Kế toán, kiểm toán - Chapter 05: Statement of financial position and statement of cash flows

C H A P T E R 5STATEMENT OF FINANCIAL POSITION AND STATEMENT OF CASH FLOWSIntermediate AccountingIFRS EditionKieso, Weygandt, and Warfield Explain the uses and limitations of a statement of financial position. Identify the major classifications of the statement of financial position. Prepare a classified statement of financial position using the report and account formats. Indicate the purpose of the statement of cash flows. Identify the content of the statement of cash flows.Prepare a basic statement of cash flows.Understand the usefulness of the statement of cash flows.Determine additional information requiring note disclosure. Describe the major disclosure techniques for financial statements.Learning ObjectivesStatement of Financial PositionAdditional InformationUsefulnessLimitationsClassificationNotesTechniques of disclosureOther guidelinesStatement of Financial Position and Statement of Cash FlowsStatement of Cash FlowsPurposeContent and formatPreparationUsefulnessStatement of Financial PositionLO 1 Explain the uses and limitations of a statement of financial position.Statement of Financial Position, also referred to as the balance sheet:Reports assets, liabilities, and equity at a specific date.Provides information about resources, obligations to creditors, and equity in net resources.Helps in predicting amounts, timing, and uncertainty of future cash flows.Computing rates of return.Evaluating capital structure.Assess risk and future cash flows.Analyze company’s: Liquidity SolvencyFinancial flexibilityUsefulnessStatement of Financial PositionLO 1 Explain the uses and limitations of a statement of financial position.Most assets and liabilities are reported at historical cost.Use of judgments and estimates.Many items of financial value are omitted.LimitationsLO 1 Explain the uses and limitations of a statement of financial position.Statement of Financial PositionClassificationLO 2 Identify the major classifications of the statement of financial position.Statement of Financial PositionSubclassificationsLO 2 Identify the major classifications of the statement of financial position.Statement of Financial PositionIllustration 5-1In some countries, such as Germany, companies often list current assets first. IAS No. 1 requires companies to distinguish current assets and liabilities from non-current ones, except in limited situations.Generally consists of: Long-term InvestmentsProperty, Plant, and EquipmentIntangibles AssetsOther AssetsClassificationLO 2 Identify the major classifications of the statement of financial position.Non-Current AssetsLong-term InvestmentsSecurities (bonds, ordinary shares, or long-term notes).Tangible assets not currently used in operations (land held for speculation).Special funds (sinking fund, pension fund, or plant expansion fund.Non-consolidated subsidiaries or associated companies.Non-Current AssetsClassificationLO 2 Identify the major classifications of the statement of financial position.Investments in Debt and Equity SecuritiesClassificationLO 2 Identify the major classifications of the statement of financial position.PortfolioTypeValuationClassificationHeld-for-CollectionDebtAmortized CostCurrent or NoncurrentTradingDebt or EquityFair ValueCurrentNon-Trading EquityEquityFair ValueCurrent or NoncurrentLong-Term Investments LO 2 Identify the major classifications of the statement of financial position.ClassificationIllustration 5-2Statement of FinancialPosition Presentation ofLong-Term InvestmentsTangible long-lived assets used in the regular operations of the business. Physical property such as land, buildings, machinery, furniture, tools, and wasting resources (minerals). With the exception of land, a company either depreciates (e.g., buildings) or depletes (e.g., oil reserves) these assets.Property, Plant, and EquipmentLO 2 Identify the major classifications of the statement of financial position.ClassificationLO 2 Identify the major classifications of the statement of financial position.ClassificationIllustration 5-3Statement of Financial Position Presentation of Property, Plant, and EquipmentLack physical substance and are not financial instruments. Patents, copyrights, franchises, goodwill, trademarks, trade names, and customer lists. Amortize limited-life intangible assets over their useful lives. Periodically assess indefinite-life intangibles for impairment.Intangible AssetsLO 2 Identify the major classifications of the statement of financial position.ClassificationIntangible AssetsLO 2 Identify the major classifications of the statement of financial position.ClassificationIllustration 5-4Statement of FinancialPosition Presentation ofIntangible AssetsItems vary in practice. Can include:Long-term prepaid expensesNon-current receivablesAssets in special fundsProperty held for saleRestricted cash or securitiesOther AssetsLO 2 Identify the major classifications of the statement of financial position.ClassificationCash and other assets a