Week2 2012 Lec

74
(2) Statement of Cash Flow

75
The Statement of Financial Position
Assets
Current Assets
Operating
Noncurrent Assets
Investing
Current Liabilities
Operating
Noncurrent Liabilities
Financing
Contributed Capital
Financing
Retained Earnings
Net Income - Operating
Cash Dividends - Financing
Liabilities &
Shareholders Equity
CMA Accelerated Program 2012/2013 Lecture Student Weekly File - Week 2
1 of 28 CMA Ontario, 2012
76
Statement of Cash Flow -
Components
operations: arrives at cash ows by adjusting
net income for those items that have no effect
on cash (indirect approach)
i.e depreciation expense, gains/losses on
disposal of assets
then taking into account the changes in non-
cash current assets and liabilities
increase in current assets use cash
increase in current liabilities generate cash
77
Components (contd)
nancing activities
issuance or retirement of common shares for cash
dividends paid, not just declared
issuance or retirement of non-current liabilities for
cash
investing activities
sale or purchase of long-term assets for cash
cash ows from interest and dividends received and paid
shall be disclosed separately - each shall be classied in
a consistent manner from period to period as either
operating, investing or nancing activities (IAS1.31)
78
Statement of Cash Flow - Direct
vs. Indirect
the direct method is recommended but not
mandatory; the majority of companies still use
the indirect approach
only affects the cash ow from operations
indirect approach takes net income and adjusts
it for non cash items
direct approach considers all of the cash ow
elements in the statement of income, line by
line
79
Statement of Cash Flow - Direct Method
cash ow from operations is a usually a
minimum of four items:
cash received from customers
cash paid out to for operating expenses*
interest paid
income taxes paid
* can be broken out into separate line items
80
Cash Flow from Operations - Direct
Cash collected from customers =
Sales adjusted for the change in A/R and
Unearned Revenues
Cash paid for interest =
Interest expense adjusted for the change in
interest payable and amortization of bond
discount/premium
Cash paid for income taxes =
Income tax expense adjusted for the change
in income taxes payable
81
Cash Flow from Operations - Direct
Cash paid to suppliers = COGS adjusted for the
change in inventory (this gives you purchases)
adjusted for the change in A/P (gives you the
cash paid on purchases)
Cash paid for salaries = Salaries and wages
expense adjusted for the change in salaries and
wages payable
Cash paid for other operating expenses = other
operating expenses adjusted for the change in
other payables and/or prepaid expenses
82
Denition of Cash / Short Term Loans
cash includes cash and cash equivalents
cash equivalents are dened as short-term, highly
liquid investments that are readily convertible to
known amounts of cash and which are subject to an
insignicant risk of changes in value
equity investments are excluded from cash
equivalents
treatment of short term bank loans:
bank overdrafts may be included as a component of
cash and cash equivalents when the bank balance
uctuates frequently from being positive to
overdrawn;
otherwise, bank overdrafts and short term demand
loans are considered as cash ow from nancing
83
ASPE Differences
dividends paid are classied as a nancing
activity
interest expense, interest and dividend
revenues are classied as an operating activity
84
Statement of Cash Flow - Example 1
Given the following information, solve for cash collections
from customers:

Beginning accounts receivable $50,000
Ending accounts receivable 60,000
Sales 2,000,000
Unearned revenues - beginning 30,000
Unearned revenues - ending 35,000
85
Given the following information, solve for cash payments to
suppliers:

Beginning inventory $270,00
0
Ending Inventory 245,000
Cost of goods sold 970,000
Beginning accounts payable 165,000
Ending accounts payable 185,000
86
Given the following information, solve for proceeds from the
sale of property, plant and equipment (there were no
additions during the year)

Cost of property, plant and equipment -
Beginning $1,200,000
Ending 1,030,000
Accumulated Depreciation -
Beginning 660,000
Ending 740,000
Loss on sale of equipment 25,000
Depreciation expense 150,000
87
Given the following information, solve for interest paid:

Interest expense $170,000
Interest payable, beginning 6,700
Interest payable, ending 7,700
Problem 4 - Statement of Cash Flow

The income statement, balance sheet, and supplementary information for Milman
Company are as follows:

MILMAN COMPANY
Income Statement
year ended December 31, 20x8

Sales revenue $ 50,000
Amortization expense - patent $ 150
Depreciation expense - equipment 1,000
Cost of goods sold 28,000
Income tax expense 3,500
Interest expense 800
Loss on sale of equipment 200
Miscellaneous expenses 400
Salaries expense 9,500 43,550
Net income $ 6,450

MILMAN COMPANY
Statement of Financial Position
December 31, 20x8

20x8 20x7
Cash $ 5,400 $ 4,500
Accounts receivable 11,000 7,400
Allowance for doubtful accounts (500) (400)
Inventory 13,000 11,000
Equipment 29,000 31,650
Accumulated amortization (4,500) (5,000)
Patents 1,500 1,650
Land 16,250 10,000
$ 71,150 $ 60,800

