IFRS EDITION
Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
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PREVIEW OF CHAPTER 13
Financial Accounting
IFRS 3rd Edition
Weygandt Kimmel Kieso
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CHAPTER
13
Statement of Cash
Flows
LEARNING OBJECTIVES
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LO 1
LO 1
Learning Objective
2
Distinguish among
operating, investing, and
financing activities.
Operating
Activities
Investing
Activities
Financing
Activities
Income
Changes in
Investments
and Noncurrent
Assets
Changes in
Non-current
Liabilities and
Equity
Statement Items
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LO 2
Illustration 13-1
Typical receipt and payment
classifications
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LO 2
LO 2
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LO 2
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LO 2
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LO 2
Direct Method
Indirect Method
3. Financing activities.
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LO 2
Illustration 13-3
Format of statement of cash flows
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LO 2
>
DO IT!
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Financing
Financing
Investing
Operating
Operating
LO 2
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LO 2
Illustration 13-4
Three major steps in preparing
the statement of cash flows
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LO 2
Illustration 13-4
Three major steps in preparing
the statement of cash flows
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LO 2
Illustration 13-4
Three major steps in preparing
the statement of cash flows
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LO 2
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LO 2
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LO 2
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Illustration 13-5
Comparative statements of financial position, income statement,
and additional information for Computer Services Company
Learning Objective 3
Prepare a statement of
cash flows using the
indirect method.
LO 3
Illustration 13-5
Comparative statements of financial position, income statement,
and additional information for Computer Services Company
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LO 3
2017
2016
Change in
Account Balance
Illustration 13-5
LO 3
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LO 3
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LO 3
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LO 3
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LO 3
Illustration 13-9
Accounts Receivable
1/1/017
Balance
Sales revenue
12/31/17 Balance
30,000
507,000
20,000
LO 3
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LO 3
Balance
Purchases
12/31/17 Balance
10,000
155,000
150,000
15,000
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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LO 3
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LO 3
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LO 3
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LO 3
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LO 3
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LO 3
Illustration 13-12
Adjustments required to convert net income to net cash provided by operating activities
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LO 3
Ethics Insight
Cash Flow Isnt Always What It Seems
Some managers have taken actions that artificially increase cash flow
from operating activities. They do this by moving negative amounts out of
the operating section and into the investing or financing section. For
example, WorldCom, Inc. (USA) disclosed that it had improperly
capitalized expenses: It had moved $3.8 billion of cash outflows from the
Cash from operating activities section of the statement of cash flows to
the Investing activities section, thereby greatly enhancing cash provided
by operating activities. Similarly, Dynegy, Inc. (USA) restated its
statement of cash flows because it had improperly included in operating
activities, instead of in financing activities, $300 million from natural gas
trading. The restatement resulted in a drop of 37% in cash flow from
operating activities.
Source: Henny Sender, Sadly, These Days Even Cash Flow Isnt Always What It
Seems to Be, Wall Street Journal (May 8, 2002).
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LO 3
Balance
Issued bonds
12/31/17 Balance
20,000
110,000
130,000
Bonds Payable
1/1/17
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Balance
For land
20,000
110,000
12/31/17 Balance
130,000
LO 3
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Illustration 13-14
LO 3
Balance
40,000
Office building 120,000
12/31/17 Balance
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160,000
LO 3
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Illustration 13-14
LO 3
Equipment
1/1/17
Balance
Purchase
12/31/17 Balance
Journal
Entry
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10,000
25,000
8,000
27,000
Cash
Accumulated Depreciation
Loss on Disposal of Plant Assets
Equipment
4,000
1,000
3,000
8,000
LO 3
Statement
of Cash
Flows
Indirect
Method
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Illustration 13-14
Balance
Shares sold
12/31/17 Balance
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50,000
20,000
70,000
LO 3
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Illustration 13-14
LO 3
29,000
Balance
Net income
12/31/17 Balance
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48,000
145,000
164,000
LO 3
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LO 3
Statement
of Cash
Flows
Illustration 13-14
Indirect
Method
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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 $4.8 billion account in the
Cayman Islands), documents were created on scanners, with signatures that were cut
and pasted from other documents. These were then passed through a fax machine
numerous times to make them look real (if difficult to read). Similarly, fictitious bills
were created in order to divert funds to other businesses owned by the Tanzi family
(who controlled Parmalat).
LO 3
Illustration 13-5
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LO 3
Learning Objective
4
Analyze the statement of
cash flows.
Illustration 13-15
Free cash flow
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LO 4
Illustration 13-16
Anheuser-Busch InBev cash
flow information ($ in millions)
Required:
Calculate
free cash
flow.
$17,451
3,869
Dividends paid
6,253
Illustration 13-17
Calculation of Anheuser-Busch InBevs free cash flow ($ in millions)
$7,329
LO 4
Consolidated Financial
APPENDIX 13A
Statements
Learning Objective 5
Prepare a statement of
1. Compute net cash provided by
cash flows using the direct
method.
operating activities by adjusting
each item in the income statement from the accrual
basis to the cash basis.
