CHAPTER 23 STATEMENT OF CASH FLOWS U.S. GAAP P

Chapter 23 Statement of Cash FlowsCHAPTER23·23–1STATEMENT OF CASH FLOWSThis IFRS Supplement provides expanded discussions of accounting guidance underInternational Financial Reporting Standards (IFRS) for the topics in IntermediateAccounting. The discussions are organized according to the chapters in IntermediateAccounting (13th or 14th Editions) and therefore can be used to supplement the U.S.GAAP requirements as presented in the textbook. Assignment material is provided foreach supplement chapter, which can be used to assess and reinforce studentunderstanding of IFRS.DISCLOSURESSignificant Non-Cash TransactionsBecause the statement of cash flows reports only the effects of operating, investing, andfinancing activities in terms of cash flows, it omits some significant non-cash transactions and other events that are investing or financing activities. Among the more common of these non-cash transactions that a company should report or disclose in somemanner are the following.1. Acquisition of assets by assuming liabilities (including finance lease obligations) orby issuing equity securities.2. Exchanges of non-monetary assets.3. Refinancing of long-term debt.4. Conversion of debt or preference shares to ordinary shares.5. Issuance of equity securities to retire debt.Investing and financing transactions that do not require the use of cash are excluded from the statement of cash flows. [1] If material in amount, these disclosuresmay be either narrative or summarized in a separate schedule. This schedule mayappear in a separate note or supplementary schedule to the financial statements.1Illustration 23-1 shows the presentation of these significant non-cash transactions orother events in a separate schedule in the notes to the financial statements.Companies do not generally report certain other significant non-cash transactionsor other events in conjunction with the statement of cash flows. Examples of these typesof transactions are share dividends, share splits, and restrictions on retained earnings.Companies generally report these items, neither financing nor investing activities, inconjunction with the statement of changes in equity or schedules and notes pertainingto changes in equity accounts.Note G: Significant non-cash transactions. During the year, the company engaged in the followingsignificant non-cash investing and financing transactions:Issued 250,000 ordinary shares to purchase land and buildingExchanged land in Steadfast, New York, for land in Bedford, PennsylvaniaConverted 12% bonds to 50,000 ordinary shares 1,750,000 2,000,000 500,0001Some non-cash investing and financing activities are part cash and part non-cash. Companiesshould report only the cash portion on the statement of cash flows. The non-cash componentshould be reported in a separate note.U.S. GAAPPERSPECTIVEIFRS requires that non-cashinvesting and financingactivities be excluded fromthe statement of cash flows.Instead, these non-cashactivities should be reportedelsewhere, usually disclosedin the notes to the financialstatements instead of in thefinancial statements. UnderU.S. GAAP, companies maypresent this information inthe cash flow statement.U.S. GAAPPERSPECTIVEThe definition of cashequivalents used in IFRS issimilar to that used in U.S.GAAP. A major difference isthat in certain situations,bank overdrafts areconsidered part of cash andcash equivalents under IFRS(which is not the case underU.S. GAAP). Under U.S. GAAP,bank overdrafts are classifiedas financing activities.ILLUSTRATION 23-1Note Presentation ofNon-Cash Investing andFinancing Activities

23–2·IFRS SupplementSpecial DisclosuresU.S. GAAPPERSPECTIVEU.S. GAAP encouragescompanies to disclose theaggregate amount of cashflows that are attributable tothe increase in operatingcapacity separately fromthose cash flows that arerequired to maintainoperating capacity.ILLUSTRATION 23-2Note Disclosure ofInterest, Taxes, andDividendsIAS 7 indicates that cash flows related to interest received and paid, and dividends received and paid, should be separately disclosed in the statement of cash flows. [2] Eachitem should be classified in a consistent manner from period to period as operating,investing, or financing cash flows. For homework purposes classify interest received and paidand dividends received as part of cash flows from operating activities and dividends paid as cashflows from financing activities. The justification for reporting the first three items in cash flowsfrom operating activities is that each item affects net income. Dividends paid, however, donot affect net income and are often considered a cost of financing.Companies should also disclose income taxes paid separately in the cash flowsfrom operating activities unless they can be separately identified as part of investingor financing activities. While tax expense may be readily identifiable with investing orfinancing activities, the related tax cash flows are often impracticable to identify andmay arise in a different period from the cash flows of the underlying transaction. Therefore, taxes paid are usually classified as cash flows from operating activities. IFRSrequires that the cash paid for taxes, as well as cash flows from interest and dividendsreceived and paid, be disclosed. The category (operating, investing, or financing) thateach item was included in must be disclosed as well.An example of such a disclosure from the notes to Daimler’s (DEU) financial statement is provided in Illustration 23-2.DaimlerCash provided by operating activities includes the following cash flows:(in millions of )2009(894)471(358)109Interest paidInterest receivedIncome taxes paid, netDividends Other companies choose to report these items directly in the statement of cash flows.In many cases, companies start with income before income taxes and then show incometaxes paid as a separate item. In addition, they often add back interest expense on anaccrual basis and then subtract interest paid. Reporting these items in the operatingactivites section is shown for Mermel Company in Illustration 23-3.ILLUSTRATION 23-3Reporting of Interest,Taxes, and Dividends inthe Operating SectionU.S. GAAPPERSPECTIVEU.S. GAAP does not requirealternatives for reporting ofinterest, dividends, and taxes.Interest paid and receivedand taxes paid are classifiedas operating. Dividends paidare classified as financing.Dividends received areclassified as operating.MERMEL COMPANYSTATEMENT OF CASH FLOWS ( 000,000)(OPERATING ACTIVITIES SECTION ONLY)Income before income taxAdjustments to reconcile income before income tax tonet cash provided by operating activitiesDepreciation expenseInterest expenseInvestment revenueDecrease in inventoriesIncrease in trade receivablesCash generated from operationsInterest paidIncome taxes paidNet cash provided by operating activities 4,000 1,000500(650)1,050(310)1,5905,590(300)(760)(1,060) 4,530Companies often provide a separate section to identify interest and income taxes paid.

