2. 5 Financial Position and Cash Flows
After studying this chapter, you should be able to:
Understand the statement of financial position and statement of cash flows from a business perspective.
Identify the uses and limitations of a statement of financial position.
Identify the major classifications of a statement of financial position.
Prepare a classified statement of financial position.
Identify statement of financial position information that requires supplemental disclosure.
Identify major disclosure techniques for the statement of financial position.
Indicate the purpose and identify the content of the statement of cash flows.
Prepare a statement of cash flows using the indirect method.
Understand the usefulness of the statement of cash flows.
Identify differences in accounting between ASPE and IFRS.
Identify the significant changes planned by the IASB regarding financial statement presentation.

3. Financial Position and Cash Flows
Usefulness from a Business Perspective
Analyzing a statement of financial position
Assessing earnings quality
Assessing the creditworthiness of companies
Statement of Financial Position
Usefulness
Limitations
Classification
Preparation
Additional information reported
Techniques of disclosure
Statement of Cash Flows
Purpose, content, and format
Preparation
Usefulness
Perspectives
IFRS / ASPE Comparison
A comparison of IFRS and ASPE
Looking ahead

4. Business Perspective
Statement of financial position (SFP) and the statement of cash flows can be used to assess:
Financial flexibility and risk of business failure
Earnings quality
Creditworthiness
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5. Statement of Financial Position: Usefulness
Statement of Financial Position (SFP) also known as the balance sheet
SFP provides information:
for evaluating the capital structure and
for computing rates of return on invested assets
It is also useful for assessing an enterprise’s:
Liquidity (time until asset is realized or liability has to be paid)
Solvency (ability to pay debts and related interest)
Financial flexibility (ability to respond to unexpected needs and opportunities)
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6. Statement of Financial Position: Limitations
Many assets and liabilities are stated at historical cost
Information presented is reliable, however
Reporting at current fair value would result in more relevant information
2. Judgement and estimates are used in determining many of the items reported on the SFP
Many “soft” numbers (estimates) are included which may be uncertain
3. SFP does not report items that cannot be recorded objectively (e.g. internally generated goodwill)
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7. Statement of Financial Position: Classification
Similar items are grouped together, with sub-total
Items with different characteristics are separated
Individual SFP items should be:
Reported separately, and in
Sufficient detail in order to:
Allow users to assess amounts, timing, and uncertainty of future cash flows
Allow users to evaluate liquidity, financial flexibility, profitability, and risk
Helps to calculate important ratios (e.g. current ratio to assess liquidity)
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8. Statement of Financial Position: Classification
Considerations for reporting items separately:
Assets that differ in their type or expected function (e.g. inventory vs. capital assets)
2. Liabilities with different implications for the entity’s financial flexibility (e.g. long term debt vs. current debt)
3. Assets and liabilities with different general liquidity characteristics (e.g. cash vs. receivables)
4. Assets, liabilities, and equities with characteristics that allow for easy measurement or valuation
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9. Statement of Financial Position: Classification
Current liabilities
Long-term debt
Shareholders’ equity
Capital shares
Contributed surplus
Retained earnings
Accumulated other comprehensive income / other surplus
Current assets
Long-term investments
Property, plant, and equipment
Intangible assets
Other assets
Liabilities and Equity
Assets
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10. Current Assets
Current assets are cash and other assets expected to be realized:
within one year from the balance sheet date or
within the normal operating cycle, whichever is longer
Generally presented in order of liquidity (normally: cash, short-term investments, receivables, inventory, and prepaid expense)
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11. Current Assets–Cash
Often includes cash and cash equivalents
Defined as:
Cash, demand deposits, short-term liquid investments convertible to a known cash amount, and not subject to material value changes
Any known restrictions to cash must be disclosed
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12. Current Assets– Short-Term Investments
Investments in debt and equity securities are presented separately from other assets
Valued at cost/amortized cost or fair value
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13. Current Assets–Receivables
Amounts should be reported separately based on the nature of their origin:
Ordinary trade accounts
Amounts owing by related parties
Other (substantial) unusual items
Separate disclosure required for:
Amount and nature of nontrade receivables
Receivables pledged as collateral
Accounts receivable valued at net realizable value
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14. Current Assets–Inventories
Valued at lower of cost and net realizable value
Cost flow assumption method (e.g. FIFO, weighted average, specific item) must be disclosed
Manufacturing enterprise will disclose completion stage of inventories:
Raw materials
Work in progress
Finished goods
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15. Current Assets– Prepaid Expenses
Defined as: expenditures already made for benefits to be received within one year or the operating cycle (whichever is longer)
Most common examples include:
Insurance
Rent
Advertising
Supplies
Current practice is to report some prepaid amounts where the benefit extends beyond one year (or operating cycle)
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16. Noncurrent Investments
Noncurrent investments normally consist of one of the following:
Debt securities
Equity securities
Sinking funds, tangible assets held as investments, other
Investments are intended to be held for an extended period of time
Valuation options are:
Fair value
Amortized cost
Equity Method
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17. Property, Plant, and Equipment
Physical (tangible) assets used in on-going business operations of the business to generate income
Generally reported at cost or amortized cost
IFRS allows for valuation at fair value
Most assets are depreciable, except for land
Written down when impaired
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18. Intangible Assets
Capital assets without physical substance, held to generate revenue
Higher degree of uncertainty regarding future benefits
Include (most common):
patents
copyrights
franchises
goodwill
trademarks, and trade names
Intangibles are grouped into two categories:
Those with finite life – amortized over useful life
Those with indefinite life – not amortized
Both are tested for impairment
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19. Other Assets Some of the items included are:
Assets in special funds
Non-current receivables
Future income taxes
Property held for sale
Advances to subsidiaries
Sufficient information to be disclosed to inform users of the nature of the asset
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20. Current Liabilities
Obligations due within one year (from balance sheet date) or within the operating cycle, whichever is longer
Examples of current liabilities include:
Payables resulting from acquisitions of goods and services
Collections received in advance of delivery of goods or performance of services
Other liabilities to be paid in the short term
Short-term financing payable on demand (e.g. line of credit)
Accounts payable normally listed first; however, current liabilities not reported in any specific order
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21. Working Capital = –
Working Capital
Current Liabilities
Current Assets
A key indicator of the company’s short-term liquidity
Not usually disclosed on the SFP
Often calculated by bankers and other creditors
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22. Long-Term Liabilities
Long-term obligations are those not expected to be paid within the normal operating cycle
Three types:
Obligations arising from specific financing situations (e.g. bonds)
Obligations from ordinary operations of the enterprise (e.g. pension obligations)
Obligations arising from ordinary business operations that are contingent on future events (e.g. product warranty)
SFP presentation requires reporting the portion due within the next year as a current liability
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23. Shareholders’ Equity Capital Shares Contributed Surplus
Exchange value of issued shares
Disclose authorized, issued, and outstanding amounts
Contributed Surplus
Usually reported as one amount
Includes issued share premiums
Retained Earnings
The amount of undistributed earnings
Presented as one item
Accumulated Other Comprehensive Income
Includes unrealized gains and losses on available-for-sale securities, certain types of donations etc.
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24. Additional Information Reported
Additional information reported on the SFP may include:
Information not presented elsewhere, or
Information that qualifies items in the SFP
Five main types of additional information
Contingencies
Accounting policies
Contractual situations
Additional detail
Subsequent events
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25. Techniques of Disclosure
Parenthetical explanations (following the items in the SFP)
Notes (to the SFP)
Cross references and contra items (where assets and liabilities may be cross referenced)
Supporting schedules (as for capital assets’ depreciation)
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26. Statement of Cash Flows
To assess the firm’s ability to generate cash and cash equivalents and
To allow comparison of cash flows between different entities
Statement of Cash Flows shows:
Where the cash came from
What the cash was used for
The change in the cash balance
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27. Statement of Cash Flows
Cash activities are divided into three main categories:
Operating Activities
Main revenue-producing activities
Investing Activities
Changes in long-term assets and investments
Financing Activities
Changes in equity and borrowings
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28. Cash Inflows and Outflows
Operating Activities
When operating cash receipts > cash expenditures
Investing Activities
Sale of property, plant, and equipment
Sale of debt or equity securities of other entities
Collection of loans to other entities
Financing Activities
Issuance of equity securities
Issuance of debt (bonds and notes)
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Cash Pool
Cash Inflows

