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Accounting Chapter 21 Homework Inflows Operating Activities Investing Activities Financing Activities

Page Count
14 pages
Word Count
3553 words
Book Title
INTERMEDIATE ACCOUNTING WITH AIR FRANCE-KLM 2013 ANNUAL REPORT 8th Edition
Authors
David Spiceland, James Sepe, Mark Nelson, Wayne Thomas
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Overview
The objective of financial reporting is to provide investors and creditors with useful
information, primarily in the form of financial statements. The balance sheet and the income
statement that have been the focus of your study in earlier chapters do not provide all the
information needed by these decision makers. In this chapter, you will learn how the statement of
cash flows fills the information gap left by the other financial statements.
The statement lists all cash inflows and cash outflows during each reporting period, and
classifies them as cash flows from (a) operating, (b) investing, or (c) financing activities. Investing
and financing activities that do not directly affect cash also are reported.
Learning Objectives
After studying this chapter, you should be able to:
LO20-1 Explain the usefulness of the statement of cash flows.
LO20-2 Define cash equivalents.
LO20-3 Determine cash flows from operating activities by the direct method.
LO20-4 Determine cash flows from operating activities by the indirect method.
LO20-5 Identify transactions that are classified as investing activities.
LO20-6 Identify transactions that are classified as financing activities.
LO20-7 Identify transactions that represent noncash investing and financing activities.
LO20-8 Prepare a statement of cash flows with the aid of a spreadsheet or T-accounts.
LO20-9 Discuss the primary differences between U.S. GAAP and IFRS with respect to the
statement of cash flows.
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I. Investors and creditors analyze the prospects of receiving a cash return from their dealings with
a firm.
A. Cash flows to investors and creditors depend on the corporation generating cash flows to
itself. (T21-1)
II. The statement of cash flows fills an information gap left by the balance sheet and the income
statement.
A. It presents information about cash flows that the other statements either (a) do not
provide or (b) provide only indirectly.
B. Cash continuously flows into and out of an active business.
21-2 Intermediate Accounting, 8/e
C. The concept of the statement is quite simple: It provides a list of the cash inflows and
outflows that occurred during the reporting period. Before seeing how the statement of
cash flows is prepared from the information typically available for this purpose, the basic
structure and composition of the statement is overviewed in Graphic 21-2. (T21-2)
III. The requirement that companies present the statement of cash flows is relatively recent.
A. During the early 1900s and continuing into the mid-1930s, the cash basis was a widely
used means of financial reporting.
IV. Cash includes “cash equivalents.” The statement of cash flows does not differentiate between
amounts held as cash and amounts held in cash equivalent investments. (T21-3)
A. These are short-term, highly liquid investments that can readily be converted to cash with
little risk of loss.
B. Examples are money market funds, treasury bills, and commercial paper.
C. These investments must have a maturity date not longer than three months from the date
V. Cash flows from operating activities are both inflows and outflows of cash that result from
activities reported on the income statement. (T21-4)
A. The classification includes the elements of net income, but reported on a cash basis, such
as: (T21-5)
2. Cash revenue received rather than investment revenue.
4. Cash paid to employees rather than salaries expense.
5. Cash paid to the government rather than income tax expense.
B. Noncash items reported on the income statement on not reported on the statement of cash
flows, such as:
2. Loss on sale of assets.
4. Amortization.
VI. Cash flows from investing activities are related to the acquisition and disposition of assets,
other than (a) inventory and (b) assets classified as cash equivalents. (T21-6)
A. The classification includes the acquisition of:
2. Investments in securities [except cash equivalents].
3. Nontrade receivables.
B. The classification also includes any cash receipts from their disposition, such as:
1. The sale of property, plant and equipment.
3. The collection of nontrade receivables.
VII. Cash flows from financing activities result from the external financing of a business. (T21-7)
A. The classification includes:
1. The sale or repurchase of shares.
3. The payment of cash dividends.
B. The classification also includes subsequent transactions related to these, such as:
2. The repayment of debt.
3. The payment of cash dividends to shareholders.
VIII. Noncash investing and financing activities, such as acquiring equipment (an investing activity)
by issuing a long-term note payable (a financing activity) must be disclosed also.
A. Examples of transactions that do not increase or decrease cash, but which result in
significant investing and financing activities are:
2. Acquiring use of an asset by entering into a lease agreement.
4. Exchanging noncash assets or liabilities for other noncash assets or liabilities.
(T21-8)
B. Noncash transactions that do not affect a company's assets or liabilities, such as the
distribution of stock dividends, are not considered investing or financing activities and
are not reported.
21-4 Intermediate Accounting, 8/e
IX. A spreadsheet offers a systematic method of preparing a statement of cash flows.
A. It allows us to analyze available data to ensure that all operating, investing, and
financing activities are detected.
B. We use it to record spreadsheet entries that explain account balance changes and
simultaneously identify and classify the activities to be reported on the statement of
cash flows.
C. It relies on the fact that, for cash to increase or decrease, there must be a corresponding
change in a noncash account. Thus, if we can identify the events and transactions that
caused the change in each noncash account during the year, we will have identified all
the operating, investing, and financing activities that occurred.
