Kế toán, kiểm toán - Chapter 5: Financial position and cash flows

CHAPTER 5:FINANCIAL POSITION AND CASH FLOWS2Chapter 5: Financial Position and Cash FlowsAfter studying this chapter, you should be able to:Understand the statement of financial position and statement of cash flows from a business perspective.Identify the uses and limitations of a statement of financial position.Identify the major classifications of a statement of financial position.Prepare a classified statement of financial position.Identify statement of financial position information that requires supplemental disclosure.Identify major disclosure techniques for the statement of financial position.Indicate the purpose and identify the content of the statement of cash flows.Prepare a statement of cash flows using the indirect method.Understand the usefulness of the statement of cash flows.Identify differences in accounting between ASPE and IFRS.Identify the significant changes planned by the IASB regarding financial statement presentation.3Financial Position and Cash Flows4Business PerspectiveStatement of financial position (SFP) and the statement of cash flows can be used to assess: Financial flexibility and risk of business failureEarnings qualityCreditworthiness5Statement of Financial Position: UsefulnessStatement of Financial Position (SFP) also known as the balance sheetSFP provides information:for evaluating the capital structure andfor computing rates of return on invested assetsIt is also useful for assessing an enterprise’s:Liquidity (time until asset is realized or liability has to be paid)Solvency (ability to pay debts and related interest)Financial flexibility (ability to respond to unexpected needs and opportunities)6Statement of Financial Position: LimitationsMany assets and liabilities are stated at historical costInformation presented is reliable, howeverReporting at current fair value would result in more relevant information2. Judgement and estimates are used in determining many of the items reported on the SFPMany “soft” numbers (estimates) are included which may be uncertain3. SFP does not report items that cannot be recorded objectively (e.g. internally generated goodwill)7Statement of Financial Position: ClassificationSimilar items are classified (grouped together), with sub-totalItems with different characteristics are separatedIndividual SFP items should be: Reported separately, and in Sufficient detail in order to:Allow users to assess amounts, timing, and uncertainty of future cash flowsAllow users to evaluate liquidity, financial flexibility, profitability, and riskHelps to calculate important ratios (e.g. current ratio to assess liquidity)8Statement of Financial Position: ClassificationConsiderations for reporting items separately:Assets that differ in their type or expected function (e.g. inventory vs. capital assets)2. Liabilities with different implications for the entity’s financial flexibility (e.g. long term debt vs. current debt)3. Assets and liabilities with different general liquidity characteristics (e.g. cash vs. receivables)4. Assets, liabilities, and equities with characteristics that allow for easy measurement or valuation9Statement of Financial Position: ClassificationCurrent liabilitiesLong-term debtShareholders’ equityCapital sharesContributed surplusRetained earningsAccumulated other comprehensive income / other surplusCurrent assetsLong-term investmentsProperty, plant, and equipmentIntangible assetsOther assetsLiabilities and EquityAssets10Current AssetsCurrent assets are cash and other assets expected to be realized:within one year from the balance sheet date orwithin the normal operating cycle, whichever is longerGenerally presented in order of liquidity (normally: cash, short-term investments, receivables, inventory, and prepaid expense)1112Current AssetsCurrent Assets–CashOften includes cash and cash equivalentsDefined as: Cash, demand deposits, short-term liquid investments convertible to a known cash amount, and not subject to material value changesAny known restrictions to cash must be disclosed 13Current Assets –Short-Term InvestmentsInvestments in debt and equity securities are presented separately from other assetsValued at cost/amortized cost or fair value14Current Assets – ReceivablesAmounts should be reported separately based on the nature of their origin:Ordinary trade accountsAmounts owing by related partiesOther (substantial) unusual itemsSeparate disclosure required for:Amount and nature of nontrade receivablesReceivables pledged as collateralAccounts receivable valued at net realizable value15Current Assets – InventoriesAssets that are: Held for sale in the ordinary course of businessIn the process of production for such sale, orIn the form of materials or supplies to be consumed in the production process or in the rendering of serviceValued at lower of cost and net realizable valueCost is determined by a cost formula (e.g. FIFO, weighted average, specific item) and must be disclosedManufacturing enterprise should disclose completion stage of inventories:Raw materialsWork in progressFinished goods16Current Assets– Prepaid ExpensesDefined as: expenditures already made for benefits to be received within one year or the operating cycle (whichever is longer)Most common examples include:InsuranceRentAdvertisingSuppliesCurrent practice is to report some prepaid amounts where the benefit extends beyond one year (or operating cycle)17Noncurrent InvestmentsNon-current investments normally consist of one of the following:Debt securities Equity securitiesSinking funds, tangible assets held as investments, otherInvestments are intended to be held for an extended period of time Valuation options are:Fair valueAmortized costEquity Method18Property, Plant, and EquipmentPhysical (tangible) assets used in on-going business operations of the business to generate incomeGenerally reported at cost or amortized costIFRS allows for valuation at fair valueMost assets are depreciable, except for landWritten down when impaired19Intangible AssetsCapital assets without physical substance, held