company expects to convert into cash, sell, or consume either in one year or in the operating cycle, whichever is longer. Current AssetsClassificationIllustration 5-5LO 2 Identify the major classifications of the statement of financial position.InventoriesDisclose: Basis of valuation (e.g., lower-of-cost-or-market). Cost flow assumption (e.g., FIFO or average cost). LO 2ClassificationIllustration 5-6InventoriesLO 2ClassificationManufacturing CompanyIllustration 5-8Statement of Financial Position Presentation of InventoriesClaims held against customers and others for money, goods, or services.Major categories of receivables should be shown in the statement of financial position or the related notes.ReceivablesLO 2 Identify the major classifications of the statement of financial position.ClassificationReceivablesLO 2 Identify the major classifications of the statement of financial position.ClassificationIllustration 5-8Statement of Financial Position Presentation of ReceivablesPayment of cash, that is recorded as an asset because service or benefit will be received in the future.insurancesuppliesadvertisingCash PaymentExpense RecordedBEFORErentmaintenance on equipmentPrepayments often occur in regard to:Prepaid ExpensesLO 2 Identify the major classifications of the statement of financial position.ClassificationPrepaid ExpensesLO 2ClassificationIllustration 5-9Statement of Financial Position Presentation of Prepaid ExpensesPortfoliosShort-Term InvestmentsTypeValuationClassificationHeld-to-MaturityDebtAmortized CostCurrent or NoncurrentTradingDebt or EquityFair ValueCurrentAvailable- for-SaleDebt or EquityFair ValueCurrent or NoncurrentLO 2 Identify the major classifications of the statement of financial position.ClassificationShort-Term InvestmentsLO 2 Identify the major classifications of the statement of financial position.ClassificationIllustration 5-10Statement of Financial Position Presentation of Short-Term InvestmentsGenerally any monies available “on demand.”Cash equivalents - short-term highly liquid investments that mature within three months or less.Restrictions or commitments must be disclosed. CashIllustration 5-11LO 2 Identify the major classifications of the statement of financial position.ClassificationCashLO 2 Identify the major classifications of the statement of financial position.ClassificationIllustration 5-12Statement of FinancialPosition—Restricted CashEquityLO 2 Identify the major classifications of the statement of financial position.ClassificationEquityLO 2 Identify the major classifications of the statement of financial position.ClassificationOrdinary shares and preference shares - must disclose the par value and the authorized, issued, and outstanding amounts.Share premium - company usually presents one amount for ordinary and preference shares.Retained earnings - amount may be divided between the unappropriated and restricted amounts. Treasury shares - shown as a reduction of equity.EquityLO 2 Identify the major classifications of the statement of financial position.ClassificationIllustration 5-13Statement of FinancialPosition—EquityNon-Current LiabilitiesLO 2 Identify the major classifications of the statement of financial position.ClassificationObligations that a company does not reasonably expect to liquidate within the longer of one year or the normal operating cycle. Three types:Obligations arising from specific financing situations.Obligations arising from the ordinary operations of the company.Obligations that depend on the occurrence or non-occurrence of one or more future events to confirm the amount payable, or the payee, or the date payable.Non-Current LiabilitiesLO 2 Identify the major classifications of the statement of financial position.ClassificationIllustration 5-15Statement of FinancialPosition Presentation of Non-Current LiabilitiesCurrent LiabilitiesLO 2 Identify the major classifications of the statement of financial position.ClassificationObligations that a company generally expects to settle in its normal operating cycle or one year, whichever is longer. This concept includes:Payables resulting from the acquisition of goods and services: accounts payable, wages payable, and so on. Collections received in advance for the delivery of goods or performance of services, such as unearned rent revenue. Other liabilities whose liquidation will take place within the operating cycle or one year.Current LiabilitiesLO 2 Identify the major classifications of the statement of financial position.ClassificationIllustration 5-16Statement of FinancialPosition Presentation of Current LiabilitiesStatement of Financial Position FormatIFRS does not specify the order or format in which a company presents items in the statement of financial position.Account form or report form.LO 3 Prepare a classified statement of financial position using the report and account formats.ClassificationClassificationAccount FormIllustration 5-17LO 3 Prepare a classified statement of financial position using the report and account formats.ClassificationLO 3Report