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CHAPTER 5

Statement of Financial Position and


Statement of Cash Flows
LEARNING OBJECTIVES
1.
2.
3.
4.
5.
6.
7.
8.
9.
*10.

Explain the uses and limitations of a statement of financial position.


Identify the major classifications of the statement of financial position.
Prepare a classified statement of financial position using the report and account formats.
Indicate the purpose of the statement of cash flows.
Identify the content of the statement of cash flows.
Prepare a basic statement of cash flows.
Understand the usefulness of the statement of cash flows.
Determine additional information requiring note disclosure.
Describe the major disclosure techniques for financial statements.
Identify the major types of financial ratios and what they measure.

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CHAPTER REVIEW
*Note:All asterisked (*) items relate to material contained in the Appendix to the chapter.
1. Chapter 5 presents a detailed discussion of the concepts and techniques that underlie the
preparation and analysis of the statement of financial position. Along with the mechanics
of preparation, acceptable disclosure requirements are examined and illustrated. A brief
introduction to the statement of cash flows is also presented. This explanation serves as a
foundation for the more comprehensive discussion of this subject presented in Chapter 23.
At the end of Chapter 5, a multi-page illustration of the financial statements and
accompanying notes of a corporation is presented. This illustration may be referred to
throughout your study of intermediate accounting as it includes information relevant to
many of the topics discussed in subsequent chapters.
Statement of Financial Position
2. (L.O. 1)For many years financial statement users generally considered the income
statement to be superior to the statement of financial position as a basis for judging the
economic well-being of an enterprise. However, the statement of financial position can be a
very useful financial statement. If a statement of financial position is examined carefully, users
can gain a considerable amount of information related to liquidity, solvency, and financial
flexibility. Liquidity is generally related to the amount of time that is expected to elapse
until an asset is realized or otherwise converted into cash or until a liability has to be paid.
Solvency refers to the ability of an enterprise to pay its debts as they mature. Financial
flexibility is the ability of an enterprise to take effective action to alter the amounts and
timing of cash flow so that it can respond to unexpected needs and opportunities.
3. Criticism of the statement of financial position has revolved around the limitations of the
information presented therein. These limitations include: (a) failure to reflect current value
information, (b) the extensive use of estimates, and (c) failure to include items of financial
value that cannot be recorded objectively.
4. The problem with current value information concerns the reliability of such information.
The estimation process involved in developing current-value type information causes
a concern about the objectivity of the resulting financial information. The use of estimates
is extensive in the development of statement of financial position data. These estimates
are required by IFRS, but reflect a limitation of the statement of financial position. The
limitation concerns the fact that the estimates are only as good as the understanding and
objectivity of the person(s) making the estimates. The final limitation of the statement of
financial position concerns the fact that some significant assets of the entity are not
recorded. Items such as human resources (employee workforce), managerial skills,
customer base, and reputation are not recorded because such assets are difficult to
quantify.

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Copyright 2015 John Wiley & Sons, Inc.Kieso, Intermediate: IFRS 2e, Instructors Manual

5. (L.O. 2)The major classifications used in the statement of financial position are assets,
liabilities, and equity. These items were defined in the discussion presented in Chapter 2.
To provide the financial statement reader with additional information, these major
classifications are divided into several subclassifications. Assets are further classified as
non-current or current, with the non-current divided among investments; property, plant,
and equipment; intangible assets; and other assets. Liabilities are classified as noncurrent or current. Equity includes share capital, share premium, and retained earnings.
These items are defined as follows:
Asset.Resource controlled by the entity as a result of past events and from which future
economic benefits are expected to flow to the entity.
Liability.Present obligation of the entity arising from past events, the settlement of which
is expected to result in an outflow from the entity of resources embodying economic
benefits.
Equity.Residual interest in the assets of the entity after deducting all its liabilities.
6. Items classified as long-term investments (or simply investments) in the assets section
of the statement of financial position normally are one of four types. These include:
a. Investments in securities, such as ordinary shares, bonds, or long-term notes.
b. Investments in tangible assets not currently used in operations (land for speculation).
c. Investments set aside in special funds (sinking, pension, plant expansion, etc.).
d. Investments in non-consolidated subsidiaries or associated companies.
7. Companies group investments in debt and equity securities into three separate portfolios
for valuation and reporting purposes.
a. Held-for-collection. Debt securities that a company manages to collect contractual
principal and interest payments. Individual securities are classified as non-current or
current, depending on circumstances.
b. Trading. Also referred to as fair value through profit or loss securities. Debt and
equity securities bought and held primarily for sale in the near term to generate
income on short-term price changes. They are reported at fair value and are current
assets.
c. Non-trading equity. Certain equity securities held for purposes other than trading,
like meeting legal or contractual requirements. They are reported at fair value.
Individual securities are classified as non-current or current, depending on
circumstances.

