Professional Documents
Culture Documents
Coby Harmon
University of California, Santa Barbara
Westmont College
17-1
17 Statement of
Cash Flows
Learning Objectives
After studying this chapter, you should be able to:
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Preview of Chapter 17
Accounting Principles
Eleventh Edition
Weygandt Kimmel Kieso
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Usefulness and Format
3. Financing activities.
3. Additional information
2. Focuses on differences
between net income and net
cash flow from operating
activities.
Illustration 17-4
Question
Which is an example of a cash flow from an operating
activity?
a. Payment of cash to lenders for interest.
b. Receipt of cash from the sale of capital stock.
c. Payment of cash dividends to the companys
stockholders.
d. None of the above.
Depreciation Expense
Although depreciation expense reduces net income, it does not
reduce cash. The company must add it back to net income.
Illustration 17-6
Illustration 17-8
Accounts Receivable
Illustration 17-9
Inventory
1/1/14 Balance 10,000 Cost of goods sold 150,000
Purchases 155,000
Cost of goods sold does not reflect cash payments made for
merchandise. The company deducts from net income this
inventory increase.
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Step 1: Operating Activities
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LO 3
ANATOMY OF A FRAUD
For more than a decade, the top executives at the Italian dairy products company Parmalat
engaged in multiple frauds that overstated cash and other assets by more than $1 billion while
understating liabilities by between $8 and $12 billion. Much of the fraud involved creating
fictitious sources and uses of cash. Some of these activities incorporated sophisticated
financial transactions with subsidiaries created with the help of large international financial
institutions. However, much of the fraud employed very basic, even sloppy, forgery of
documents. For example, when outside auditors requested confirmation of bank accounts
(such as a fake $4.8 billion account in the Cayman Islands), documents were created on
scanners, with signatures that were cut and pasted from other documents. These were then
passed through a fax machine numerous times to make them look real (if difficult to read).
Similarly, fictitious bills were created in order to divert funds to other businesses owned by the
Tanzi family (who controlled Parmalat).
Land
1/1/14 Balance 20,000
Issued bonds 110,000
12/31/14 Balance 130,000
Bonds Payable
1/1/14 Balance 20,000
For land 110,000
12/31/14 Balance 130,000
Building
1/1/14 Balance 40,000
Office building 120,000
Equipment
1/1/14 Balance 10,000 Equipment sold 8,000
Purchase 25,000
Cash 4,000
Journal
Accumulated depreciation 1,000
Entry
Loss on disposal of equipment 3,000
Equipment 8,000
Statement
of Cash
Flows
Indirect
Method
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LO 3
Step 2: Investing and Financing Activities
Common Stock
1/1/14 Balance 50,000
Shares sold 20,000
Retained Earnings
1/1/14 Balance 48,000
Dividends 29,000 Net income 145,000
Statement
of Cash
Flows
Indirect
Method
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LO 3
Step 2: Investing and Financing Activities
Question
Which is an example of a cash flow from an investing
activity?
a. Receipt of cash from the issuance of bonds payable.
b. Payment of cash to repurchase outstanding capital
stock.
c. Receipt of cash from the sale of equipment.
d. Payment of cash to suppliers for inventory.
Required:
Calculate
Microsofts free
cash flow.
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APPENDIX 17A Direct Method
Illustration
Illustration 17A-1
Illustration 17A-1
Illustration 17A-1
Illustration 17A-4
Accounts Receivable
1/1/014 Balance 30,000 Receipts from customers 517,000
Sales revenue 507,000
Illustration 17A-5
Inventory
1/1/14 Balance 10,000 Cost of goods sold 150,000
Purchases 155,000
Illustration 17A-8
Accounts Payable
Payment to suppliers 139,000 1/1/14 Balance 12,000
Purchases 155,000
Illustration 17A-10
Illustration 17A-11
Interest Payable
Illustration 17A-13
Illustration 17A-14
Operating activities section
of the statement of cash flows
Accumulated Depreciation
Cash 4,000
Accumulated depreciation 1,000
Loss on disposal of equipment 3,000
Equipment 8,000
Step 2:
Investing
and
Financing
Activities
Illustration 17A-16
Statement of cash
flows, 2014direct
method
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APPENDIX 17A Direct Method
Illustration 17B-2
Comparative
balance sheets,
income statement,
and additional
information for
Computer Services
Company
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APPENDIX 17B WorksheetIndirect Method
Illustration 17B-2
Comparative
balance sheets,
income statement,
and additional
information for
Computer Services
Company
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APPENDIX 17B WorksheetIndirect Method
Preparing a Worksheet
1. Enter in the balance sheet accounts section the balance sheet
accounts and their beginning and ending balances.
3. Enter on the cash line and at the bottom of the worksheet the
increase or decrease in cash. This entry should enable the
totals of the reconciling columns to be in agreement.
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LO 6 Explain how to use a worksheet to prepare the
statement of cash flows using the indirect method.
APPENDIX 17B WorksheetIndirect Method
Illustration 17B-3
Completed worksheet
indirect method
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APPENDIX 17C T-Account Approach
T-Account Approach
What this means is that the change in cash is equal to the change
in all of the other balance sheet accounts.
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A Look at IFRS
Key Points
Companies preparing financial statements under IFRS must prepare a
statement of cash flows as an integral part of the financial statements.
Both IFRS and GAAP require that the statement of cash flows should
have three major sectionsoperating, investing, and financingalong
with changes in cash and cash equivalents.
Similar to GAAP, the cash flow statement can be prepared using either
the indirect or direct method under IFRS. In both U.S. and international
settings, companies choose for the most part to use the indirect method
for reporting net cash flows from operating activities.
Key Points
The definition of cash equivalents used in IFRS is similar to that used in
GAAP. A major difference is that in certain situations, bank overdrafts are
considered part of cash and cash equivalents under IFRS (which is not
the case in GAAP). Under GAAP, bank overdrafts are classified as
financing activities in the statement of cash flows and are reported as
liabilities on the balance sheet.
Key Points
IFRS requires that noncash investing and financing activities be
excluded from the statement of cash flows. Instead, these noncash
activities should be reported elsewhere. This requirement is interpreted
to mean that noncash investing and financing activities should be
disclosed in the notes to the financial statements instead of in the
financial statements. Under GAAP, companies may present this
information on the face of the statement of cash flows.
Key Points
One area where there can be substantial differences between IFRS and
GAAP relates to the classification of interest, dividends, and taxes. The
following table indicates the differences between the two approaches.
Key Points
Under IFRS, some companies present the operating section in a single
line item, with a full reconciliation provided in the notes to the financial
statements. This presentation is not seen under GAAP.
Similar to GAAP, under IFRS companies must disclose the amount of
taxes and interest paid. Under GAAP, companies disclose this in the
notes to the financial statements. Under IFRS, some companies disclose
this information in the notes, but others provide individual line items on
the face of the statement.
c) the IASB will not allow companies to use the direct approach
to the statement of cash flows.
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