Accounts payable $ 13,000 $ 10,000
Salaries payable 10,000 10,500
Income tax payable 7,000 5,000
Long-term bonds payable 6,500 9,000
Common shares 24,150 19,000
Retained earnings 10,500 7,300
$ 71,150 $ 60,800


Equipment which was no longer in use was sold for $950. It had originally cost
$2,650 and had accumulated amortization of $1,500.
Land was acquired for $4,250.
Shares with a fair market value of $2,000 were issued in exchange for land.
A cash dividend was paid
Long-term bonds with a face value of $2,500 were repurchased

Required

a. Prepare a statement of cash flow for the year ended December 31, 20x8 using the
indirect method.
b. Prepare the operating section of the statement of cash flow using the direct
method.

88
(3) Revenue Recognition
89
IAS 18 - Revenue Recognition
applies to:
sale of goods
rendering of services
interest, royalties and dividends
revenue is measured as the fair value of the
consideration received or receivable
if the consideration is to be received over time and
provides favorable nancing terms to the buyer, then the
cash ows are discounted and the amount of revenue is
calculated based on the discounted value
90
Sale of Goods
revenue from the sale of goods shall be recognized when
all the following conditions have been satised:
the entity has transferred to the buyer the
signicant risks and rewards of ownership of the
goods;
the entity retains neither continuing managerial
involvement to the degree usually associated with
ownership nor effective control over the goods sold;
the amount of revenue can be measured reliably;
it is probable that the economic benets associated
with the transaction will ow to the entity; and
the costs incurred or to be incurred in respect of the
transaction can be measured reliably.
91
Rendering of Services
service revenue is to be recognized on the percentage of
completion basis if the following conditions are present:
the amount of revenue can be measured reliably;
it is probable that the economic benets associated
with the transaction will ow to the entity;
the stage of completion of the transaction at the
reporting date can be measured reliably; and
the costs incurred for the transaction and the costs
to complete the transaction can be measured
reliably.
when the outcome of the transaction involving the
rendering of services cannot be estimated reliably,
revenue shall be recognized only to the extent of the
expenses recognized that are recoverable
92
Interest, royalties and dividends
the criteria for recognizing interest, royalties and dividends
are:
it is probable that the economic benets associated with
the transaction will ow to the entity; and
the amount of the revenue can be measured reliably.
the bases for recognizing revenues are:
for interest using the effective interest method,
for royalties accrual basis in accordance with the
substance of the relevant agreement, and
for dividends when the right to receive payment is
established (typically when the dividends have been
declared).
93
Bill and hold sales
transactions where delivery is delayed at the
buyers request, but the buyer takes title and
accepts billing
criteria:
it is probable that delivery will be made
the item is on hand, identied and ready for
delivery
the buyer specically acknowledges the
deferred delivery instructions, and
the usual payment terms apply
94
Franchises
franchise revenue can take on the following
forms:
initial franchise fee - accrue over time as
services are rendered (i.e. when earned)
continuing franchise fee - accrue as earned
acquisition of equipment, inventory and
supplies - accrue using general revenue
recognition principles
95
Other
insurance agent commissions: recognize at the
commencement or renewal of the policy unless
the agent has to render further services
consignment sales - recognize revenue when
the sale has been made to a 3rd party
96
Long-term construction contracts -
IAS 11
actual construction costs incurred are
accumulated in a construction-in-progress (CIP)
account - an inventory account
accounts receivable is debited and a billings
account is credited
any prot or loss realized on the contract gets
debited/credited to the CIP account
when the contract is completed, nal billings
are made to the customer, and construction in
progress should be equal to billings
the completed contract method is not
permitted
97
Application of the Percentage of
Completion method
% of completion = costs incurred to date /
total estimated project costs
total estimated project costs = costs incurred
to date + estimated costs to complete
the % of completion is applied against the total
estimated contract prot resulting in the
cumulative prot that can be accrued on the
contract
the difference between the cumulative prot
and the accumulated prot taken on the
contract to the beginning of the period = the
prot that can be taken on the contract in the
current period
98
Percentage of Completion Example
The Jerome Company is ending the rst year of a
three year project whose contracted price is
$2,500,000. A total of $600,000 has been
spent on this project to date and they expect
to incur an additional $1,400,000. A total of
$500,000 was billed in the rst year.
How much prot can be reported on this contract
in the rst year. Prepare all journal entries
relative to this contract.
99
Accounting for a contract loss
if we expect to incur a loss on the contract,
then we have to recognize the full loss in the
year the loss is rst estimated (prudence)
the % of completion is not relevant in the
period a contract loss can be estimated
prior year results are not adjusted since this
constitutes a change in accounting estimate
Problem 7 - Revenue Recognition

Broadway Company builds shopping centres. Information on a $10 million three-year
construction contract is as follows (all numbers in thousands):

20x1 20x2 20x3

Costs incurred during the year $1,000 $3,800 $3,000
Estimated costs to complete 7,000 2,700 0
Billings during the year 750 3,000 6,250
Collections during the year 675 2,700 6,500

The company uses the percentage of completion method to account for long-term
construction contracts.

