Kế toán, kiểm toán - Chapter 22: Statement of cash flows

CHAPTER 22:STATEMENT OF CASH FLOWS2CHAPTER 22: Statement of Cash FlowsAfter studying this chapter, you should be able to:Understand the business importance of cash flows and describe the purpose and uses of the statement of cash flows.Define cash and cash equivalents.Identify the major classifications of cash flows and explain the significance of each classification.Prepare the operating activities section of a statement of cash flows using the direct versus the indirect method.Prepare a statement of cash flows using the direct method.Prepare a statement of cash flows using the indirect method.Prepare a more complex statement of cash flows using both methods.Identify the financial presentation and disclosure requirements for the statement of cash flows.Read and interpret a statement of cash flows.Identify differences in IFRS and APSE, and explain what changes are expected to standards for the statement of cash flows.Use a work sheet to prepare a statement of cash flows.3Cash Flows from a Business PerspectiveA lack of cash flow is one of the main causes of bankruptcyA sign of a healthy company is positive cash flows from operationsOver the years, the statement of cash flows has grown in importanceHelps users answer many questions such as: Will the company be able to pay dividends?How was the acquisition of the new subsidiary financed?4Purpose and Usefulness of the Statement of Cash FlowsThe information helps users (investors, creditors, and others) assess the following:Liquidity and solvency – i.e., the entity’s ability to generate future cash flows and its needs for cash resourcesThe amounts, timing, and uncertainty of future cash flows The reasons why net income and net cash flow from operating activities differ 5Cash and Cash EquivalentsCashCash on handDemand depositsCash EquivalentsInvestments that areShort term,Highly liquid, andEasily converted to a known amount of cashSubject to an insignificant risk of change in valueAll references to Cash include Cash Equivalentswhen discussing the Statement of Cash Flows6The Cash Flow StatementThe cash flow statement provides information about:the cash receipts (cash inflows), anduses of cash (cash outflows) during the year Inflows and outflows are reported for:operating activitiesinvesting activities, andfinancing activities during the year7Classification of Cash FlowsOperating ActivitiesThe cash flows resulting from the primary revenue-producing activities of the business such as:Collections from customersPayments to suppliersPayments to Canada Revenue Agency (CRA) for taxPayments to employeesCash flow provided by operating activities is necessary for long term sustainability of the business (i.e., to take advantage of new investment opportunities, to pay dividends without seeking external financing etc.)8Classification of Cash FlowsInvesting ActivitiesThe acquisition and disposal of long term assets and long-term investments such as:Making and collecting loansAcquiring and disposing of investmentsPurchase/disposal of long-lived assetsCash flow generated by investing activities shows if the business is investing in additional long term assets that will generate profits and increase cash flows in the future9Classification of Cash FlowsFinancing ActivitiesChanges in long-term debt or equity capital such as:Issuing or repayment of debtIssuing new shares or repurchase of currently outstanding sharesProvides information to assess potential for future claims to entity’s cash and major changes in the form of financing10Statement of Cash Flows: ConceptOperatingactivitiesInvestingactivitiesFinancingactivitiesInflowsCashPoolOperatingactivitiesInvestingactivitiesFinancingactivitiesOutflows11Classification of Cash FlowsIFRS requirements relating to classification of cash flows are similar to ASPE except for the following:12Classification of Cash FlowsIncome statement gains and losses on disposal of long-term assets must be adjusted in determining cash flows from operationsThese result from investing activities, not operating activitiesThe amount of the cash flow is the proceeds on disposal not the gain or loss included in income13Classification of Cash FlowsIncome statement gains and losses on redemption of long-term debt must be adjusted in determining cash flows from operationsThese result from financing activities, not operating activities, andThe amount of the cash flow is the amount paid to redeem the debt not the gain or loss included in income14Significant Non-Cash TransactionsTransactions that do not involve the direct receipt or disbursement of cash in the period such as:Asset purchased and paid for by assuming debt, or issuance of sharesExchanges of non-monetary assetsConversion of debt to equityIssuance of shares to retire debtNon-cash