Stice18e PPT Ch21 Student

8/18/2019 Stice18e PPT Ch21 Student

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Intermediate

AccountingJames D. Stice Earl K. Stice

© 2012 Cengage Learning

PowerPoint presented by Douglas Cloud

Proessor Emeritus o Accounting! Pe""erdine

#ni$ersit%

Statement oCas& 'lo(s)e$isited

C&a"ter 21C&a"ter 21

1*t& Edition


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• If we do not have access to detailed cashflow information, the preparation of astatement of cash flows involves analyzing

the income statement and comparativebalance sheets to determine how abusiness generated and used cash.

• A company’s cash inflow and outflow canbe determined through a careful analysis ofeach account contained in thesestatements.

+continued,

Pre"aring a Statement o Cas& 'lo(s int&e Asence o Detailed ransaction Data


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Accounts )ecei$aleAccounts )ecei$ale

To demonstrate two approaches for

gathering information for a statement ofcash flows when we do not have readyaccess to detailed cash inflow and outflowinformation, we will use Western eserve’s

accounts receivable from Exhibit 21-2 !withthe ad"ustments covered#.

+continued,



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$ow do we e%plain the change in accountsreceivable from &'(,)(( to &*',(((+

+continued,

Pre"aring a Statement o Cas& 'lo(s in t&eAsence o Detailed ransaction Data


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We see from Item !# that sales on account totaled&*--,-((. When sales is credited, the normal debit is to

Accounts eceivable. et’s plug this into the wor/ sheet.

+continued,



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Accounts )ecei$ale3 450!00 +dr., 6 4**!*00 7 8 9 45!000

We solve the e0uation to find the missingamount, which is &*12,3((.

4ow we can determine the missing amount.



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When accounts receivable is credited, we canassume that cash is debited. 5%amine entry !2#in Exhibit 21-2 . This is how we arrive at thedebit to cash when the information is not given.



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A Second A""roac&A Second A""roac&

6eginning accounts receivable !initial amount owed to Western esources# & '(,)((

7 8ales during the year !&*--,-(( 7 &*),(((# ')3,-((

9 Total amount owed to Western esources by customers &-2:,3((

; 5nding accounts receivable !amount not yet collected# *',(((

9


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Western esources’ buildings and e0uipmentaccount increased from &3:),((( to &:22,(((. Anotes to the financial statement reveal that abuilding with a cost of &:(,((( and accumulated

depreciation of &2*,((( was sold during 2(3 for&(,(((. The wor/sheet line for building ande0uipment is shown below.

&3:),((( 7 + ; &:(,((( 9 &:22,(((

4115!000


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.


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2.


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3. Analyze the long=term assets to identify thecash flow effects of investing activities. Alsoe%amine certain investment securitiesaccounts.

+continued,

-Ste" Process or Pre"aring aStatement o Cas& 'lo(s


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:. Analyze the long=term debt andstoc/holders’ e0uity accounts todetermine the cash flow effects of anyfinancing transactions. Also e%aminechanges in short=term loan accounts.

+continued,



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). >a/e sure that the total net cash flowfrom operating, investing, and financingactivities is e0ual to the net increase ordecrease in cash as computed in step .Then prepare a formal statement of cashflows by classifying all cash inflows andoutflows according to operating, investing,

and financing activities.

+continued,



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*. ?repare supplemental disclosure,including the disclosure of any significantinvesting or financing transactions that didnot involve cash.



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8tep @


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8tep 2@


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#ains and losses (adjustments $1 and $2!"8ubtract the amount of gains and add theamount of losses because they are included inthe computation of net income. Bailure to ad"ust

for them here would result in counting themtwice.

Add@ oss on sale of building & :,(((ess@ Cain on sale of long=term

investment &!*,)((#

+continued,

An Illustration o t&e-Ste" Process


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ccounts recei%able (adjustment C1!" Theaccounts receivable account decreasedbecause customers paid for more than theypurchased this year. Thus, Western esources’

e%ceeded sales by &3,)((, which e%plains whythe accounts receivable account decreased by&3,)((.

Add@ ecrease in Accounts eceivable &3,)((

!continues#



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&nearned sales re%enue (adjustment C2!"The unearned sales revenue account increasedby &',((( !from &2),((( to &32,(((#,representing cash received from customers in

2(3 that won’t be reflected in sales andincluded in the computation of net income untilthe subse0uent year.

Add@ Increase in Dnearned 8alesevenue &',(((

+continued,



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'n%entory (adjustment C!" The statement ofcash flows should reflect the amount of cashpaid for inventory during the year, which is notnecessarily the same as the cost of inventory

sold. Western esources’ inventorydecreased from &'*,)(( to &'),((( during2(3, indicating that the amount of inventorypurchased during 2(3 was less than theamount of inventory sold.