Chapter 23 Statement of Cash Flows·23–3AUTHORITATIVE LITERATUREAuthoritative Literature References[1] International Accounting Standard 7, Statement of Cash Flows (London, U.K.: International AccountingStandards Committee Foundation, 2001), par. 43.[2] International Accounting Standard 7, Statement of Cash Flows (London, U.K.: International AccountingStandards Committee Foundation, 2001), par. 31.QUESTIONS(h) Purchase of treasury shares.1. Classify the following items as (1) operating, (2) investing, (3) financing, or (4) significant non-cash investing andfinancing activities, using the direct method.(i) Issuance of bonds for land.(j) Payment of dividends.(a) Cash payments to employees.(k) Purchase of equipment.(b) Redemption of bonds payable.(l) Cash payments for operating expenses.(c) Sale of building at book value.2. Stan Conner and Mark Stein were discussing the state-(d) Cash payments to suppliers.ment of cash flows of Bombeck Co. In the notes to thestatement of cash flows was a schedule entitled “Non-cashinvesting and financing activities.” Give three examplesof significant non-cash transactions that would be reported in this schedule.(e) Exchange of equipment for furniture.(f) Issuance of preference shares.(g) Cash received from customers.EXERCISESE23-1 (Classification of Transactions) Springsteen Co. had the following activity in its most recentyear of operations.(a)(b)(c)(d)(e)(f)Pension expense exceeds amount funded.Redemption of bonds payable.Sale of building at book value.Depreciation.Exchange of equipment for furniture.Issuance of ordinary shares.(g)(h)(i)(j)(k)(l)Amortization of intangible assets.Purchase of treasury shares.Issuance of bonds for land.Payment of dividends.Increase in interest receivable on notes receivable.Purchase of equipment.InstructionsClassify the items as (1) operating—add to net income; (2) operating—deduct from net income; (3) investing; (4) financing; or (5) significant non-cash investing and financing activities. Use the indirectmethod.E23-2 (Classification of Transactions) Following are selected statement of financial position accountsof Sander Bros. Corp. at December 31, 2010 and 2009, and the increases or decreases in each account from2009 to 2010. Also presented is selected income statement information for the year ended December 31,2010, and additional information.Selected statement of financial position accounts20102009Increase(Decrease) 277,000(178,000)34,000 247,000(167,000)24,000 30,000(11,000)10,000AssetsProperty, plant, and equipmentAccumulated depreciationAccounts receivable

23–4·IFRS SupplementEquity and liabilitiesShare capital—ordinary, 1 parShare premium—ordinaryRetained earningsBonds payableDividends payable 22,0009,000104,00049,0008,000 19,0003,00091,00046,0005,000 3,0006,00013,0003,0003,000Selected income statement information for the year ended December 31, 2010Sales revenueDepreciationGain on sale of equipmentNet income 155,00038,00014,50031,000Additional information:1.2.3.During 2010, equipment costing 45,000 was sold for cash.Accounts receivable relate to sales of merchandise.During 2010, 25,000 of bonds payable were issued in exchange for property, plant, and equipment. There was no amortization of bond discount or premium.InstructionsDetermine the category (operating, investing, or financing) and the amount that should be reported inthe statement of cash flows for the following items.(a)(b)(c)(d)Payments for purchase of property, plant, and equipment.Proceeds from the sale of equipment.Cash dividends paid.Redemption of bonds payable.E23-3 (Classification of Transactions) In 2010, Leppard Inc. issued 1,000 ordinary shares of 10 parvalue for land worth 40,000.Instructions(a) Prepare Leppard’s journal entry to record the transaction.(b) Indicate the effect the transaction has on cash.(c) Indicate how the transaction is reported on the statement of cash flows.PROBLEMSP23-1 (SCF—Indirect Method) The comparative statements of financial position for Hinckley Corporation show the following information.December nts receivableCashShare capital—ordinaryRetained earningsAllowance for doubtful accountsAccumulated depreciation on equipmentAccumulated depreciation on buildingAccounts payableDividends payableLong-term notes payableNotes payable, short-term (non-trade)20102009 –0––0–45,0005,00012,00012,25033,500 3,00029,75020,0006,2509,00010,00013,000 107,750 91,000 00 33,0006,0004,5004,5006,0003,0005,00025,0004,000 107,750 91,000