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8. Property, plant and equipment are tangible properties of a durable nature that are used
in the regular operations of the enterprise. Examples include land, buildings, machinery,
furniture, tools, and wasting resources. With the exception of land, these assets are either
depreciable or depletable.
9. Intangible assets lack physical substance and are not financial instruments; however,
their benefit lies in the rights they convey to the holder. Examples include patents,
copyrights, franchises, goodwill, trademarks, trade names, and customer lists.
10. Limited-life intangible assets are amortized over their useful lives. Indefinite-life intangibles (such as goodwill) are not amortized but, instead, are assessed at least annually
for impairment.
11. Many companies include an Other Assets classification in the statement of financial
position after Intangible Assets. This section includes a wide variety of items that do not
appear to fall clearly into one of the other classifications. Some of the more common
items included in this section are: long-term prepaid expenses, prepaid pension cost,
non-current receivables, assets in special funds, and restricted cash or securities.
12. Current assets are cash and other assets expected to be converted into cash, sold, or
consumed either in one year or in the operating cycle, whichever is longer. There are
some exceptions to a literal interpretation of the current asset definition. These exceptions
involve prepaid expenses, available-in-sale securities, and the subsequent years
depreciation of fixed assets. These exceptions are recognized in the accounting process and
are understood by most financial statement users. Current assets normally include
inventories, receivables, prepaid expenses, short-term investments, cash and cash
equivalents. Their basis of valuation are:
a. Inventories. Are reported at the lower-of-cost-or-net-realizable value and the cost flow
assumption (FIFO or weighted-average) is disclosed.
b. Receivables. Are reported at their net realizable value. Major categories of receivables
should be shown in the statement of financial position or the related notes.
c. Prepaid Expenses. Are reported at their unexpired or unconsumed cost.
d. Short-term Investments. Includes trading securities and held-for-collection and nontrading equity securities that will mature or be sold within twelve months or the normal
operating cycle, whichever is longer. Held-for-collection securities are reported at
amortized cost. Trading and non-trading equity securities are reported at fair value.
e. Cash and Cash Equivalents. Cash includes currency and demand deposits. Cash
equivalents are short-term, highly liquid investments that will mature within three
months. Cash and cash equivalents are reported as approximating fair value. Any
restrictions or commitments related to the availability of cash must be disclosed.

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Copyright 2015 John Wiley & Sons, Inc.Kieso, Intermediate: IFRS 2e, Instructors Manual