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LO 5
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Illustration 13A-2
Major classes of cash receipts and payments
LO 5
Direct Method
Illustration 13A-1
Comparative statements of financial position, income statement,
and additional information for Computer Services Company
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LO 5
Illustration 13A-1
Comparative statements of financial position, income statement,
and additional information for Computer Services Company
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LO 5
2017
2016
Change in
Account Balance
LO 5
Accounts Receivable
1/1/017
Balance
Sales revenue
12/31/17
Balance
30,000
507,000
517,000
20,000
Illustration 13A-5
Formula to compute cash receipts from customersdirect method
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LO 5
Balance
Purchases
12/31/17
Balance
10,000
155,000
150,000
15,000
Accounts Payable
Payment to suppliers
139,000
1/1/17
Balance
Purchases
12/31/17
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Illustration 13A-8
Analysis of accounts payable
Balance
12,000
155,000
28,000
LO 5
Illustration 13A-9
Formula to compute cash payments to suppliersdirect method
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LO 5
Illustration 13A-10
Computation of cash payments for operating expenses
Illustration 13A-11
Formula to compute cash payments for operating expensesdirect method
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LO 5
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42,000
1/1/17
Balance
0
Interest expense
42,000
12/31/17 Balance
0
LO 5
49,000
1/1/17
Balance
8,000
Income tax expense
47,000
12/31/17 Balance
6,000
Illustration 13A-13
Formula to compute cash payments for income taxesdirect method
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LO 5
Illustration 13A-14
Operating activities section of the statement of cash flows
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LO 5
Illustration 13A-15
Analysis of equipment
Equipment
1/1/17
Balance
Purchases
12/31/17 Balance
10,000
25,000
8,000
27,000
Accumulated Depreciation
Equipment sold
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1,000
1/1/17
Balance
1,000
Depreciation expense
3,000
12/31/17 Balance
3,000
LO 5
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3,000
8,000
LO 5
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Significant non-cash
investing and financing
transaction.
Investing
transaction.
Significant non-cash
investing and financing
transaction.
LO 5
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Financing
transaction.
Financing
transaction
(cash dividend)
LO 5
Illustration 13A-16
Statement of cash flows,
2017direct method
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LO 5
Illustration 13A1
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LO 5
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Illustration 13B-1
Format of worksheet
LO 6
Preparing a Worksheet
1. Enter in the statement of financial position accounts section the
statement of financial position accounts and their beginning and
ending balances.
2. Enter in the reconciling columns of the worksheet the data that
explain the changes in the statement of financial position
accounts other than cash and their effects on the statement of
cash flows.
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
Preparing a
Worksheet
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Illustration 13B-3
Completed worksheet
indirect method
LO 6
Learning Objective 7
Use the T-account
approach to prepare a
statement of cash flows.
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LO 7
Illustration 13C-1
T-account approach
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Learning Objective 8
Compare the accounting for
statement of cash flows
under IFRS and U.S. GAAP.
Similarities
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Companies preparing financial statements under both GAAP and 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 sections operating, investing, and financingalong with
changes in cash and cash equivalents.
Similar to IFRS, the statement of cash flows can be prepared using either the
indirect or direct method under GAAP. Companies choose for the most part
to use the indirect method for reporting net cash flows from operating
activities.
LO 8
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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.
LO 8
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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 IFRS, under GAAP 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. In order to provide this information on the face of the statement,
companies first add back the amount of interest expense and tax expense
(similar to adding back depreciation expense) and then further down the
statement they subtract the cash amount paid for interest and taxes. This
treatment can be seen in the statement of cash flows provided for Petra
Foods in Appendix C.
LO 8
LO 8
A Look at
U.S. GAAP
A Look
at IFRS
GAAP Self-Test Questions
Under GAAP interest paid can be reported as:
a) only a financing element.
b) a financing element or an investing element.
c) a financing element or an operating element.
d) only an operating element.
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LO 8
A Look at
U.S. GAAP
A Look
at IFRS
GAAP Self-Test Questions
IFRS requires that non-cash items:
a) be reported in the section to which they relate, that is, a
non-cash investing activity would be reported in the
investing section.
b) be disclosed in the notes to the financial statements.
c) do not need to be reported.
d) be treated in a fashion similar to cash equivalents.
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LO 8
A Look at
U.S. GAAP
A Look
at IFRS
GAAP Self-Test Questions
In the future, it appears likely that:
a) the income statement and statement of financial position
(balance sheet) will have headings of operating,
investing, and financing, much like the statement of cash
flows.
b) cash and cash equivalents will be combined in a single
line item.
c) the IASB will not allow companies to use the direct
approach to the statement of cash flows.
d) None of the above.
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LO 8
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