Add@ ecrease in Inventory &,)((

+continued,



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ccounts payable (adjustment C)!" Westernesources paid for more than it bought from itssuppliers during the year. The ad"ustmentnecessary to reflect this additional cash outflow

is to subtract &*,'(( in computing cash fromoperations.

8ubtract@ ecrease in Accounts?ayable &!*,'((#

+continued,



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Prepaid operating expenses (adjustmentC*!" ?repaid operating e%penses increasedfrom &2,((( to &*,)(( during 2(3. ?repaide%penses are increased when a company pays

cash in advance for a service that it will uselater.

8ubtract@ Increase in ?repaid Eperating5%penses &!:,)((#

+continued,



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+estructuring charge (adjustment C,!" Arestructuring charge is an accounting estimateof the decrease in value of some assets and thecreation of future obligations as a result of the

decision to restructure part of the business.Western esources’ restructuring charge of&,'(( is still unpaid as of the end of the year.

Add@ Increase in Ebligation for 5mployee8everance &,'((

+continues,



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'nterest expense" 6ecause an interest payableaccount does not e%ist on the Westernesources’ balance sheet, we can safelyassume that all interest e%pense was paid for in

cash. Therefore, there is no need for anad"ustment for interest e%pense.

+continues,


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+continued,

'ncome tax expense (adjustments C andC.!" The amount of income ta% e%pensereported in the financial statements is not thesame as the amount of income ta% that is

owed to the ta%ing authorities for the year.

In 2(3 the deferred income ta% liability forWestern esources increased by &2,'((,

indicating that some of the &2:,((( income ta%e%pense reported won’t actually be payableuntil some future year.



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• This means that the income ta%es owed for2(3 operations are "ust &2,3((!&2:,((( ; &2,'((#.

• The effect of the increase in the deferredincome ta% liability is to reduce the amount ofcash paid for income ta%es this yearF this isshown in adjustment C. .

• Western esources balance sheet indicatesthat income ta% payable decreased by &2,2((during the year !see adjustment C #.



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&e Indirect and Direct ;et&ods

• The indirect method begins with net incomeas reported in the income statement and thendetails the ad"ustments needed to arrive atcash flow from operations.

• The direct method involves simply reportingthe information contained in the last column ofthe ad"usted wor/ sheet.

+continued,

Ill t ti t&


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Illustration o t&e -Ste" Process

The long=term investments account was reducedby &1*,((( !&(*,((( ; &(,(((# during the year.

8ince no long=term investments were purchased,the entire &1*,((( reduction represents the boo/value of the long=term investments sold duringthe year.

!continues#

ong=Term Investmentsong=Term Investments

Ill t ti t&


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6oo/ value of long=term investments sold & 1*,(((?lus@ Cain on sales *,)((


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The land account increased by &(-,)((!&-3,)(( ; &'),(((# during the year. 6ecause

there is no indication of land sales during theyear, we conclude that the &(-,)(( representsthe price of new land purchased during the year.8upplemental information tells us that payment

was a combination of &*-,)(( cash andcommon stoc/ valued at &:(,(((.

+continued,


andand

Ill t ti t&


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Increase in land account &(-,)(( ess@ ?ayment with common stoc/ !:(,(((#


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The balance in buildings and e0uipment accountincreased by &'',((( !&:22,((( ; &3:),(((#

during 2(3. A building costing &:(,((( was soldfor &(,((( during the year. With this data wecan ma/e the following computation@

+continued,


6uilding and 50uipment6uilding and 50uipment

6eginning balance &3:),(((


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A useful way to summarize all purchase and saleinformation for buildings and e0uipment is toreconstruct the T=accounts for the buildings ande0uipment account and the associated

accumulated depreciation account.

+continued,


Purc&ased uildings and e


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With this information, we can compute whetherthe sale of buildings and e0uipment resulted in again or in a loss as follows@


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The patents account began the year with a&:(,((( balance and ended with a &3),(((balance. The data indicate that no new patentswere purchased during the year. $owever,

amortization was applied to the patent as shownbelow@

6eginning ?atents &:(,((( ; ?atent amortization recognized during year

!),(((#7 4ew patents purchased +++ 5nding ?atents &3),(((


&:(,(((!),(((#

0&3),(((

Illustration o t&e


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• Although investment securities are now alwayslong=term assets, their purchase and sale aresometimes reported as investing activities.

