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

PREVIEW OF CHAPTERIntermediate AccountingIFRS 2nd EditionKieso, Weygandt, and Warfield 5Explain 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.After studying this chapter, you should be able to:Statement of Financial Position and Statement of Cash Flows5LEARNING OBJECTIVESStatement 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.STATEMENT OF FINANCIAL POSITIONLO 1Computing rates of return.Evaluating the capital structure.Assess risk and future cash flows.Assess the company’s: Liquidity, Solvency, and Financial flexibility.UsefulnessSTATEMENT OF FINANCIAL POSITIONLO 1Most assets and liabilities are reported at historical cost.Use of judgments and estimates.Many items of financial value are omitted.LimitationsSTATEMENT OF FINANCIAL POSITIONLO 1Explain 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.After studying this chapter, you should be able to:Statement of Financial Position and Statement of Cash Flows5LEARNING OBJECTIVESLIABILITYEQUITYElements of the Statement of Financial Position Resource controlled by the entity.Result of past events.Future economic benefits are expected to flow to the entity.ASSETCLASSIFICATION IN THE STATEMENTLO 2EQUITYElements of the Statement of Financial Position Present obligation of the entity.Arising from past events.Settlement is expected to result in an outflow of resources embodying economic benefits.ASSETCLASSIFICATION IN THE STATEMENTLIABILITYLO 2LIABILITYElements of the Statement of Financial Position Residual interest in the assets of the entity after deducting all its liabilities.ASSETCLASSIFICATION IN THE STATEMENTEQUITYLO 2SubclassificationsA recent survey shows that companies are moving toward reporting current assets first on the statement of financial position, which is a change from a few years ago.CLASSIFICATION IN THE STATEMENTILLUSTRATION 5-1Statement of FinancialPosition ClassificationLO 2Generally consists of: Long-term InvestmentsProperty, Plant, and EquipmentIntangibles AssetsOther AssetsNon-Current AssetsCLASSIFICATION IN THE STATEMENTLO 2Long-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.CLASSIFICATION IN THE STATEMENTLO 2Investments in Debt and Equity SecuritiesPortfolioTypeClassificationHeld-for-CollectionDebtAmortized CostCurrent or Non-currentTradingDebt or EquityFair ValueCurrentNon-Trading EquityEquityFair ValueCurrent or Non-currentCLASSIFICATION IN THE STATEMENTValuationLO 2Long-Term Investments ILLUSTRATION 5-17Classified Report-Form Statement of Financial PositionCLASSIFICATION IN THE STATEMENTLO 2Tangible 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 EquipmentCLASSIFICATION IN THE STATEMENTLO 2CLASSIFICATION IN THE STATEMENTProperty, Plant, and EquipmentILLUSTRATION 5-17Classified Report-Form Statement of Financial PositionLO 2Lack 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 AssetsCLASSIFICATION IN THE STATEMENTLO 2Intangible AssetsILLUSTRATION 5-17Classified Report-Form Statement of Financial PositionLO 2Items vary in practice. Can include:Long-term prepaid expensesNon-current receivablesAssets in special fundsProperty held for saleRestricted cash or securitiesOther AssetsCLASSIFICATION IN THE STATEMENTLO 2Cash 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 AssetsCLASSIFICATION IN THE STATEMENTILLUSTRATION 5-5Current Assets and Basis of ValuationLO 2Disclose: Basis of valuation (e.g., lower-of-cost-or-net realizable value). Cost flow assumption (e.g., FIFO or average cost). CLASSIFICATION IN THE STATEMENTInventoriesLO 2InventoriesILLUSTRATION 5-17Classified Report-Form Statement of Financial PositionLO 2Major categories of receivables should be shown in the balance sheet or the related notes.A company should clearly identify Anticipated loss due to uncollectibles.Amount and nature of any non-trade receivables.Receivables used as collateral.ReceivablesCLASSIFICATION IN THE STATEMENTLO 2ReceivablesLO 2ILLUSTRATION 5-17Classified Report-Form Statement of Financial PositionPayment of cash, that is recorded as an asset because service or benefit will be received in the future.InsuranceSuppliesAdvertisingCash PaymentExpense RecordedBEFORERentTaxesPrepayments often occur in regard to:Prepaid ExpensesCLASSIFICATION IN THE STATEMENTLO 2Prepaid ExpensesILLUSTRATION 5-17Classified Report-Form Statement of Financial PositionLO 2Short-Term InvestmentsCLASSIFICATION IN THE STATEMENTPortfolioTypeClassificationHeld-for-CollectionDebtAmortized CostCurrent or Non-currentTradingDebt or EquityFair ValueCurrentNon-Trading EquityEquityFair ValueCurrent or Non-currentValuationLO 2Short-Term InvestmentsILLUSTRATION 5-17Classified Report-Form Statement of Financial PositionLO 2Generally 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. CashCLASSIFICATION IN THE STATEMENTLO 2CashILLUSTRATION 5-17Classified Report-Form Statement of Financial PositionLO 2EquityCLASSIFICATION IN THE STATEMENTLO 2EquityILLUSTRATION 5-17Classified Report-Form Statement of Financial PositionLO 2Non-Current