D. Procedure:
1. Enter the beginning and ending balances of each account by transferring the
comparative balance sheets and income statement to a blank spreadsheet. (T21-10)
3. Enter spreadsheet entries that duplicate the actual journal entries used to record the
4. When a transaction being entered on the spreadsheet includes an operating,
5. Since there can be no operating, investing, or financing activity without a
corresponding change in one or more of the noncash accounts, once all noncash
6. To check the accuracy of the analysis, compare the change in the balance of the
7. The spreadsheet is now complete. The statement of cash flows can now be
X. Either the direct or the indirect method can be used to calculate and present the net cash
increase or decrease from operating activities.
A. Unlike the direct method, which directly lists cash inflows and outflows, the indirect
Decision-Makers’ Perspective
A. Some analysts supplement their analysis with cash flow ratios. (T21-35)
1. Some cash flow ratios are derived by simply substituting “Cash flow from
2. Cash flow ratios offer insight in the evaluation of a company’s profitability and
financial strength.
21-6 Intermediate Accounting, 8/e
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A PowerPoint presentation of the chapter is available at the textbook website.
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The following can be reproduced on transparency film as they appear here, or
CASH INFLOWS
Operating Activities Investing Activities Financing Activities
Cash received Sale of operational assets Issuance of stock
from revenues
Sale of investments Issuance of bonds
in securities and notes
Collections of loans
________________________________
T21-1
21-8 Intermediate Accounting, 8/e
United Brands Corporation
Statement of Cash Flows
For Year Ended December 31, 2016 ($ in millions)
Cash flows from operating activities:
Cash inflows:
From customers $98
Net cash flows from operating activities $22
Cash flows from investing activities:
Purchase of land ($30)
Cash flows from financing activities:
Net increase in cash $9
T21-2
Note X:
Noncash investing and financing activities:
Acquired $20 million of equipment
Reconciliation of Net Income to Cash Flows from Operating
Activities:
Net income $12
Adjustments for noncash effects:
Gain on sale of land (8)
T21-2 (continued)
21-10 Intermediate Accounting, 8/e
CASH EQUIVALENTS
The statement of cash flows does not differentiate between
amounts held as cash and amounts held in cash equivalent
investments.
Short-term, highly liquid investments that can readily
be converted to cash with little risk of loss.
Examples of cash equivalents:
Money market funds
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flows from operating activities are both inflows and
outflows of cash that result from activities reported on the
income statement.
Income Statement Cash Flows from Operating
Activities
Revenues: Cash inflows:
Sales and service revenue Cash received from customers
T21-4
21-12 Intermediate Accounting, 8/e
CASH FLOWS FROM OPERATING ACTIVITIES
Direct Method
Cash flows from operating activities are the elements of net
income, but reported on a cash basis.
Cash flows from operating activities reported by United Brands
Corporation:
Cash flows from operating activities:
Cash inflows:
From customers $98
T21-5
CASH FLOWS FROM OPERATING ACTIVITIES
Indirect Method
By the indirect method, the net cash increase or decrease from
operating activities ($22 million in our example) would be derived
indirectly by starting with reported net income and working
backwards to convert that amount to a cash basis.
Net income $12
Adjustments for noncash effects:
Gain on sale of land (8)
T21-5 (continued)
21-14 Intermediate Accounting, 8/e
CASH FLOWS FROM INVESTING ACTIVITIES
Cash flows from investing activities are related to the
acquisition and disposition of assets, other than (a) inventory
and (b) assets classified as cash equivalents.
Included in this classification are cash payments to acquire:
Property, plant and equipment and other productive assets
[except inventories].
Cash Flows from Investing Activities:
Purchase of land $(30)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows from financing activities are both inflows and
outflows of cash resulting from the external financing of a
business.
Included in this classification are cash inflows from:
Subsequent transactions related to these financing
transactions are also classified as financing activities,
such as:
T21-7
21-16 Intermediate Accounting, 8/e
NONCASH INVESTING AND FINANCING ACTIVITIES
A statement of cash flows should report transactions that do not
increase or decrease cash, but still represent significant
investing and financing activities.
Examples are:
Acquiring an asset by incurring a debt payable to the
seller.
T21-8
INTERNATIONAL FINANCIAL REPORTING STANDARDS
Classification of Cash Flows. Both U.S. GAAP and IFRS require
a statement of cash flows that classifies cash flows into operating,
investing, or financing activities. A difference, though, is that U.S.
GAAP designates (a) interest payments and interest received as
T21-9
21-18 Intermediate Accounting, 8/e
United Brands Corporation
Comparative Balance Sheets
December 31, 2016 and 2015 ($ in millions)
Assets: 2016 2015
Cash $29 $20
Accounts receivable 32 30
Short-term investments 12 0
$267 $221
Liabilities:
Accounts payable $ 26 $ 20
Salaries payable 3 1
Shareholders' Equity:
Common stock $130 $100
T21-10
United Brands Corporation
Income Statement
For the Year Ended December 31, 2016 ($ in millions)
Revenues:
Sales revenue $100
Expenses:
Cost of goods sold $60
Net income $12
Additional information from the accounting records:
a. A portion of company land, purchased in a previous year for $10 million, was sold
for $18 million.
b. Equipment that originally cost $14 million, and which was one-half depreciated,
T21-10 (continued)
United Brands Corporation
Spreadsheet for the Statement of Cash Flows
Dec. 31 Changes Dec. 31
2015 Debits Credits 2016
Balance Sheet
Assets:
Cash 20 29
Liabilities:
Accounts payable 20 26
Salaries payable 1 3
Shareholders' Equity:
T21-11
(continued)

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