13. The Equity (also referred to as Shareholders Equity) section is difficult to prepare and
understand because of the complexity of capital share agreements, restrictions on equity
imposed by corporation law, liability agreements, and boards of directors. It consists of six
parts.
a. Share capital. The par or stated value of shares issued. It includes ordinary shares
and preference shares.
b. Share premium. The excess of amounts paid-in over the par or stated value.
c. Retained earnings. The corporations undistributed earnings. It may be divided between
the unappropriated and restricted amounts.
d. Accumulated other comprehensive income. Also referred to as reserves or other
reserves, includes such items as unrealized gains and losses on non-trading equity
securities and unrealized gains and losses on certain derivative transactions.
e. Treasury shares. The amount of ordinary share capital repurchased.
f. Non-controlling interest (Minority interest). A portion of the equity of subsidiaries
not owned by the reporting company.
14. Non-current liabilities are obligations whose settlement date extends beyond the normal
operating cycle or one year, whichever is longer. Examples include bonds payable, notes
payable, lease obligations, and pension obligations. Generally, the disclosure requirements for long-term liabilities are quite substantial as a result of various covenants and
restrictions included for the protection of the lenders. Long-term liabilities that mature within
the current operating cycle are classified as current liabilities if their liquidation requires
use of current assets. Long-term liabilities generally fall into one of the three following
categories:
a. Obligations arising from specific financing situations, such as the issuance of bonds,
long-term lease obligations, and long-term notes payable.
b. Obligations arising from the ordinary operations of the company such as pension
obligations and deferred income tax liabilities.
c. Obligations that depend on the occurrence or non-occurrence of one or more future
events to confirm the amount payable, or the date payable, such as product warranties
often referred to as provisions.
15. Current liabilities are the obligations that are reasonably expected to be settled either
through the use of current assets or the creation of other current liabilities. Items normally
shown in the current liabilities section of the statement of financial position include notes
and accounts payable, advances received from customers, current maturities of long-term
debt, taxes payable, and accrued liabilities. Obligations due to be paid during the next
year may be excluded from the current liability section if the item is expected to be
refinanced through long-term debt or the item will be paid out of non-current assets.

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16. Working capital is the excess of current assets over current liabilities. This concept,
sometimes referred to as net working capital, represents the net amount of a companys
relatively liquid resources. By reference to this amount, a financial statement user is able to
assess the entitys margin of safety for meeting financial demands of the operating cycle.
While the amount of working capital has a definite relationship to liquidity, the reader must
analyze the composition of the current assets to determine their nearness to cash.
17. (L.O. 3)IFRS do not specify the order or format in which a company presents items in the
statement of financial position. The account format of a classified statement of financial
position lists assets by sections on the left side and liabilities and equity by sections on
the right side. The report format lists equity and liabilities directly below assets on the
same page.
Statement of Cash Flows
18. (L.O. 4)The primary purpose of a statement of cash flows is to provide relevant
information about the cash receipts and cash payments of an enterprise during a period.
The statement of financial position, income statement, and statement of changes in equity
do not provide a convenient source of information on cash flows.
19. (L.O. 5)In accomplishing its purpose, the statement focuses attention on three different
activities related to cash flows.
a. Operating activities involve the cash effects of transactions that enter into determination
of net income.
b. Investing activities include making and collecting loans and acquiring and disposing
of debt and equity investments and property, plant, and equipment.
c. Financing activities involve liability and owners equity items and include (1) obtaining
resources from owners and providing them with return on their investment and
(2) borrowing money from creditors and repaying the amounts borrowed.
The basic format of the statement of cash flows is shown below.
Statement of Cash Flows
Cash flows from operating activities...................
Cash flows from investing activities...................
Cash flows from financing activities...................
Net increase (decrease) in cash.........................
Cash at beginning of year..................................
Cash at end of year............................................

$XXX
XXX
XXX
XXX
XXX
$XXX

20. The statements value is that it helps users evaluate liquidity, solvency, and financial
flexibility. Liquidity refers to the nearness to cash of assets and liabilities. Solvency is
the firms ability to pay its debts as they mature. Financial flexibility is a companys