LiabilitiesObligations 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.CLASSIFICATION IN THE STATEMENTLO 2Non-Current LiabilitiesILLUSTRATION 5-17Classified Report-Form Statement of Financial PositionLO 2Current LiabilitiesObligations that a company generally expects to settle in its normal operating cycle or one year, whichever is longer. Includes:Payables resulting from the acquisition of goods and services. Collections received in advance for the delivery of goods or performance of services. Other liabilities whose liquidation will take place within the operating cycle or one year.CLASSIFICATION IN THE STATEMENTLO 2Current LiabilitiesILLUSTRATION 5-17Classified Report-Form Statement of Financial PositionLO 2Explain 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.After studying this chapter, you should be able to:Statement of Financial Position and Statement of Cash Flows5LEARNING OBJECTIVESIFRS does not specify the order or format of the items in the statement.Two general forms:Account formAssets on left sideEquity and liabilities on right sideReport formCLASSIFICATION IN THE STATEMENTStatement of Financial Position FormatLO 3Report Form lists the sections one above the other.Statement of Financial Position FormatILLUSTRATION 5-17Classified Report-Form Statement of Financial PositionLO 3Explain 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.After studying this chapter, you should be able to:Statement of Financial Position and Statement of Cash Flows5LEARNING OBJECTIVESAn important element of the objective 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).STATEMENT OF CASH FLOWSLO 4Primary Purpose: To provide relevant information about the cash receipts and cash payments of an enterprise during a period. 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?STATEMENT OF CASH FLOWSLO 4Explain 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.After studying this chapter, you should be able to:Statement of Financial Position and Statement of Cash Flows5LEARNING OBJECTIVESTransactions that enter into the determination of net incomeOperating ActivitiesMaking and collecting loans and acquiring and disposing of investments and property, plant, and equipmentInvesting ActivitiesTransactions involving liability and equity itemsFinancing ActivitiesContent and FormatSTATEMENT OF CASH FLOWSLO 5CONTENT AND FORMATILLUSTRATION 5-19Cash Inflows and OutflowsLO 5Explain 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.After studying this chapter, you should be able to:Statement of Financial Position and Statement of Cash Flows5LEARNING OBJECTIVESInformation obtained from several sources: comparative statements of financial position,current income statement, and selected transaction data. Sources of InformationPreparation of the Statement of Cash FlowsSTATEMENT OF CASH FLOWSLO 6Preparation of Statement of Cash FlowsIllustration: On January 1, 2015, in its first year of operations, Telemarketing Inc. issued 50,000 ordinary shares of $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 2015, the company purchased land for $15,000.Illustration 5-20 shows the company’s comparative statements of financial position at the beginning and end of 2015.LO 6ILLUSTRATION 5-20ILLUSTRATION 5-21Preparing the Statement of Cash FlowsDetermine: Net cash provided by (or used in) operating activities.Net 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.Preparation of Statement of Cash FlowsLO 6Net cash provided by operating activities Excess of cash receipts over cash payments from operating activities. Determined by converting net income on an accrual basis to a cash basis. Add to or deduct from net income those items in the income statement that do not affect cash. Requires an analysis of the current year’s income statement, comparative statements of financial position and selected transaction data.Preparing the Statement of Cash FlowsLO 6Cash provided by operating activitiesILLUSTRATION 5-22ILLUSTRATION 5-20Increase in accounts receivable reflects a non-cash increase of $41,000 in revenues.LO 6Cash provided by operating activitiesILLUSTRATION 5-22ILLUSTRATION 5-20Increase in accounts payable reflects a non-cash increase of $12,000 in expenses.LO 6Telemarketing Inc.’s investing and financing activities. Purchased land for $15,000. Issued ordinary shares for $50,000.Paid $14,000 in dividends.Preparing the Statement of Cash FlowsLO 6ILLUSTRATION 5-23Purchased land for $15,000(Investing)Investing and Financing ActivitiesLO 6ILLUSTRATION 5-23Issued ordinary shares for $50,000(Financing)Investing and Financing ActivitiesLO 6ILLUSTRATION 5-23Paid $14,000 in dividends(Financing)Investing and Financing ActivitiesLO 6BE 5-12: Keyser Beverage Company reported the following items in the most recent year.ActivityRequired: Determine if each item should be classified as an operating, investing, or financing activity.Preparation of Statement of Cash FlowsNet income $40,000OperatingDividends paid 5,000FinancingIncrease in accounts receivable 