Kế toán, kiểm toán - Chapter 21: The statement of cash flows revisited

21THE STATEMENT OF CASH FLOWSREVISITEDChapter 21© 2013 The McGraw-Hill Companies, Inc.Investing ActivitiesOperating ActivitiesFinancing ActivitiesSale of property, plant, and equipment, and intangible assetsSale of investmentsCollections of loansCash received from revenuesIssuance of sharesIssuance of bonds and notesCASH INFLOWSBusinessCASH OUTFLOWSPurchase of property, plant, and equipment, and intangible assetsPurchase of investmentsLoans to othersCash paid for expensesPayment of dividendsRepurchase of sharesRepayment of debtRole of the Statement of Cash FlowsHelps users assess . . .a firm’s ability to generate cash.a firm’s ability to meet its obligations.the reasons for differences between income and associated cash flows.the effect of cash and noncash investing and financing activities on a firm’s financial position.Role of the Statement of Cash FlowsLists all cash inflows and all cash outflows by category: Operating, Investing, and FinancingExplains the change in cash during the periodRequired by IFRSCash is King!Especially during an economic downturnCash and Cash EquivalentsShort-term, highly liquid investments.Readily converted into cash, with little or no risk of loss. Examples: money market funds, Treasury billsMaturity date must not be longer than 3 months from date of purchase.Resources immediately available to pay obligations.CashCashEquivalentsOperating ActivitiesInvesting ActivitiesFinancing ActivitiesReconciliation of the Net Increase or Decrease in Cash with the Change in the Balance of the Cash AccountsSignificant Noncash Investing and Financing Activities are disclosed in the notes to the financial statements.Primary Elements of the Statement of Cash FlowsInvesting ActivitiesReports the cash effects of the acquisition and disposition of assets (other than inventory and cash equivalents).Financing ActivitiesReports the cash effects of the sale or repurchase of shares, and the issuance or repayment of debt securities.Primary Elements of the Statement of Cash FlowsOperating ActivitiesReports the cash effects of the elements of net income.Cash Flows from Operating ActivitiesCash Flows from Operating Activities+Inflows from:customers.interest and dividends received from investments._Outflows to:suppliers of goods.salaries and wages.interest on debt.income taxes.dividends paid.Direct Method or Indirect Method of Reporting Cash Flows from Operating ActivitiesReports the cash effects of each operating activityDirect MethodStarts with accrual net income and converts to cash basisIndirect MethodTwo Formats for Reporting Operating ActivitiesNote that no matter which format is used, the same amount of net cash flows operating activities is generated.Direct MethodUnder the direct method, the cash effect of each operating activity is reported directly in the statement.Indirect MethodBy the indirect method, we arrive at net cash flow from operating activities indirectly by starting with reported net income and working backwards to convert that amount to a cash basis.Cash Flows from Investing Activities+Cash Flows from Investing ActivitiesInflows from:Sale of long-term assets used in the business.Sale of investment securities (shares and bonds).Collection of nontrade receivables.Interest or dividends received from investments._Outflows to:Purchase of long-term assets used in the business.Purchase of investment securities (shares and bonds).Create nontrade receivables, loans to other entities.Cash Flows from Financing ActivitiesInflows from:Issuance of ordinary and preference shares.Borrowing from creditors through notes, loans, mortgages, and bonds.Cash Flows from Financing Activities+_Outflows to:Owners in the form of dividends or other distributions.Owners for the reacquisition of shares previously sold.Creditors as repayment of the principal amounts of debt.Creditors for the payment of interest on debt.Reconciliation with Change in Cash BalanceThe net amount of cash inflows and outflows reconciles the change in the company’s beginning and ending cash balances.For example, assume that UBC’s net increase in cash is $9 million and the Cash beginning balance is $20 million. The cash reconciliation would be as follows:21 - 15Noncash Investing and Financing ActivitiesSignificant investing and financing transactions not involving cash are also disclosed in a disclosure note.Acquiring an asset by incurring a debt payable to the seller.Acquiring an asset by entering into a lease agreement.Converting debt into ordinary shares or other equity securities.Exchanging noncash assets or liabilities for other noncash assets or liabilities.Note X:Noncash Investing and Financing Activities Acquired $20 million of equipment by issuing a 12%, five-year note.Preparation of the Statement of Cash FlowsA spreadsheet can be used to ensure that no reportable