Required -

(a) How much profit will be recognized on the construction contract during each of
the three years?
(b) Prepare the asset side of the balance sheet for each of the three years. Omit the
cash account.
(c) Assume that the Broadway Company is a private enterprise and is subject to
ASPE. The company has determined that the completed contract method is to be
used for this project. Prepare the journal entries for the years 20x1 through to
20x3 for this project.
(d) Assume now that the costs incurred during the year and estimated costs to
complete are as follows:
20x1 20x2 20x3
Costs incurred during the year $1,000 $4,880 $3,000
Estimated costs to complete 7,000 3,800 2,000

Calculate the profit on the contract for 20x2 and 20x3.

100
When the outcome of a construction
contract cannot be estimated reliably?
revenue shall be recognized only to the extent
of contract costs incurred that it is probable
will be recoverable; and
contract costs shall be recognized as an
expense in the period in which they are
incurred
i.e. zero prot!
101
ASPE Differences
revenues from the sale of goods and services
are to be recognized when specic performance
requirements are met provided that ultimate
collection is reasonably assured
sales of goods and services criteria are similar
except
the existence of contractual arrangements
will be a determining factor when
recognizing revenues
the completed contract method is allowed in
the determination of service and
construction contract revenues
102
ASPE Differences - contd
completed contract method:
used when performance consists of the
execution of a single act or when you cannot
reasonably estimate the extent towards
completion
all costs are accumulated in the CIP
account, billings accumulated in the billings
account until the time the contract is
complete at which time both accounts are
closed to cost of construction and revenue
on the income statement
103
ASPE Differences - contd
interest, royalties and dividends
interest revenue can be recognized using
either the effective interest method or any
systematic method of allocation, i.e.
straight-line
104
(4) Cash
105
Cash
accounting for petty cash
the bank reconciliation:
First, record any transactions that went through the
bank statement that were not recorded on the
company books;
Second, reconcile the bank statement balance to the
book balance:
Cash in Bank
- Outstanding Cheques
+ Outstanding Deposits
Bank errors
= Cash per books
Problem 8 - Cash

The following information is available for Joanne Corporation for the month of August,
20x5:

1. The balance on the bank statement as at August 31, 20x5 is $16,733.

2. The August 31, 20x5 deposit of $3,567 is not recorded on the bank statement.

3. The following cheques were written and in July and August 20x5 but have not yet
been cashed by the bank:

# 315 Rays Plumbing Service $1,211
# 367 HandiHouse 565
# 368 Hydro Canada 1,897
# 369 Receiver General for Canada 2,540
# 370 Dollco Printing 1,874

4. A customers cheque in the amount of $545 was returned by the bank NSF.

5. Bank service charges amounted to $78.

6. Cheque # 356 for office supplies was incorrectly recorded in the books of
accounts in the amount of $1,985. The correct amount (and the amount that
cleared the bank account) is $1,598.

7. The bank charged interest on the line of credit in the amount of $1,950.

8. A cheque in the amount of $876 cleared the bank account. This cheque was
written by JoAnn Corporation and was charged to our account by mistake.

9. The cash account on the companys books shows a balance of $15,275.

Required

a. Prepare all journal entries required to adjust the cash account.
b. Prepare a bank reconciliation as at August 31, 20x5.
106
(5) Accounts Receivable
107
Valuation of Accounts Receivable
Two approaches:
statement of nancial position approach: we estimate
the amount needed in the allowance for doubtful
accounts; any remainder goes to bad debt expense
income statement approach: we estimate the amount of
bad debt expense directly (usually as a % of credit
sales); any remainder goes to the allowance for doubtful
accounts
we cannot simultaneously estimate the allowance for
doubtful account and bad debt expense
108
Application of the Allowance
Method
when the allowance for doubtful accounts is adjusted,
the corresponding debit or credit is bad debt expense:
dr. Bad debt expense
cr. Allowance for doubtful accounts
when accounts are actually written off, they reduce
both accounts receivable and allowance for doubtful
accounts;
dr. Allowance for doubtful accounts
cr. Accounts receivable
109
Application of the Allowance
Method - contd
when a previously written-off account
subsequently gets recovered, we rst reverse
the entry made to write the account off:
dr. Accounts receivable
cr. Allowance for doubtful accounts
we then record the collection of the account:
dr. Cash
cr. Accounts receivable

110
Accounts Receivable - Example 1
Assume that the allowance for doubtful accounts at the end
of the year is estimated to be $35,000. Calculate the bad
debt expense for the year.