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Copyright 2015 John Wiley & Sons, Inc.Kieso, Intermediate: IFRS 2e, Instructors Manual

ability to respond and adapt to financial adversity and unexpected needs and
opportunities.
21. (L.O. 6)The information to prepare the statement of cash flows comes from three sources:
(a) comparative statement of financial position, (b) the current income statement, and
(c) selected transaction data. Preparation of the statement of cash flows involves the
following steps.
a. Determine the cash provided by (or used in) operating activities.
b. Determine the cash provided by (or used in) investing and financing activities.
c. Determine the change (increase or decrease) in cash during the period.
d. Reconcile the change in cash with the beginning and the ending cash balances.
The information included in this chapter on the preparation of the statement of cash flows
provides a basic introduction to the concepts involved. A complete and detailed presentation
of the statement of cash flows is found in Chapter 23 of the text.
22. (L.O. 7)Creditors look for answers to the following questions in the companys cash flow
statement:
a. How successful is the company in generating net cash provided by operating activities?
b. What are the trends in net cash flow provided by operating activities over time?
c. What are the major reasons for the positive or negative net cash provided by operating
activities?
23. The current cash debt coverage ratio is:
Net Cash Provided
by Operating Activities

Average Current
Liabilities

Current Cash Debt


Coverage Ratio

Average Total
Liabilities

Cash Debt
Coverage Ratio

24. The cash debt coverage ratio is:


Net Cash Provided
by Operating Activities

25. Free cash flow is the amount of discretionary cash flow a company has for purchasing
additional investments, retiring its debt, purchasing treasury stock, or simply adding to its
liquidity.
Net Cash Provided
by Operating Activities

(Capital Expenditures
+ Dividends)

Free Cash Flow

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Additional Information
26.(L.O. 8)Companies must provide comparative information in addition to the current years
financial statements, i.e., two complete sets of financial statements and related notes.
The notes to the financial statements can provide supplemental data of a quantitative
nature to expand the information in the financial statements and explain restrictions
imposed by financial arrangements or basic contractual agreements.
27. Generally the first note to the financial statements is a Summary of Significant Accounting
Policies. The IASB recommends disclosure for all significant accounting principles and
methods that involve selection from among alternatives or those that are peculiar to a
given industry.
28. In addition, the IFRSs require many specific disclosures concerning such items as
property, plant, and equipment, receivables, inventories, employee benefits, and equity
capital and reserves. Companies are also required to reconcile the balances of many
assets and liabilities reported in the financial statements from the beginning of the year to
the end of the year.
29. (L.O. 9)Effective communication of the information required to be disclosed in financial
statements is an important consideration. Accountants have developed certain methods
that have proven useful in disclosing pertinent information. The methods are parenthetical
explanations, cross reference and contra items, and adjunct accounts. Numerous
examples of the techniques of disclosure are presented in the text. These examples
should be reviewed as they represent concepts referred to in subsequent chapter
material.
30. Other important issues related to the presentation of information in the financial
statements include offsetting, consistency, and fair presentation. Offsetting is not
permitted unless a specific IFRS permits it. As a part of comparability, the Framework
requires that companies follow consistent principles and methods from one period to the
next. Companies must present fairly the financial position, financial performance, and
cash flows of the company. It is presumed that the use of IFRS with appropriate
disclosure results in financial statements that are fairly presented.
*31. (L.O. 10) Appendix 5A Ratio AnalysisA Reference demonstrates various ratios used
to analyze financial performance and examine trends and relationships between financial
statement items.
a. Liquidity ratios: measure a companys ability to pay its maturing obligations.
b. Activity ratios: measure how effectively a company uses its assets.
c. Profitability ratios: measure the degree of success or failure of a company or division
for a given period of time.
d. Coverage ratios: measure the degree of protection for long-term creditors and
investors.

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Copyright 2015 John Wiley & Sons, Inc.Kieso, Intermediate: IFRS 2e, Instructors Manual

LECTURE OUTLINE
It should be emphasized that this chapter is a review chapter and the intent is to provide
an overview for topics that will be dealt with in greater detail in later chapters.
As a review of Chapters 4 and 5, we recommend that you encourage students to examine
a set of actual financial statements and the accompanying notes. Appendix 5-B in the text
contains specimen financial statements for the Marks and Spencer Group.
The material in the chapter can be covered in two class sessions. The first session can be
used for lecture on the concepts covered in the chapter. Most students should have had
previous exposure to these concepts. The first session can also be used for reviewing some of
the shorter problem material such as Exercises 5-1 through 5-4 and Cases 5-1 through 5-3.
You may wish to call upon students for their answers to the items in these cases and
exercises. Most items are straightforward, but some of them will stimulate class discussion and
highlight areas of misunderstanding.
The second class session can be used for final review and for going over the longer problem
material. This material allows students to apply chapter concepts by critiquing and preparing
financial statements.
The following lecture outline is appropriate for the chapter.
A. (L.O. 1)Usefulness of the Statement of Financial Position.
1.