to generate revenueHigher degree of uncertainty regarding future benefitsInclude (most common):patentscopyrightsfranchisesgoodwilltrademarks, and trade namesIntangibles are grouped into two categories:Those with finite life – amortized over useful lifeThose with indefinite life – not amortizedBoth are tested for impairment20Other AssetsSome of the items included are:Assets in special fundsNon-current receivablesDeferred income tax assetsProperty held for saleAdvances to subsidiariesSufficient information to be disclosed to inform users of the nature of the asset21Current LiabilitiesObligations due within one year (from balance sheet date) or within the operating cycle, whichever is longerExamples of current liabilities include:Payables resulting from acquisitions of goods and servicesCollections received in advance of delivery of goods or performance of servicesOther liabilities to be paid in the short termShort-term financing payable on demand (e.g. amounts borrowed under a line of credit)Accounts payable normally listed first; however, current liabilities not reported in any specific order22Working CapitalA key indicator of the company’s short-term liquidityNot usually disclosed on the SFPOften calculated by bankers and other creditors=–Working CapitalCurrent LiabilitiesCurrent Assets23Long-Term LiabilitiesLong-term obligations are those not expected to be paid within the normal operating cycleThree types:Obligations arising from specific financing situations (e.g. bonds)Obligations from ordinary operations of the enterprise (e.g. pension obligations)Obligations arising from ordinary business operations that are contingent on future events (e.g. product warranty)SFP presentation requires reporting the portion due within the next year as a current liability24Shareholders’ Equity Capital SharesExchange value of issued sharesDisclose authorized, issued, and outstanding amounts Contributed SurplusUsually reported as one amountIncludes issued share premiumsRetained EarningsThe amount of undistributed earningsPresented as one itemAccumulated Other Comprehensive IncomeIncludes unrealized gains and losses on FV-OCI investments, certain types of donations, etc.25Additional Information ReportedAdditional information reported on the SFP may include:Information not presented elsewhere, orInformation that qualifies items in the SFPFive main types of additional informationContingencies and provisionsAccounting policiesContractual situationsAdditional detailSubsequent events26Techniques of DisclosureParenthetical explanations (following the items in the SFP)Notes (to the SFP)Cross references and contra items (where assets and liabilities may be cross referenced)Supporting schedules (as for capital assets’ depreciation)Terminology27Statement of Cash FlowsTo assess the firm’s ability to generate cash and cash equivalents andTo allow comparison of cash flows between different entitiesStatement of Cash Flows shows:Where the cash came fromWhat the cash was used forThe change in the cash balance28Statement of Cash FlowsCash activities are divided into three main categories:Operating ActivitiesMain revenue-producing activitiesInvesting ActivitiesChanges in long-term assets and investmentsFinancing ActivitiesChanges in equity and borrowings29Cash Inflows and OutflowsOperating ActivitiesWhen operating cash receipts > cash expendituresCash PoolInvesting ActivitiesSale of property, plant, and equipmentSale of debt or equity securities of other entitiesCollection of loans to other entitiesFinancing ActivitiesIssuance of equity securitiesIssuance of debt (bonds and notes)Cash Inflows30Cash Inflows and OutflowsCash PoolInvesting ActivitiesPurchase of property, plant, and equipmentPurchase of debt or equity securities of other entitiesLoans to other entitiesOperating ActivitiesWhen operating cash expenditures > cash receiptsFinancing ActivitiesPayment of dividendsRedemption of debtReacquisition of capital stockCash Outflows31Statement of Cash Flows PresentationPresentation methodsDirect method: includes specific cash inflows/outflows (e.g. cash received from customers, cash paid to suppliers and employees, interest paid/received, taxes paid, etc.)Indirect method: begins with net income and reconciles to cash (e.g. adds back non-cash charges deducted from net income, such as depreciation)Both methods are acceptable, but direct method is preferred32Usefulness of the Statement of Cash FlowsCash is a “company’s lifeblood”Provides creditors with useful information about a company, such as:Company’s ability to generate net cash from operating activitiesNet cash flow trends or patterns from operating activitiesMajor reasons for positive or negative net cash from operating activitiesWhether the cash flows are renewable or sustainable33Usefulness of the Statement of Cash FlowsProvides insight into the following areas:Financial Liquidity Current Cash Debt Coverage Ratio = Net Cash Provided by Operating Activities Average Current LiabilitiesFinancial Flexibility Cash Debt Coverage Ratio = Net Cash Provided by Operating Activities Average Total Liabilities34Usefulness of the Statement of Cash FlowsCash Flow PatternsThere may be useful patterns identified of cash inflows and outflows from operating, investing and financing activitiesFree Cash FlowCalculated as net cash from operations less capital expenditures and dividendsIndicates discretionary cash flow (cash left to invest or expand) to make additional investments, to retire its debt, or to add to its liquidity35Looking Ahead36As noted in Chapter 4, the IASB and FASB are working on financial statement presentation as a major projectThe idea is to present the main financial statements so as to highlight major business and financing activities. Could ultimately result in the replacement of IAS 1 and IAS 7In June 2014 the IASB issue and Exposure Draft called “Disclosure Initiative – Proposed Amendments to IAS 7”Rather than replacing IAS 7, the exposure draft proposes amendments that would provide additional information to financial statement users about financing activities