,000 Cash flows from financing activities Payment of dividends Payment of short-term note payable Net cash used by financing activities (5,000) (1,000) Increase in cash Cash, January 1, 2012 Cash, December 31, 2012 Copyright © 2011 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 14/e, Solutions Manual (7,450) 7,300 19,200 (6,000) 20,500 13,000 $33,500 (For Instructor Use Only) 23-81 IFRS23-7 (Continued) Supplemental disclosures of cash flow information: Cash paid during the year for: Interest Income taxes Non-cash investing and financing activities:* Retired note payable by issuing ordinary shares Purchased equipment by issuing note payable $ 2,000 $ 6,500 $10,000 16,000 $21,000 *Presented in the notes to the financial statements Supporting Computations: 23-82 (a) Ending retained earnings Beginning retained earnings Net income $20,750 (6,000) $14,750 (b) Cost Accumulated depreciation (40% X $11,000) Book value Proceeds from sale Loss on sale $11,000 (4,400) 6,600 (2,500) $ 4,100 (c) Cost Accumulated depreciation Book value Proceeds from insurance Gain on flood damage $29,750 (6,000) 23,750 (32,000) ($ 8,250) (d) Accumulated depreciation on equipment sold Decrease in accumulated depreciation Depreciation expense $ 4,400 (2,500) $ 1,900 Copyright © 2011 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only) IFRS23-8 (a) According to IAS 7, “Information about the cash flows of an entity is useful in providing users of financial statements with a basis to assess the ability of the entity to generate cash and cash equivalents and the needs of the entity to utilise those cash flows The economic decisions that are taken by users require an evaluation of the ability of an entity to generate cash and cash equivalents and the timing and certainty of their generation The objective of this Standard is to require the provision of information about the historical changes in cash and cash equivalents of an entity by means of a statement of cash flows which classifies cash flows during the period from operating, investing and financing activities.” IAS does not mention anything about working capital (b) According to paragraph 10, “The statement of cash flows shall report cash flows during the period classified by operating, investing and financing activities.” Further, paragraph 11 states “An entity presents its cash flows from operating, investing and financing activities in a manner which is most appropriate to its business Classification by activity provides information that allows users to assess the impact of those activities on the financial position of the entity and the amount of its cash and cash equivalents This information may also be used to evaluate the relationships among those activities.” (c) According to paragraph 14, “Cash flows from operating activities are primarily derived from the principal revenue-producing activities of the entity Therefore, they generally result from the transactions and other events that enter into the determination of profit or loss Examples of cash flows from operating activities are: (a) (b) (c) (d) (e) cash receipts from the sale of goods and the rendering of services; cash receipts from royalties, fees, commissions and other revenue; cash payments to suppliers for goods and services; cash payments to and on behalf of employees; cash receipts and cash payments of an insurance entity for premiums and claims, annuities and other policy benefits; (f) cash payments or refunds of income taxes unless they can be specifically identified with financing and investing activities; and (g) cash receipts and payments from contracts held for dealing or trading purposes.” Copyright © 2011 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only) 23-83 IFRS23-9 (a) M&S uses the indirect method to compute and report net cash provided by operating activities The amounts of net cash provided by operating activities for 2010 and 2009 are £1,229.0 million and £1,290.6 million, respectively The two items most responsible for the decrease in cash provided by operating activities in 2010 compared to 2009 are the lower operating profit and the smaller increase in payables (b) The most significant item in the investing activities section is the £352.0 million that M&S spent on “property, plant and equipment.” The most significant item in the financing activities section is repayment of syndicated bank facility (See Note 28) (c) M&S does not report deferred income taxes on its statement of cash flows It does report income tax expense as an add back to net income in the operating activities section (d) Depreciation and amortization is reported in the operating activities section of M&S’s statement of cash flows as an add back to net income because it is a non-cash charge in the income statement 23-84 Copyright © 2011 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only) ... Worksheet preparation E23-4 E23-5 E23-6 E23-7 E23-8 E23-9 E23-10 E23-11 E23-12 E23-13 E23-14 E23-15 E23-16 E23-17 E23-18 E23-19 E23-20 E23-21 P23-1 P23-2 P23-3 P23-4 P23-5 P23-6 P23-7 Copyright © 2011... © 2011 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only) 23- 3 SOLUTIONS TO CODIFICATION EXERCISES CE23-1 Master Glossary (a) Cash equivalents... used during the period 23- 6 Copyright © 2011 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only) Questions Chapter 23 (Continued) It is necessary