FormIllustration 5-17The Statement of Cash FlowsOne of the three basic objectives of financial reporting is “assessing the amounts, timing, and uncertainty of cash flows.”IASB requires the statement of cash flows (also called the cash flow statement).Primary Purpose: To provide relevant information about the cash receipts and cash payments of an enterprise during a period. The statement provides answers to the following questions:Where did the cash come from?What was the cash used for?What was the change in the cash balance?Purpose of the Statement of Cash FlowsLO 4 Indicate the purpose of the statement of cash flows.OperatingCash inflows and outflows from operations.InvestingCash inflows and outflows from non-current assets.FinancingCash inflows and outflows from non-current liabilities and equity.Statement helps users evaluate liquidity, solvency, and financial flexibility.LO 5 Identify the content of the statement of cash flows.Content and FormatLO 5 Identify the content of the statement of cash flows.Illustration 5-19Content and FormatInformation obtained from several sources: (1) comparative statement of financial position, (2) current income statement, and (3) selected transaction data. Sources of InformationPreparation of the Statement of Cash FlowsLO 6 Prepare a basic statement of cash flows.Preparation of the Statement of Cash FlowsStatement of Cash Flows: On January 1, 2011, in its first year of operations, Telemarketing Inc. issued 50,000 ordinary shares ($1 par value) for $50,000 cash. The company rented its office space, furniture, and telecommunications equipment and performed marketing services throughout the first year. In June 2011 the company purchased land for $15,000. Illustration 5-20 shows the company’s comparative statement of financial position at the beginning and end of 2011.LO 6 Prepare a basic statement of cash flows.Preparation of the Statement of Cash FlowsLO 6Illustration 5-21Illustration 5-20Preparation of the Statement of Cash FlowsPreparing the Statement of Cash FlowsDetermine: Cash provided by (or used in) operating activities.Cash provided by or used in investing and financing activities.Determine the change (increase or decrease) in cash during the period.Reconcile the change in cash with the beginning and the ending cash balances.LO 6 Prepare a basic statement of cash flows.Preparation of the Statement of Cash FlowsCash provided by operating activitiesIllustration 5-22Illustration 5-20Illustration 5-21LO 6 Prepare a basic statement of cash flows.The Statement of Cash FlowsIllustration 5-29Next, the company determines its investing and financing activities.Illustration 5-20Illustration 5-21Preparation of the Statement of Cash FlowsStatement of Cash Flows (BE 5-12): Keyser Beverage Company reported the following items in the most recent year.ActivityOperatingFinancingOperatingOperatingInvestingOperatingFinancingRequired: Prepare a Statement of Cash FlowsNet income $40,000Dividends paid 5,000Increase in accounts receivable 10,000Increase in accounts payable 7,000Purchase of equipment 8,000Depreciation expense 4,000Issue of notes payable 20,000LO 6 Prepare a basic statement of cash flows.Preparation of the Statement of Cash FlowsStatement of Cash Flows (BE 5-12)LO 6 Prepare a basic statement of cash flows.Noncash credit to revenues.Noncash charge to expenses.ReviewIn preparing a statement of cash flows, which of the following transactions would be considered an investing activity? a. Sale of equipment at book value b. Sale of merchandise on credit c. Declaration of a cash dividend d. Issuance of bonds payable.Preparation of the Statement of Cash FlowsLO 6 Prepare a basic statement of cash flows.Issuance of ordinary shares to purchase assets.Conversion of bonds into ordinary shares.Issuance of debt to purchase assets.Exchanges on long-lived assets.Preparation of the Statement of Cash FlowsSignificant financing and investing activities that do not affect cash are reported in either a separate schedule at the bottom of the statement of cash flows or in the notes. Examples include:Significant Non-Cash ActivitiesLO 6 Prepare a basic statement of cash flows.Preparation of the Statement of Cash FlowsIllustration 5-24Comprehensive Statementof Cash FlowsHigh amount - company able to generate sufficient cash to pay its bills.Low amount - company may have to borrow or issue equity securities to pay bills.Usefulness of the Statement of Cash FlowsWithout cash, a company will not survive. Cash flow from Operations:LO 7 Understand the usefulness of the statement of cash flows.Usefulness of the Statement of Cash FlowsRatio indicates whether the company can pay off its current liabilities from its operations. A ratio near 1:1 is good.LO 7 Understand the usefulness of the statement of cash flows.Financial LiquidityNet Cash Provided by Operating ActivitiesAverage Current Liabilities Current Cash Debt Coverage Ratio =Illustration 5-26Usefulness of the Statement of Cash FlowsThis ratio indicates a company’s ability to repay its liabilities from net cash provided