Provides information about entitys assets, liabilities, and equity.

2.

Evaluation of liquidity, solvency, and financial flexibility.

3.

Aids in assessing risk and predicting future cash flows.

B. Limitations of the Balance Sheet.


1.

Current value is not reflected, since most assets and liabilities are reported at historical
cost.

2.

Estimates and judgments must be utilized:

3.

a.

in determining the collectibility of receivables.

b.

in assessing the salability of inventory.

c.

in determining the useful lives of long-term assets.

Omits many items that are of financial value to the business.


a.

Assets such as the value of a companys human resources and research and
development are not reported because a company cannot record them objectively.

b.

Some liabilities or commitments such as leases and certain contractual arrange ments are reported in an off balance sheet manner.

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C. (L.O. 2)Classifications in the statement of financial position. Review definitions of the


elements on text page 184.
1. Assets.
2.

Liabilities.

3.

Equity.

D. Major Subclassifications in the statement of financial position: Non-current assets.


1.

Long-term investmentsmanagement intent is to hold these investments for an


extended period of time.
a.

Investments in securities: bonds, common stock, long-term notes.

b.

Investments in tangible assets not currently used in operations: land held for
speculation.

c.

Investments set aside in special funds: sinking funds, pension funds, plant expansion
funds.

d.

Investments in non-consolidated subsidiaries or associated companies.

e.

Types of investment portfolios used for valuation and reporting purposes:


(1) Held-for-collection: debt securities that a company manages to collect
contractual principal and interest payments; classified as current or noncurrent asset, depending on circumstances.
(2) Trading: debt and equity securities bought and held for sale primarily in the
near term to generate income on short-term price changes; reported at fair
value and classified as current asset.
(3) Non-trading equity: certain equity securities held for purposes other than
trading, like legal and contractual requirements; reported at fair value and
classified as current or non-current asset, depending on circumstances.

2.

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Property, plant, and equipmenttangible long-lived assets such as land, buildings,


machinery, furniture, and wasting resources (timberland, minerals) used in operations.
a.

Most assets in this category are either depreciable (e.g., buildings) or consumable
(e.g., minerals). Land is not depreciated. However, land improvements are
depreciated.

b.

Long-lived costly tools are usually included in this category. In practice, small tools
are frequently expensed when purchased or are included as inventoriable current
assets.

c.

The basis of valuation (e.g., historical cost), any liens against the property, and
accumulated depreciation or depletion must be disclosed.

Copyright 2015 John Wiley & Sons, Inc.Kieso, Intermediate: IFRS 2e, Instructors Manual

d.
3.

4.

5.

In practice, a detailed classification of property, plant, and equipment is disclosed


in a supplementary schedule rather than on the face of the balance sheet.

Intangible assetsresources that lack physical substance and are not financial
instruments but provide economic rights and advantages.
a.

Examples include patents, franchises, copyrights, goodwill, trademarks, trade names,


and customer lists.

b.

Usually a high degree of uncertainty exists regarding realizability of future benefits.

c.

Limited-life intangible assets are amortized over their useful lives and reported
net of the accumulated amortization.

d.

Indefinite-life intangible assets, such as goodwill, are not amortized but are
assessed periodically for impairment.

e.

Expenditures for intangible assets, such as most R & D and internally-developed


goodwill, are not capitalized but are expensed as incurred.

Other assetsa special classification for unusual items that cannot be included in
one of the other asset categories.
a.