29. Cash Inflows and Outflows
Cash Outflows
Cash Pool
Operating Activities
When operating cash expenditures > cash receipts
Investing Activities
Purchase of property, plant, and equipment
Purchase of debt or equity securities of other entities
Loans to other entities
Financing Activities
Payment of dividends
Redemption of debt
Reacquisition of capital stock
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30. Statement of Cash Flows Presentation
Presentation methods
Direct method: includes specific cash inflows/outflows (e.g. cash received from customers, cash paid to suppliers and employees, interest paid/received, taxes paid, etc.)
Indirect method: begins with net income and reconciles to cash (e.g. adds back non-cash charges deducted from net income, such as depreciation)
Both methods are acceptable, but direct method is preferred
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31. Usefulness of the Statement of Cash Flows
Cash is a “company’s lifeblood”
Provides creditors with useful information about a company, such as:
Company’s ability to generate net cash from operating activities
Net cash flow trends or patterns from operating activities
Major reasons for positive or negative net cash from operating activities
Whether the cash flows are renewable or sustainable
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32. Usefulness of the Statement of Cash Flows
Provides insight into the following areas:
Financial Liquidity
Current Cash Debt Coverage Ratio =
Net Cash Provided by Operating Activities Average Current Liabilities
Financial Flexibility
Cash Debt Coverage Ratio =
Net Cash Provided by Operating Activities Average Total Liabilities
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33. Usefulness of the Statement of Cash Flows
Cash Flow Patterns
There may be useful patterns identified of cash inflows and outflows from operating, investing and financing activities
Free Cash Flow
Calculated as net cash from operations less capital expenditures and dividends
Indicates discretionary cash flow (cash left to invest or expand) to make additional investments, to retire its debt, or to add to its liquidity
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34. Looking Ahead
IASB and FASB are preparing a converged standard on “Financial Statement Presentation”
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35. COPYRIGHT
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