by operating activities, without having to liquidate the assets employed in its operations.LO 7 Understand the usefulness of the statement of cash flows.Financial FlexibilityAverage Total Liabilities Cash Debt Coverage Ratio =Net Cash Provided by Operating ActivitiesIllustration 5-27Usefulness of the Statement of Cash FlowsThe amount of discretionary cash flow a company has for purchasing additional investments, retiring its debt, purchasing treasury stock, or simply adding to its liquidity.LO 7 Understand the usefulness of the statement of cash flows.Free Cash FlowIllustration 5-29ReviewThe current cash debt coverage ratio is often used to assess a. financial flexibility. b. liquidity. c. profitability. d. solvency.LO 7 Understand the usefulness of the statement of cash flows.Usefulness of the Statement of Cash FlowsFinancial Statements and NotesIFRS requires that a complete set of financial statements be presented annually. Comprised of the following:LO 8 Determine additional information requiring note disclosure.Statement of financial position at the end of the period;Statement of comprehensive income for the period to be presented either as:One single statement of comprehensive income.A separate income statement and statement of comprehensive income. Statement of changes in equity;Statement of cash flows; andNotes, comprising a summary of significant accounting policies and other explanatory information. Accounting policies Specific principles, bases, conventions, rules, and practices applied by a company in preparing and presenting financial information. First note generally titled, “Summary of Significant Accounting Policies.”Financial Statements and NotesLO 8 Determine additional information requiring note disclosure.Notes to the Financial StatementsFinancial Statements and NotesAdditional Notes to the Financial Statements In many cases, IFRS requires specific disclosures. Examples include:Items of property, plant, and equipment are disaggregated into classes.Receivables are disaggregated into amounts receivable from trade customers, receivables from related parties, prepayments, and other amounts.Inventories are disaggregated into classifications such as merchandise, production supplies, work in process, and finished goods.Financial Statements and NotesLO 8 Determine additional information requiring note disclosure.Techniques of DisclosureLO 9 Describe the major disclosure techniques for financial statements.Cross-Reference and Contra ItemsParenthetical ExplanationsIllustration 5-37Illustration 5-38Other GuidelinesLO 9 Describe the major disclosure techniques for financial statements.OffsettingIAS No. 1 indicates that it is important that assets and liabilities, and income andexpense, be reported separately.ConsistencyIAS No. 8, for example, notes that users of the financial statements need to beable to compare the financial statements of a company over time to identify trendsin financial position, financial performance, and cash flows.Fair PresentationFaithful representation of transactions and events using the definitions and recognition criteria in the Framework.IFRS requires that specific items be reported on the statement of financial position. No such general standard exists in U.S. GAAP. However under U.S. GAAP, public companies must follow U.S. SEC regulations, which require specific line items. U.S. GAAP statements report current assets first, followed by non-current assets. Current liabilities, noncurrent liabilities, and shareholders’ equity then follow. While the use of the term “reserve” is discouraged in U.S. GAAP, there is no such prohibition in IFRS.There are many similarities between IFRS and U.S. GAAP related to statement of financial position presentation. For example:U.S. GAAP specifies minimum note disclosures, similar to IFRS on accounting policies and judgments. These must include information about (1) accounting policies followed, (2) judgments that management has made in applying the entity’s accounting policies, and (3) key assumptions and estimation uncertainty that could result in a material adjustment to the carrying amounts of assets and liabilities.Financial statements must be prepared annually.LO 10 Identify the major types of financial ratios and what they measure.Using Ratios to Analyze PerformanceAnalysts and other interested parties can gather qualitative information from financial statements by examining relationships between items on the statements and identifying trends in these relationships.LO 10 Identify the major types of financial ratios and what they measure.Using Ratios to Analyze PerformanceIllustration 5A-1 A Summary of Financial RatiosLO 10 Identify the major types of financial ratios and what they measure.Using Ratios to Analyze PerformanceIllustration 5A-1 A Summary of Financial RatiosLO 10 Identify the major types of financial ratios and what they measure.Using Ratios to Analyze PerformanceIllustration 5A-1 A Summary of Financial RatiosCopyright © 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.Copyright