Credit Sales $2,000,000
Allowance for doubtful accounts,
beginning
$27,000 cr.
Accounts written off during the year 37,000
Account recoveries during the year 4,500
111
Accounts Receivable - Example 2
Given the following information, solve for cash collections
from customers:

Beginning accounts receivable $75,000
Ending accounts receivable 100,000
Sales 2,250,000
Accounts written off 5,000
Problem 9 Accounts Receivable

Eden Ltd. began operations on January 1, 20x3, and has a December 31 fiscal year end.
Eden Ltd. estimates that, on average, 5% of credit sales will never be collected. The
following information is available for 20x3 and 20x4:

20x4 20x3

Cash sales $ 360,000 $ 260,000
Credit sales 940,000 840,000
Total sales $1,300,000 $1,100,000

Payments received on account of credit sales $700,000 $500,000

Credit accounts written off $45,000 $20,000

Recoveries of accounts previously written off
(not included in the $700,000 payments received
on account of credit sales) $5,000 0

Required -

On its December 31, 20x4, balance sheet, what amount would Eden Ltd. report as
accounts receivable, net of allowance for uncollectible accounts?

Problem 10 Accounts Receivable

M Ltd. uses the allowance method, based on 5% of accounts receivable, for estimating its
annual allowance for uncollectible accounts. Selected balances from M Ltd.'s December
31 trial balance are as follows:

Accounts receivable $420,000 dr
Allowance for uncollectible accounts 22,000 cr
Sales 2,500,000 cr
Bad debt expense 13,500 dr

An analysis of bad debt expense as at December 31 indicates the following:

Accounts written off during the year $16,000 dr
Recovery of bad debts written off in previous years 2,500 cr
$13,500 dr

What amount of bad debt expense should M. Ltd. report for the year?
Week 2
Homework File

Suggested study plan for this week:

Primary List Secondary List

1. Review what we did in class on Saturday.

2. Statement of Cash Flow
Prepare In-Class Problem 5 Worsley Ltd. It
will be taken up in class next week (this
problem is located on the next page and is also
replicated in the Week 3 file)

MCQ, Problems 1, 2, 4 Problems 3, 5

3. Revenue Recognition
MCQ, Problems 2, 3, 4, Problems 1, 5

4. Cash
MCQ, Problems 2, 3 Problem 1

5. Accounts receivable
Problems 1, 2, 3 Problems 4, 5, 6

6. Prepare the Week 2 Quiz.

Problem 5 Statement of Cash Flow

The comparative statements of financial position and income of Worsley Ltd. are shown
below.

WORSLEY LTD.
Statement of Financial Position
as at December 31

20x3 20x2
Current assets
Cash $ 137,000 $ 116,000
Accounts receivable 371,000 364,000
Inventory 460,000 486,000
Prepaid expenses 26,000 17,000
994,000 983,000
Property, plant and equipment 2,836,000 2,445,000
Accumulated depreciation (1,121,000) (1,034,000)
1,715,000 1,411,000
$ 2,709,000 $ 2,394,000
Current liabilities
Accounts payable $ 436,000 $ 492,000
Unearned revenues 56,000 78,000
Interest payable 104,000 99,000
Income taxes payable 31,000 35,000
Dividends payable 35,000 23,000
662,000 727,000
Bonds payable 800,000 1,000,000
Mortgage payable 400,000 250,000
1,200,000 1,250,000
Shareholders equity
Common shares 500,000 100,000
Retained earnings 347,000 317,000
847,000 417,000
$ 2,709,000 $ 2,394,000

WORSLEY LTD.
Income Statement
for the year ended December 31, 20x3

Sales $ 4,971,000
Cost of goods sold (4,112,000)
Depreciation expense (155,000)
Operating expenses (471,000)
Interest expense (84,000)
Income tax expense (36,000)
Gain on repayment of bonds payable 3,000
Loss on disposal of capital assets (4,000)
Net income $ 112,000

Additional information

1. On January 10, 20x3, Worsley issued 10,000 common shares for property, plant
and equipment. The property, plant and equipment acquired had a current market
value of approximately $75,000.
2. On March 16, 20x3, Worsley sold a capital asset that cost $112,000.

Required

a. Prepare a cash flow statement for the year ending December 31, 20x3. Use the
indirect approach to report the operating activities.
b. Prepare the cash flow from operations using the direct approach.


Week2 2012 Lec

Încărcat de

Informații document

Descriere originală:

Titlu original

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

Week2 2012 Lec

Încărcat de

Drepturi de autor:

Formate disponibile

74

(2) Statement of Cash Flow

S-ar putea să vă placă și