Examples include long-term prepaid expenses, non-current receivables, and prepaid


pension cost.

b.

Some items included in this category should be classified elsewhere.

Current assets.
a.

Definition: Resources which are expected to be turned into cash, sold, or consumed
within a year or the operating cycle, whichever is longer. (Point out the distinction
between the operating cycle and the accounting cycle.)

b.

Point out some conceptual weaknesses in the classification of current assets:


(1) Prepaid expenses will neither be turned into cash nor used to pay a current
liability. Discuss the justification for including them in current assets.
(2) Consumption of fixed assets during the current period: conceptually, the
current depreciation and amortization charges should be classified as current
assets, analogous to the currently maturing portion of long-term debt.

c.

Items included in the current asset section include:


(1) Inventoriesthe basis of valuation (e.g., lower-of-cost-or-net realizable
value), cost flow assumption (e.g., FIFO or average cost), and stage of
completion of manufactured inventories should be disclosed.
(2) Receivablesthe amounts of expected uncollectibles, nontrade receivables,
and accounts pledged or discounted must be disclosed.

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(3) Prepaid expensesexpenses prepaid beyond the current operating cycle are
reported in the other asset section.
(4)

Short-term investmentsa company should report trading securities


(whether debt or equity) as current assets. Individual non-trading
investments should be classified as current or non-current,
depending on the
circumstances. It should report held-forcollection (sometimes referred to as
held-to-maturity) securities at
amortized cost. All trading securities are
reported at fair value.
(5) Cashany cash restricted for purposes other than current obligations is
excluded from current assets. Cash equivalents are short-term highly liquid
instruments that mature within three months or less.
6.

7.

Equitydifficult to prepare and understand. Divided into six parts.


a.

Share capital. The par or stated value of shares issued. It includes ordinary
shares and preference shares.

b.

Share premium. The excess of amounts paid-in over the par or stated value.

c.

Retained earnings. The corporations undistributed earnings. It may be divided


between the unappropriated and restricted amounts.

d.

Accumulated other comprehensive income. Also referred to as reserves or


other reserves, includes such items as unrealized gains and losses on availablefor-sale securities and unrealized gains and losses on certain derivative
transactions.

e.

Treasury shares. The amount of ordinary share capital repurchased.

f.

Non-controlling interest (Minority interest). A portion of the equity of subsidiaries


not owned by the reporting company.

Non-current liabilities.
a.

Definition: Obligations that a company does not reasonably expect to liquidate


within the longer of one year or one normal operating cycle.

b.

Three types:
(1) Obligations arising from specific financing situations where additional assets
are acquired: issuance of bonds, long-term lease obligations, long-term notes
payable.
(2) Obligations arising from ordinary operations of the company such as pension
obligations and deferred income tax liabilities.

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(3) Obligations that depend on the occurrence or non-occurrence of one or more


future events to confirm the amount payable, or the payee, or the date payable
(e.g., service or product warranties).

8.

c.

Any premium or discount on bonds payable is disclosed separately as an addition


to or subtraction from the bonds.

d.

The currently maturing portion of long-term debt is classified as a current


liability. Theoretically any related premium or discount should also be reclassified
as current.

e.

Supplementary information that is usually disclosed in separate schedules includes


the existence of debt covenants and restrictions and the terms of the debt such as
maturity dates, interest rates, and amounts of any securities pledged to support
the debt.

Current liabilities.
a.

Definition: Obligations that the company reasonably expects to settle within its
normal operating cycle or one year, whichever is longer.

b.

Examples:
(1) Payables resulting from the acquisition of goods and services: accounts
payable, salaries and wages payable, income taxes payable.
(2) Collections received in advance for the delivery of goods or performance of
services: unearned rent revenue, unearned subscriptions revenue.
(3) Other liabilities whose liquidation will take place within the operating cycle or
one year, such as the portion of bonds to be paid in the current period, shortterm obligations arising from purchase of equipment.

c.

