COPYRIGHT © 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. Statement of Cash Flows Re-visited Chapter 21 S t I c e | S t I c e | S k o u s e n Intermediate Accounting 16E Prepared by: Sarita Sheth | Santa Monica College

Learning Objectives 1.Prepare a complete statement of cash flows, and provide the required supplemental disclosures. 2.Understand the differences among cash flow statements prepared according to U.S. GAAP, U.K. GAAP, and IASB standards. 3.Incorporate material from the entire text into the preparation of a statement of cash flows. 4.Perform a detailed case analysis of a company’s operations and performance using cash flow data.

Preparing a Complete Statement of Cash Flows Insert Exhibit 21-3 here. You will need to refer to pages 1222 and Exhibit 21-3 in your text for this chapter’s presentation.

Absence of Transaction Data Sometimes, detailed cash flow information, we can create the statement by analyzing the income statement and balance sheet. We must infer the cash flow effects of the various transactions during the business period.

A 6-Step Process 1.Compute how much the cash balance changed during the year. 2.Convert the income statement from an accrual-basis to a cash-basis summary of operations. a.Eliminate expenses that do not involve the outflow of cash, such as depreciation expense. b.Eliminate gains and losses associated with investing or financing activities to avoid counting these items twice. c.Adjust for changes in the balances of current operating assets and operating liabilities- these are cases where cash flow does not match revenue or expenses reported.

A 6-Step Process 3.Analyze the long-term assets to identify the cash flow effects of investing activities. Also examine investment securities accounts. 4.Analyze the long-term debt and stockholders’ equity accounts to determine the cash flow effects of any financing transactions. Also analyze the short-term loan accounts. 5.Make sure that the total net cash flow is equal to the net increase or decrease in cash as computed in step 1. Prepare the formal statement of cash flows by classifying all cash inflows and outflows by their activity class. 6.Prepare supplemental disclosure, including the disclosure of any significant investing or financing transactions.

International Cash Flow Statements The primary differences in cash flow reporting around the world relate to interest and income tax payments. International Accounting Standard 7 (IAS 7) opted to allow more company discretion in deciding how to classify items like interest and dividends paid and received. Within the FASB there was great debate about how these items should be classified. The final version of SFAS No. 95 says that they must be classified as operating activities.

International Cash Flow Statements Interest and dividends received: IAS 7 allows companies to classify them as either operating or investing activities. Interest paid: IAS 7 classifies it as either an operating activity or a financing activity; but it must be applied consistently. Dividends paid: IAS 7 allows classification as either a financing activity or as an operating activity. Income Taxes: IAS 7 allows classification as either operating activity unless the income taxes can be identified with a financing or investing activity.

Cash Flow Analysis Analysis of cash flow data can add insight into the performance of a company, beyond what we can see from the income statement and balance sheet. When a company has a strong incentive to favorably bias its accrual assumptions to make it look good on paper, cash flow data can provide a reality check on the performance of the company. Make sure you go through the analysis in the case of Kamila Software to see these techniques at work.