activities are inadvertently overlooked. Reconstructing the events and transactions that occurred during the period helps identify the operating, investing and financing activities to be reported. Let’s see how to use a spreadsheet to prepare a Statement of Cash Flows on the next few slides.We begin by entering the beginning and ending balances for each account on the comparative statement of financial position and income statement.The changes columns will be used later to explain the increase or decrease in each account balance.21 - 18The beginning balances for income statement accounts are always zero.21 - 19Next we allocate space on the spreadsheet for the statement of cash flows.Spreadsheet entries duplicate the actual journal entries used to record the transactions as they occurred during the year.They are only entered on the spreadsheet and are not recorded in the accounting records.21 - 20Let’s start by analyzing Sales Revenue and its related account Accounts Receivable by looking at the relationship in a T-account format.21 - 21We can see from this analysis that cash received from customers must have been $98 million.Let’s see how to post this entry to the spreadsheet.21 - 22First, $2 million is debited to Accounts Receivable to account for the total change in the account.Then, $100 million is credited to Sales Revenue to account for the total change in the account.21 - 23The final part of this entry is a $98 million entry on the Statement of Cash Flows under Cash Inflows from Customers. 21 - 24Note that in the textbook, entry number 12 illustrates the analysis of the Short-term Investments account.The $12 million increase in the Short-term Investments account is due to the purchase of short-term investments during the year.21 - 25The final part of this entry is a $12 million entry on the Statement of Cash Flows under Investing Activities. 21 - 26In entry number 14, we find that a note payable was issued as payment for a building.Investing in a new building is a significant investing activity and financing the acquisition with long-term debt is a significant financing activity.xx21 - 27xxAfter entering all the transactions, this is what the statement of financial position portion of the spreadsheet looks like.21 - 28After entering all the transactions, this is what the income statement portion of the spreadsheet looks like.21 - 29After entering all the transactions, this is what the statement of cash flows portion of the spreadsheet looks like.21 - 30Here is the Statement of Cash Flows prepared using the direct method.21 - 31Preparing an SCF: The Indirect MethodGetting There through the Back DoorThe indirect method derives the net cash increases or decreases from operating activities indirectly by starting with reported net income and “working backwards” to convert that amount to a cash basis.Components of Net Income that Do Not Increase or Decrease CashDepreciation ExpenseLoss on Sale of EquipmentAdding these items back to net income restores net income to what it would have been had depreciation and the loss not been subtracted at all.Subtracting the gain reverses the effect of the gain having been added to net income. Gain on Sale of LandComponents of Net Income that Do Increase or Decrease CashNote: Cash and cash equivalents, short-term investments in securities available for sale, and short-term payables to financial institutions are excluded from this category.For components of net income that increase or decrease cash, but by an amount different from that reported on the income statement, net income is adjusted for changes in the balances of related statement of financial position accounts to convert the effects of those items to a cash basis.Comparison with the Direct MethodAppendix 21A: Spreadsheet for the Indirect MethodA spreadsheet is equally useful in preparing a statement of cash flows whether we use the direct or the indirect method of determining cash flows from operating activities. Appendix 21B: The T-Account Method of Preparing the Statement of Cash FlowsThe T-Account method serves the same purpose as a spreadsheet in assisting in the preparation of a statement of Cash Flows. Appendix 21B: The T-Account Method of Preparing the Statement of Cash FlowsDraw a T-account for each income statement and statement of financial position account.The T-account for cash should be drawn considerably larger.Enter each account’s net change on the appropriate side (debit or credit) of the uppermost portion of each T-account.Reconstruct the transactions that caused changes in each account balance during the year and record the entries for those transactions directly in the T-accounts.After all account balances have been explained by T-account entries, prepare the statement of cash flows from the cash T-account, being careful also to report noncash investing and financing activities. End of Chapter 21