10,000OperatingIncrease in accounts payable 7,000OperatingPurchase of equipment 8,000InvestingDepreciation expense 4,000OperatingIssue of notes payable 20,000FinancingLO 6BE 5-12Net income of $40,000LO 6BE 5-12Dividends paid $5,000LO 6BE 5-12Increase in accounts receivable of $10,000LO 6BE 5-12Purchase equipment for $8,000LO 6BE 5-12Increase in accounts payable of $7,000LO 6BE 5-12Proceeds from notes payable of $20,000LO 6BE 5-12Depreciation expense of $4,000LO 6BE 5-12LO 6In 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 Statement of Cash FlowsQuestionLO 6Reported in a separate note to the financial statements. Examples include:Issuance of ordinary shares to purchase assets.Conversion of bonds into ordinary shares.Issuance of debt to purchase assets.Exchanges on long-lived assets.Significant Non-Cash ActivitiesPreparation of Statement of Cash FlowsLO 6ILLUSTRATION 5-24Comprehensive Statementof Cash FlowsExplain 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.After studying this chapter, you should be able to:Statement of Financial Position and Statement of Cash Flows5LEARNING OBJECTIVESWithout cash, a company will not survive. Cash flow from Operations:High amount - able to generate sufficient cash from operations to pay its bills without further borrowing. Low or negative amount - may have to borrow or issue equity securities.Usefulness of Statement of Cash FlowsLO 7Ratio indicates the ability to pay off current liabilities from operations. Ratio near 1:1 is good.Financial LiquidityNet Cash Provided by Operating ActivitiesAverage Current Liabilities Current Cash Debt Coverage Ratio =ILLUSTRATION 5-26Usefulness of Statement of Cash FlowsLO 7Ratio indicates the ability to repay liabilities from net cash provided by operating activities, without having to liquidate assets employed in operations.Average Total Liabilities Cash Debt Coverage Ratio =Net Cash Provided by Operating ActivitiesILLUSTRATION 5-27Usefulness of Statement of Cash FlowsFinancial FlexibilityLO 7Indicates the amount of discretionary cash flow available.Free Cash FlowILLUSTRATION 5-29Usefulness of Statement of Cash FlowsLO 7The current cash debt coverage ratio is often used to assess a. financial flexibility. b. liquidity. c. profitability. d. solvency.Usefulness of Statement of Cash FlowsQuestionLO 7Explain 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.After studying this chapter, you should be able to:Statement of Financial Position and Statement of Cash Flows5LEARNING OBJECTIVESIFRS requires that a complete set of financial statements be presented annually. Comprised of the following: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. ADDITIONAL INFORMATIONLO 8Accounting Policies Specific principles, bases, conventions, rules, and practices applied in preparing and presenting financial information. First note generally titled, “Summary of Significant Accounting Policies.”Notes to the Financial StatementsADDITIONAL INFORMATIONLO 8Notes to the Financial StatementsILLUSTRATION 5-30Accounting Policies—InventoryILLUSTRATION 5-31Accounting Policies—Intangible AssetLO 8IFRS requires specific disclosures. Examples include:Notes to the Financial StatementsAdditional Notes to the Financial StatementsItems of property, plant, and equipment are disaggregated into classes such as land, buildings, etc., in the notes, with related accumulated depreciation reported where applicable.LO 8Additional NotesILLUSTRATION 5-36Reconciliation Schedule for Property, Plant, and EquipmentLO 8IFRS requires specific disclosures. Examples include:Notes to the Financial StatementsAdditional Notes to the Financial StatementsReceivables are disaggregated into amounts receivable from trade customers, receivables from related parties, prepayments, and other amounts.LO 8Additional NotesILLUSTRATION 5-34Maturity Analysis for ReceivablesIFRS requires specific disclosures. Examples include:Additional NotesAdditional Notes to the Financial StatementsInventories are disaggregated into classifications such as merchandise, production supplies, work in process, and finished goods.Provisions are disaggregated into provisions for employee benefits and other items.LO 8Explain 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.After studying this chapter, you should be able to:Statement of Financial Position and Statement of Cash Flows5LEARNING OBJECTIVESParenthetical ExplanationsTechniques of DisclosureILLUSTRATION 5-37Parenthetical Disclosureof Shares IssuedParenthetical explanation is an advantage over a note because it brings the additional information into the body of the statement where readers will less likely overlook it.LO 9Cross-Reference and Contra ItemsTechniques of DisclosureCompanies “cross-reference” a direct relationship between an asset and a liability on the statement of financial position.ILLUSTRATION 5-38Cross-Referencing and Contra ItemsLO 9Fair PresentationOther GuidelinesIAS No. 1 indicates that it is important that assets and liabilities, and income and expense, be