transactions are not reported on the Statement of Cash FlowsIf material, they are reported as notes to the statement or in a supplementary schedule to the financial statements15Format of the Statement of Cash FlowsTwo methods of preparing the operating cash flow section of the Statement of Cash Flows:Indirect methodDerives operating cash flows from accrual basis income statementDirect methodDetermines operating cash flows directly for each operating source or use of cash16The Indirect MethodNet Income+-Earned RevenuesExpensesIncurredOperatingcash flowEliminatenon-cash revenuesEliminatenon-cash charges17The Indirect MethodAccrual Basis StatementsCash Flow StatementIncome Statement itemsand changes in CurrentAssets and Current LiabilitiesOperating activities:Adjust net income for accruals,non-cash charges and non-operating gains/lossesBalance Sheet: Changes in Non-Current AssetsInvesting activities:Inflows from sale of assets and outflows for purchases of assetsBalance Sheet:Changes in Non-CurrentLiabilities and EquityFinancing activities:Inflows and outflows from loanand equity transactions 18Format of the Statement of Cash Flows (Indirect Method)Cash flows from operating activities:Net Income (Loss) $ XXXAdjustments (List individual adjustments) $ XXNet cash flow from operating activities $ XXXCash flows from investing activities:(List individual inflows and outflows) $ XXNet cash flow from investing activities $ XXXCash flows from financing activities:(List individual inflows and outflows) $ XXNet cash flow from financing activities $ XXXChange in cash $ XXX19The Direct MethodReceived from customers for cash sales and on accountCash receipts from other revenue sourcesOutflowsInflowsPaid to suppliers for cash purchases and payments on accountPaid to employees for salaries and wagesPaid to government for taxes20Format of the Statement of Cash Flows (Direct Method)Cash flows from operating activities:Cash receipts (separately): inflows $ XXXCash payments (separately): outflows ($XXX)Net cash flow from operating activities $ XXXCash flows from financing activities:(List individual inflows and outflows) $ XXNet cash flow from financing activities $ XXXCash flows from investing activities:(List individual inflows and outflows) $ XXNet cash flow from investing activities $ XXXChange in cash $ XXX21Format of the Statement of Cash FlowsBoth IFRS and ASPE encourage the use of the direct method as it provides additional informationMore consistent with the objective of the statement of cash flowsInformation about specific sources of cash inflows and purposes of cash outflows helps in estimating future cash flowsLending officers and other investors also prefer the direct method22Direct Method - ExampleGiven:Tax Consultants Inc. began operations on January 1, 2016 Income Statement For the year ended December 31, 2017Revenues $ 125,000Operating expenses 85,000Income before income taxes 40,000Income tax expense 6,000Net Income $ 34,00023Direct Method - ExampleComparative Statement of Financial Position Dec 31, 2017 Dec 31, 2016Assets:Cash $ 89,000 $ 40,000Accounts receivable 66,000 30,000Total $155,000 $ 70,000Liabilities and Shareholders’ Equity:Accounts payable $ 35,000 $ 30,000Common shares 80,000 20,000Retained earnings 40,000 20,000Total $155,000 $ 70,00024Direct Method – ExampleOperating Cash FlowsAccounts Receivableincreased by $36,000Cash collections areless than revenue recognizedReduce revenuefrom credit salesby $36,000 to derivecash flows from operations25Direct Method – ExampleOperating Cash FlowsAccounts Payableincreased by $5,000Cash paid for purchasesis less than COGSreportedIncrease COGSby $5,000 to derivecash flows from operations26Direct Method – ExampleOperating Cash FlowsCash receipts from customers:= Revenue from credit sales – increase in A/R balance= $125,000 – $36,000 = $89,000Cash payments to suppliers:= Cost of goods sold – increase in A/P balance= $85,000 – $5,000 = $80,00027Direct Method – ExampleOperating Cash FlowsOperating Activities: Cash received from customers $89,000 Cash paid to suppliers (80,000) Cash paid for income taxes (6,000) Net cash inflow $ 3,00028Investing and Financing Cash FlowsAccrual BasisCommon stock + $60,000 Retained earnings +$20,000Beg. Balance: $ 0Net Income: 34,000less: Dividends (14,000)End Balance: $20,000Cash Flow Financing Activities:Issue of Shares: $60,000Dividends paid: (14,000)Inflow 46,00029Direct Method – ExampleSummaryCash provided by operating activities: 3,000 Cash used by investing activities: -0-Cash provided by financing activities: 46,000Net inflow for the year 49,000Beginning cash balance: 40,000Cash, end of year $89,00030Indirect Method – Eastern Window ProductsThe company’s comparative financial statements are provided in Illustration 22-10Determine cash flows from operating