CA 23.1 (Continued)
6. The details of changes in long-term debt should be shown separately. Payments should not be
netted against increases in long-term borrowings. The long-term borrowing of $620,000 should
CA 23.2
(a) From the information given, it appears that from an operating standpoint PANAKA Clothing Store
did not have a superb first year, having suffered an €11,000 net loss (see below). Lenny is correct;
(b) PANAKA CLOTHING STORE
Statement of Cash Flows
For the Year Ended January 31, 2019
Cash flows from operating activities
Net loss ……………………………………………………….
€ (11,000)*
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation expense …………………………...
Gain from sale of investment …………………
Net cash provided by operating activities ……..
Cash flows from investing activities
Sale of debt investment ………………………………..
120,000
Purchase of fixtures and equipment ……………..
Purchase of investment ……………………………….
Net cash used by investing activities …………….
Cash flows from financing activities
Sale of ordinary shares ………………………………..
380,000
Purchase of treasury shares …………………………
Net cash provided by financing activities ………
Supplemental disclosure of cash flow information:
Cash paid for interest …………………………………..
€ 3,000
CA 23.2 (Continued)
Significant non-cash investing and financing activities
(presented in the notes).
Issuance of note for truck ………………………………..
*Computation of net income (loss)
Sales of merchandise ………………………………………
Interest on investments …………………………………..
Total revenues………………………………………….
Merchandise purchases …………………………..………
Depreciation ……………………………………………………
Interest expense ……………………………………………..
Total expenses …………………………………………
Net loss ………………………………………………………….
CA 23.3
1. The loss of $110,000 should be added back to the net income of $700,000 as an adjustment to
.
2. The $315,000 depreciation expense is neither a source nor a use of cash. Because depreciation is
an expense, it was deducted in the computation of net income. Accordingly, the $315,000 must be
3. The writeoff of uncollectible accounts receivable against the allowance account has no effect on
cash because the net accounts receivable remain unchanged. An adjustment to income is only
necessary if the net receivable amount increases or decreases. Because the net receivable amount
4. The $6,000 gain realized on the sale of the machine is deducted from net income as an
CA 23.3 (Continued)
5. In this case, no cash flow resulted from the lightning damage. The net loss (a non-cash event) must
be added back to net income (under the indirect method) as one of the adjustments to reconcile
net income to net cash flow provided by operating activities.
CA 23.4
Where to Present
How to Present
1.
Investing and operating
Cash provided by sale of fixed assets, R4,750 as an investing
activity. In addition, the loss of R2,250 [(R20,000 x 31/2) ÷ 10] –
R4,750 on the sale would be added back to net income.
2.
Operating
The impairment reduced earnings from operations but did not use
cash. The amount of R15,000 is added back to net income.
3.
Financing
Cash provided by the issuance of ordinary shares for R16,000.
5.
Not reported in statement.
6.
Investing and operating
Cash provided by the sale of the investment, R10,600 as an
investing activity. The loss of R1,400 is added back to net income.
R24,240 (R24,000 x 1.01). Additionally, the gain of R1,760 =
[(R24,000 + R2,000) – R24,240] is deducted from net income in
the operating activities section as an adjustment.
CA 23.5
(a) The primary purpose of the statement of cash flows is to provide information concerning the cash
receipts and cash payments of a company during a period. The information contained in the
statement of cash flows, together with related disclosures in other financial statements, may help
investors and creditors:
1. assess the company’s ability to generate future net cash inflows.
CA 23.5 (Continued)
(b) The statement of cash flows classifies cash inflows and outflows as those resulting from operating
activities, investing activities, and financing activities.
Cash inflows from operating activities include receipts from the sale of goods and services,
receipts from returns on loans and equity securities (interest and dividends), and all other receipts
(c) Cash flows from operating activities may be presented using the direct method or the indirect
method. Under the direct method, the major classes of operating cash receipts and cash payments
are shown separately. The indirect method involves adjusting net income to net cash flow from
operating activities by removing the effects of deferrals of past cash receipts and payments,
accruals of future cash receipts and payments, and non-cash items from net income.
CA 23.6
(a) It is true that selling current assets, such as receivables and notes to factors, will generate cash flows
for the company, but this practice does not cure the systemic cash problems for the organization.
In short, it may be a bad business practice to liquidate assets, incurring expenses and losses, in
order to “window dress” the cash flow statement.
The ethical implications are that Brockman creates a short-term cash flow at the longer-term
expense of the company’s operations and financial position. Barbara’s idea creates the deceiving
illusion that the company is successfully generating positive cash flows.
(b) Barbara Brockman should be told that if she executes her plan, the company may not survive.
While the factoring of receivables and the liquidation of inventory will indeed generate cash, the
FINANCIAL REPORTING PROBLEM
(a) M&S uses the indirect method to compute and report net cash provided
by operating activities. The amounts of net cash provided by operating
(b) The most significant item in the investing activities section is the
(c) M&S does not report deferred income taxes on its statement of cash
flows. It does report income tax expense as an add-back to net income
COMPARATIVE ANALYSIS CASE
(a) Both Puma and adidas use the indirect method of computing and
reporting net cash provided by operating activities.