•8pecifically, purchases and sales of available=for=sale and held=to=maturity securities arereported as part of investing activities whereaspurchases and sales of trading securities are

usually part of operating activities.• The balance in the available=for=sale securities

increased by &2,(((.


+continued,

Illustration o t&e


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8tep :@ Analyze the long=term debt andstoc/holders’ e0uity accounts to identify thecash flow effects of financing transactions


Western esources balance in long=term debtincreased by &2(,((( !&2(,((( ; (# during theyear. Accordingly, we infer that the companyborrowed an additional &2(,((( during 2(3, a

a cash provided by financing activity.

+continued,

Illustration o t&e


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• The common stoc/ account increased&)(,((( !&3((,((( ; &2)(,(((# during theyear. We learned earlier that &:(,((( of thisincrease arose from the e%change of common

stoc/ for land.

• The actual cash generated by issuance ofnew shares during the year is "ust &(,(((.

This cash inflow is report as part of cash fromfinancing activities.

+continued,

Illustration o t&e


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• The treasury stoc/ account increased by&3,2(( !&)1,'(( ; &)*,)((# during the year.Thus, the company should report a cashoutflow of &3,2(( from treasury stoc/

purchases in the Binancing Activities section.

• The retained earnings account increases fromthe recognition of net income, decreases as a

result of net losses, and decreases throughthe payment of dividends.

+continued,

Illustration o t&e


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+continued,


• It is possible to infer the amount of dividendsdeclared by identifying the une%plainedchange in the retained earnings balance. et’srecreate the retained earnings T=account as

follows@

Illustration o t&e


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The increase in Western esources’ dividendspayable account indicates that not all of the&2),(( in dividends declared were paid in cashduring the year. We can see this in the following

calculation@ividends declared &2),((ess@ Increase in dividends payable :,:((


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8tep )@ ?repare a formal statement ofcash flows


+continued,

Illustration o t&e


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8tep *@ ?repare supplemental disclosures

.


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econciliation 8cheduleeconciliation 8chedule

• When the direct method is used, a scheduleshould be included that reconciles net

income to cash from operations.

• The schedule is the same as the Eperating Activities section prepared using the indirect

method.


+continued,

Illustration o t&e -


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4oncash Investing and Binancing Activities4oncash Investing and Binancing Activities

• When a company has a significant noncashtransaction, such as purchasing property,

plant, and e0uipment by issuing debt or ine%change for shares of stoc/, thesetransactions must be disclosed in the notesto the financial statements.

• Western esources e%changed commonstoc/ for land valued at &:(,(((.



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International Cas& 'lo( Statements

• The ma"ority of the BA86 decided in pre=codification /0/ o" * that since interestand dividends received are included in thecomputation of net income, they should be

classified as operating activities.• In '/ , the IA86 allowed companies to

classify interest and dividends received eitheras operating or investing activities.

• The ma"ority of the BA86 members ruled thatinterest paid should be treated as anoperating activity.

+continued,


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• '/

allows dividends paid to be classifiedas either a financing activity !as in the D.8.#or as an operating activity.

• According to '/ , the amount of incometa%es paid should be reported as anoperating activity unless the income ta%escan be specifically identified with a financingor investing activity.

+continued,


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• The D.G. Accounting 8tandards 6oardrevised its standards concerning thestatement of cash flows in the revisedversion of 0+/ 1.

• The revised version specifies eight differentcategories for classifying cash flowtransactions and represents the mostinnovate and, probably, the most usefulstandard for cash flow reporting currently ine%istence in the world.

+continued,


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. Eperating activities2. eturns on investments and servicing of

finance3. Ta%ation:.


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Kamila Sot(are Illustration

Gamila 8oftware develops, produces, andsells software. The company head0uarters islocated in ?anaca, 4evada.

+continued,


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. In 2(3, Gamila 8oftware’s accounts receivablebalance includes amounts related to bothregular software sales and consulting pro"ects.


+continued,


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2. Ever the past three years, Gamila’s systemsconsultants have wor/ed on a total of ninepro"ects !designated A through I#. The total

contract prices, and the amount of revenuerecognized in each year with respect to thesepro"ects are given on /lide 21-* .


+continued,


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+continued,


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3. 6oth of Gamila’s buildings are leased. 6othleases were signed on Hanuary , 2((. Thefactory is leased under a capital lease

arrangementF the office building is leased underan operating lease arrangement. The officebuilding lease payments are &(( per year.Dnder the office building lease contract, Gamila

can elect to defer an annual payment for oneyear in e%change for a 2( payment surcharge.The factory lease payment is &3( per year.

+continued,


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Stice18e PPT Ch21 Student

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