reported separately.It is proper to measure assets net of valuation allowances, such as allowance for doubtful accounts or inventory net of impairment.OffsettingConsistencyADDITIONAL INFORMATIONLO 9Fair PresentationOther GuidelinesThe Conceptual Framework indicates that companies should follow consistent principles and methods from one period to the next. Accounting policies must be consistently applied for similar transactions and events unless an IFRS requires a different policy.OffsettingConsistencyADDITIONAL INFORMATIONLO 9Other GuidelinesFaithful representation of transactions and events using the definitions and recognition criteria in the Conceptual Framework.Presumed that the use of IFRS with appropriate disclosure results in financial statements that are fairly presented.OffsettingConsistencyADDITIONAL INFORMATIONLO 9Fair PresentationSTATEMENT OF FINANCIAL POSITION AND STATEMENTOF CASH FLOWSAs in IFRS, the statement of financial position and the statement of cash flows are required statements for U.S. GAAP. In addition, the content and presentation of a U.S. GAAP statement of financial position and cash flow statement are similar to those used for IFRS.GLOBAL ACCOUNTING INSIGHTSRelevant FactsFollowing are the key similarities and differences between U.S. GAAP and IFRS related to the statement of financial position. SimilaritiesBoth U.S. GAAP and IFRS allow the use of the title “balance sheet” or “statement of financial position.” IFRS recommends but does not require the use of the title “statement of financial position” rather than balance sheet.Both U.S. GAAP and IFRS require disclosures about (1) accounting policies followed, (2) judgments that management has made in the process of applying the entity’s accounting policies, and (3) the key assumptions and estimation uncertainty that could result in a material adjustment. Comparative prior period information must be presented and financial statements must be prepared annually.GLOBAL ACCOUNTING INSIGHTSRelevant FactsSimilaritiesU.S. GAAP and IFRS require presentation of non-controlling interests in the equity section of the statement of financial position.DifferencesU.S. GAAP follows the same guidelines as presented in the chapter for distinguishing between current and noncurrent assets and liabilities. However, under U.S. GAAP, public companies must follow U.S. SEC regulations, which require specific line items. In addition, specific U.S. GAAP mandates certain forms of reporting for this information. IFRS requires a classified statement of financial position except in very limited situations.GLOBAL ACCOUNTING INSIGHTSRelevant FactsDifferencesUnder U.S. GAAP cash is listed first, but under IFRS it is many times listed last. That is, under IFRS, current assets are usually listed in the reverse order of liquidity than under U.S. GAAP.U.S. GAAP has many differences in terminology that you will notice in this textbook. One example is the use of common stock under U.S. GAAP, which is referred to as share capital—ordinary under IFRS. Use of the term “reserve” is discouraged in U.S. GAAP, but there is no such prohibition in IFRS.GLOBAL ACCOUNTING INSIGHTSAbout The NumbersThe order of presentation in the statement of financial position differs between U.S. GAAP and IFRS. As indicated in the following table, U.S. companies generally present current assets, non-current assets, current and non-current liabilities, and shareholders’ equity. In addition, within the current asset and liability classifications, items are presented in order of liquidity.GLOBAL ACCOUNTING INSIGHTSOn the HorizonThe IASB and the FASB are working on a project to converge their standards related to financial statement presentation. A key feature of the proposed framework is that each of the statements will be organized, in the same format, to separate an entity’s financing activities from its operating and investing activities and, further, to separate financing activities into transactions with owners and creditors. Thus, the same classifications used in the statement of financial position would also be used in the statement of comprehensive income and the statement of cash flows. GLOBAL ACCOUNTING INSIGHTSLO 10 Identify the major types of financial ratios and what they measure.USING RATIOS TO ANALYZE PERFORMANCEQualitative information can be gathered from financial statements by examining relationships between items on the statements and identifying trends in these relationships.APPENDIX 5ARATIO ANALYSIS—A REFERENCEUSING RATIOS TO ANALYZE PERFORMANCEAPPENDIX 5ARATIO ANALYSIS—A REFERENCEILLUSTRATION 5A-1 A Summary of Financial RatiosLO 10USING RATIOS TO ANALYZE PERFORMANCEAPPENDIX 5ARATIO ANALYSIS—A REFERENCELO 10ILLUSTRATION 5A-1 A Summary of Financial RatiosUSING RATIOS TO ANALYZE PERFORMANCEAPPENDIX 5ARATIO ANALYSIS—A REFERENCELO 10ILLUSTRATION 5A-1 A Summary of Financial RatiosCopyright © 2014 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. 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