activities Under the indirect method you will start with net income and adjust working capital to arrive at cash inflows and outflowsThe adjustments made for operating activities are provided in Illustration 22-11 Panel A31Indirect Method – Eastern Window ProductsFor each current asset and current liability, the change in the account will require an adjustment to net income to arrive at operating cash flowReceivables have gone down so this will be added to net income as receipts from customers were $10,000 more than revenues reported32Indirect Method – Eastern Window ProductsInventory has increased by $9,000 reducing transferred costs to cost of goods sold, requiring net income to be reduced by this amount to obtain the effect on cash from operating activitiesPrepaid Expenses have decreased by $1,500, requiring net income to be increased by this amount to obtain the effect on cash from operating activities, as a greater amount was expensed as compared to cash payments33Indirect Method – Eastern Window ProductsAccumulated depreciation has gone up entirely due to depreciation, a non-cash expense, which needs to be added back to the income statement to arrive at a cash basisAccounts payable have increased therefore cash payments must have been less than amounts expensed, and needs to be added back to net income34Indirect Method – Eastern Window ProductsIncome taxes payable and wages payable have increased, therefore the expense is higher than the payments, requiring an add back to net income Net income accounts for $59,900 of the increase in retained earnings, with the remainder of the change being dividends This is required to be treated as a financing outflow under ASPE and is permitted under IFRS with the alternative recognition as an operating outflow35Indirect Method – Eastern Window Products36Using Both Methods -Yoshi CorporationUsing the indirect method, all changes in working capital items as well as non-cash items are adjusted to and from net income to arrive at cash flow from operating activitiesSee Illustration 22-20 on the next slide for cash flows using the indirect method3738Using Both Methods -Yoshi CorporationUsing Both Methods -Yoshi CorporationUsing the direct method, receipts from customers and payments for goods and services and those payments made to others such as employees, for income taxes and for interest are shown directly, without making adjustments to net income for changes in working capitalNon-cash items are also not adjusted as they are when using the indirect method39Using Both Methods -Yoshi Corporation40Using Both Methods -Yoshi CorporationSome accounts require further analysis in determining their impact on operating cash flows, such as:FV-NI InvestmentsAccounts ReceivableAllowance for Doubtful AccountsInvestmentsProperty, Plant and EquipmentAppendix 22A provides a Work Sheet approach which could be used for the additional analysis required for a complex SCF41Disclosure RequirementsIFRS and ASPE require similar disclosures on certain items, including the disclosure of:Significant non-cash investing and financing transactions Policy on what makes up cash and cash equivalents Reconciliation of cash and cash equivalents to balance sheet accountsIFRS has more strict requirements relating to disclosure of some items, including:Income taxesInterest and dividends (paid and received)Restrictions on cash and cash equivalents42Analyzing the Statement of Cash FlowsOperating cash flows indicate the extent to which cash receipts from customers and other operating sources were able to cover cash payments to suppliers of goods and services and to employees, and for other operating expenditures43Analyzing the Statement of Cash FlowsThe investing activities section will show outflows for new business assetsIt is important to understand whether the new investment just maintains the existing capacity of a company OR whether the investment increases the potential for higher levels of operating cash flows in the future 44Analyzing the Statement of Cash FlowsThe financing activities section captures what changes took place to the firm’s capital structure and whether the entity increased or reduced the claims of creditors to cash in the future45Free Cash FlowFree cash flow (FCF) is a non-GAAP measure used by many companies to indicate discretionary cash available for new investments, paying dividends, retiring debt, repurchasing shares, or improving liquidityFCF is typically calculated as: Net operating cash flowsLess: capital expenditures to sustain current level operations As it is a non-GAAP measure, some companies calculate FCF differently46Looking AheadSignificant changes were expected from the FASB-IASB Financial Statement Presentation projectThe project was paused in 2011 and had not recommenced as of January 201647