Generally notes payable, accounts payable, or short-term debt are listed first and
income taxes payable or other current liabilities are listed last.

d.

Some liabilities that will be paid within a year are reported as long-term liabilities.
These include:
(1) short-term debt expected to be refinanced.
(2) debt that will be retired out of noncurrent assets (alternatively, both the debt
and the assets could be classified as current).

e.

Working capital is a measure of a firms ability to meet its currently maturing


obligations.

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Working capital = Current assets minus current liabilities.


E. (L.O. 3)Statement of financial position format.
1.

Account form.

2.

Report form.

F. Statement of Cash Flows.


1.

2.

3.

4.

(L.O. 4)Purpose of the statement.


a.

To provide information about the cash receipts and cash payments of an entity
during a period.

b.

To achieve this, the statement reports on the operating, investing, and financing
activities of the business.

The statement is useful because it provides answers to the following important


questions:
a.

Where did cash come from?

b.

What was cash used for?

c.

What was the change in the cash balance?

(L.O. 5 and 6)Classification of cash flows.


a.

Operating activities.The cash flows connected with the determination of net


income.

b.

Investing activities.The cash flows connected with purchasing and selling


investments and property, plant, and equipment and making and collecting loans.

c.

Financing activities.The cash flows connected with borrowing and repaying


amounts borrowed, selling stock, and paying cash dividends.

Significant noncash transactions.


a.

All significant financing and investing activities must be disclosed in a separate,


note to the financial statements, even though cash is not affected.

b.

Examples of transactions that must be disclosed:


(1) conversion of bonds to common stock.
(2) acquisition of property through issuance of stock or through exchange for
other property.

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5.

Investing activities and financing activities.


Investing Activities

Financing Activities

Sale of property, plant, and equipment

Issuance of equity securities

Sale of investments in other entities

Issuance of debt

Collection of loans to other entities

Payment of dividends

Purchase of property, plant and equipment

Redemption of debt

Purchase of investments in other entities

Reacquisition of share capital

Loans to other entities


6.

Chapter 23 discusses preparation of the statement of cash flows in detail.

G. (L.O. 7)Usefulness of the statement of cash flows:


1.

Information on the statement is used to evaluate financial liquidity and financial


flexibility.

2.

Analysis of net cash provided by operating activities includes:


a.

Current cash debt coverage:used to determine if a company can pay off its cur rent liabilities from its operating activities in a given year.

b.

Cash debt coverage:used to determine if a company can repay all of its liabili ties from its operating activities, without liquidating operational assets.

c.

Free cash flow:used to determine the discretionary cash flow a company has for
additional investments, debt retirement, treasury stock, or adding to its liquidity.

H. (L.O. 8)Notes to the financial statements.


1.

Summary of Significant Accounting Policies

2.

Disaggregated information about:


(a) Property, plant, and equipment, with related accumulated depreciation.
(b) Receivables.
(c) Inventories
(d) Provisions.
(e) Equity capital and reserves.

I. (L.O. 9)Techniques of Disclosure.

Copyright 2015 John Wiley & Sons, Inc.Kieso Intermediate: IFRS 2e, Instructors Manual

5-15

1.

Parenthetical explanations (example: net of tax calculations in Chapter 4).

2.

Notes (example: accounting policies and contingencies).

3.

Cross-reference and contra items (example: bond discounts).

4.

Other guidelines.
a.

Offsetting

b.

Consistency

c.

Fair presentation

J. (L.O. 10)APPENDIX 5-A. Ratio Analysis.


1.

Used to express the relationships between selected financial statement data.

2.

Can be classified as:

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a.

Liquidity ratios:measure the short-run ability to pay maturing obligations.

b.

Activity ratios:measure the effectiveness of asset usage.

c.

Profitability ratios:measure the success or failure of a firm for a given period of


time.

d.

Coverage ratios:measure the degree of protection for long-term creditors and


investors.

Copyright 2015 John Wiley & Sons, Inc.Kieso, Intermediate: IFRS 2e, Instructors Manual