(b) The most significant investing activities items in 2015:
Puma
Purchase of property and equipment €79.0 million
(c) Puma decreased net cash from operating activities from a positive
€126.4 million in 2014 to a negative €37.1 million in 2015, a decrease of
(d) Both Puma and adidas report depreciation and amortization in the
operating activities section:
COMPARATIVE ANALYSIS CASE (Continued)
(e)
Puma
adidas
1.
Current cash
€-37.1
Cash debt
€1,090
(f) The current cash debt coverage uses cash generated from operations
during the period and provides a better representation of liquidity on
an average day. adidas ratio of €.22 of cash flow from operations for
FINANCIAL STATEMENT ANALYSIS CASE
(a) Telefónica uses the direct method to prepare the operating cash flow
section of its statement of cash flows. Telefónica reports cash
(b) Adjustments that would explain the difference between net income
and operating cash flow include non-cash expenses (depreciation and
(c) Telefónica reports interest received (paid), taxes paid, and dividends
received as operating activities. It shows under investing activities
payments made on various investments and proceeds from
disposals, and dividends paid as a financing activity. IFRS allows
ACCOUNTING, ANALYSIS, AND PRINCIPLES
ACCOUNTING
LASKOWSKI AG
Statement of Cash Flows—Indirect Method
For the Year Ended December 31, 2019
Cash flows from operating activities
Net income …………………………………………………… € 430,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense ……………………………….. € 880,000
Cash flows from investing activities
Sale of machinery …………………………………………. 270,000
Purchase of machinery………………………………….. (750,000)
Net cash used by investing activities ……………… (480,000)
ANALYSIS
Laskowski’s free cash flow is:
Net cash provided by operating activities …… €1,222,000
ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued)
Laskowski’s free cash flow for the current year (€272,000) is less than the
amount needed for expansion next year (€500,000). Thus, assuming
PRINCIPLES
According to IAS 7, “Information about the cash flows of an entity is useful
in providing users of financial statements with a basis to assess the ability
of the entity to generate cash and cash equivalents and the needs of the
RESEARCH CASE
(a) According to IAS 7, “Information about the cash flows of an entity is
useful in providing users of financial statements with a basis to
assess the ability of the entity to generate cash and cash equivalents
and the needs of the entity to utilise those cash flows. The economic
(b) According to paragraph 10, “The statement of cash flows shall report
cash flows during the period classified by operating, investing and
financing activities.” Further, paragraph 11 states “An entity presents
(c) According to paragraph 14, “Cash flows from operating activities are
primarily derived from the principal revenue-producing activities of
the entity. Therefore, they generally result from the transactions and
other events that enter into the determination of profit or loss. Examples
of cash flows from operating activities are:
(a) cash receipts from the sale of goods and the rendering of
RESEARCH CASE (Continued)
(e) cash receipts and cash payments of an insurance entity for
premiums and claims, annuities and other policy benefits;
GAAP CONCEPTS AND APPLICATION
23.1. As in U.S. GAAP, the statement of cash flows is a required statement
for IFRS. In addition, the content and presentation of an IFRS
statement of cash flows is similar to one used for U.S. GAAP.
However, the disclosure requirements related to the statement of cash
flows are more extensive under U.S. GAAP.
Other similarities include: (1) Companies preparing financial
statements under IFRS must prepare a statement of cash flows as
an integral part; (2) Both IFRS and U.S. GAAP require that the
Notable differences are (1) The definition of cash equivalents used in
IFRS is similar to that used in U.S. 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 U.S. GAAP).
Under U.S. GAAP, bank overdrafts are classified as financing
23.2. The following table relates to the classification of interest, dividends,
and taxes and indicates relative degree of choice inherent under
GAAP CONCEPTS AND APPLICATION (Continued)
Item
U.S. GAAP
IFRS
Interest paid
Operating
Operating or financing
Interest received
Operating
Operating or investing
Dividends paid
Financing
Operating or financing
Dividends received
Operating
Operating or investing
23.3. Presently, the FASB and the IASB are involved in a joint project on
the presentation and organization of information in the financial
23.4. VERMONT TEDDY BEAR CO.
(a) Vermont’s statement of cash flows has the same 3 categories
(operating, investing, and financing) as an IFRS statement does. IFRS
GAAP CONCEPTS AND APPLICATION (Continued)
(b) Even though prior year income exceeded the current year income by
$821,432 ($838,955 – $17,523), the current year cash flow from opera-
tions exceeded prior year’s cash flow from operations by $937,437
($236,480 + $700,957). This apparent paradox can be explained by
evaluating the components of cash from operating activities. Significant
contributors to the positive cash flow figure in the current year were
(c) Liquidity: current cash debt coverage (net cash provided by operating
activities ÷ average current liabilities).
All of these ratios are very low. This is not surprising, however, for a
company like the Vermont Teddy Bear Company that is still in a growth
stage. When a company is in growth phase of its main product, it will
LO: 6, Bloom: AP, Difficulty: Simple, Time: 10-15, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving