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Chase
Accounting 400 605-84B
Dr. M. D. Chase
Accounting 400 605-84B
Indirect Method (reconciliation method): Net income is reconciled to cash flow by adjusting for changes in receivables, payables, accruals,
deferrals and prepayments. Gains are deducted from accounting income; losses and non-cash expenses such as depreciation are added back to
income to determine net cash flows.
C.
Dr. M. D. Chase
Accounting 400 605-84B
F.
NOTE: Alternative "b" details the entire transaction in one location but is showing the financing activity (issuance of the note) in the investing
section. The accountant should weight the relative importance of the financing/investing aspect of the transaction and select
the most appropriate reporting alternative.
G.
Cash dividends declared but not paid in the reporting period require special consideration.
1.Dividends are not related to operating activities but are a return of capital to owners. This means that the decrease in the current
liability (dividends payable) in the year of payment is not treated as an adjustment to net income.
2.In the year of declaration: account for the change in retained earnings and dividends payable.
3.In the year of payment: account for the change in dividends payable and cash without adjusting net income.
Dr. M. D. Chase
Accounting 400 605-84B
IV. PREPARING THE STATEMENT OF CASH FLOWS (all inclusive worksheet approach)
A. Compute the change in balance for each account in the trial balance from year 1 to year 2.
1.Debits are represented as positive numbers, credits as negative (bracketed)
B. Using accounting paper of sufficient width to accommodate all trial balance accounts in separate columns and allowing four (4)
additional columns for the Statement of Cash Flows, list the components of the Statement of Cash Flows down the left side of the
spreadsheet. List the account names and changes in balance across the top of the spreadsheet starting column five (5) with Cash. Be
certain to include:
1.The name of the company;
2.The title "Statement of Cash Flows"
3.Three sections labeled
a. "Cash flows from operating activities:"
b. Cash flows from investing activities:"
c. Cash flows from financing activities:"
4.those items that must always be included if present: (recall that companies must separately report the following classes of cash
payments at a minimum:
a. Cash collected from customers, including lessees, licensees, and the like;
b. Interest and dividends received;
c. Other operating cash receipts, if any;
d. Cash paid to employees and other suppliers of goods or services, including suppliers of insurance, advertising and the like;
e. Interest paid;
f. Income taxes paid;
g. Other operating cash payments if any;
C. The amount of change in each column must be reconciled to zero (footed to 0 balance); the total amount in each row must be cross
footed to zero (note that the cross footing will include only those rows reconciling trial balance accounts). This procedure is
illustrated in the following examples.
Dr. M. D. Chase
Accounting 400 605-84B
12/31/76
Adjusted
Trial Balance
Difference
Trial
Balance
Dr (Cr)
Cash
$5,300
$9,800
$4,500
A/R
9,600
10,900
1,300
Inventory
12,500
11,000
(1,500)
L/T Inv
22,000
20,000
(2,000)
PP&E
82,600
107,300
24,700
A/D-PP&E
(32,800)
(41,900)
(9,100)
A/P
(10,300)
(12,100)
(1,800)
Sal Pay
(1,100)
(800)
300
Int Pay
(300)
(500)
(200)
C/S
(64,000)
(74,000)
(10,000)
RE
(23,500)
(20,000)
3,500
(98,700)
(98,700)
(2,500)
(2,500)
(800)
(800)
COGS
51,000
51,000
Sal Exp
23,000
23,000
Depr Exp
9,100
9,100
Int Exp
4,000
4,000
Other Exp
1,900
1,900
Tax Exp
3,300
3,300
$0
$0
Sales
Int Rev
Gain:LTI
Total
$0
Cash
A/R
PP&E
A/D
PP&E
A/P
Sal Pay
Int Pay
C/S
RE
Sales
Int Inc
Dallas, Inc.
Gain on
COGS
Sal Exp
L/T Inv
4,500
1,300
(1,500) (2,000)
Operating Activities:
300
(200) (10,000)
3,500 (98,700)
(2,500)
(800)
Exp
51,000
23,000
9,100
Increases in A/R
(1,300)
Sales
1,300
97,400
2,500
(2,500)
9,100
Other
Exp
4,000
1,900
Tax
Bal
Exp
3,300
(9,100)
0
0
(1,300)
98,700 (98,700)
Cash Collections
98,700
0
0
2,500
99,900
Owtflows:
Change in Inventory
1,500
(1,500)
Change in A/P
1,800
(1,800)
(51,000)
51,000
COGS
Payments to Suppliers
(47,700)
0
1,800
0
(51,000)
0
(300)
300
(23,000)
23,000
(23,300)
0
1,500
0
(300)
0
(23,000)
0
200
(200)
(4,000)
4,000
0
200
(3,800)
(3,300)
3,300
(1,900)
1,900
(4,000)
0
0
(3,300)
(1,900)
0
0
Dr. M. D. Chase
Accounting 400 605-84B
(80,000)
19,900
Investing Activities:
Sale of Investments
2,800
(2,800)
(24,700)
24,700
0
2,000
800
Purchase of Investments
Sale of PP&E
Purchases of PP&E
Net Cash: Inv. Activ.
(21,900)
Financing Activities:
(24,700)
0
0
Sales of C/S
10,000 (10,000)
Payment of Dividends
(3,500)
0
10,000
3,500
0
(3,500)
Change in Short-term
Debt
Change in Long-term
Debt
Change in InterCo Debt
Treasury Stock
Net Cash: Fin. Activ.
6,500
4,500
5,300
9,800
Dr. M. D. Chase
Accounting 400 605-84B
(1,300)
( 300)
( 800)
(2,400)
10,200
19,900
Example 1: Assume that P purchases 80% of S for $540,000 cash. S has the following account balances at acquisition.
BV
FMV
Diff
50,000
50,000
Inventory
60,000
60,000
190,000
250,000
400,000
425,000
25,000
0
60,000
700,000
Lt Liabilities
(150,000)
(150,000)
CS ($10)
(200,000)
(200,000)
RE
(350,000)
(700,000)
$
$
160,000
280,000
48,000
20,000
32,000
100,000
540,000
440,000
100,000
Dr. M. D. Chase
Accounting 400 605-84B
490,000
Supplemental Disclosure:
Full cost must be disclosed; that was dealt with under investing activities if presented as above
Each asset affected by the purchase would be adjusted IAW the analysis as presented above
o
In this case adjustments to Equipment, Building and GW.
Liabilities assumed of $150,000 would be disclosed in the worksheet
MI (NCI) of $110,000 [(.2)(200,000 CS + 350,000 RE)] must be disclosed (this is a credit i.e. use)
Noncash Acquisition of a Controlling Interest in S
Noncash acquisitions usually involve the use of P CS or P Debt (bonds). The same rules apply but we now have a situation that is both and
Investing Activity (acquisition of S) and a Financing Activity (issuance of P CS and/or P Debt)
Example 2:
Assume the same facts outlined above except that P issues 10,000 shares of $10par/FMV $54 common stock for the 80%
interest is S.
This would produce the following changes to account for in the trial balance that would
Cash
Inventory
Equipment
190,000 + 48,000
Building
400,000 + 20,000
GW
LT Debt
MI (.2)(S CS 200,000 + S RE 350,000)
P CS (10,000)(10)
P PIC (10,000)($44)
50,000
60,000
238,000
420,000
32,000
(150,000)
(110,000)
(100,000)
(440,000)
Other Impacts on the Statement of Cash Flows caused by the Consolidation Process
Purchase of Additional Intercompany shares
o
CS purchased for cash directly from S is a wash under Operating Activities (+S cash P cash) but the change in P % must
be reflected.
o
Shares purchased from the market are a use of cash and a purchase ofTS and a financing activity; Change in P% is reflected
Intercompany Dividends
o
Dividends to P wash as a source and use in Operating Activities (wash)
o
If a MI exists, the dividends to MI are a use of cash under Financing Activities
Intercompany Bonds
o
Recall that purchases of bonds directly between affiliates is simply eliminated; therefore no effect
o
Purchases of affiliate bonds (up or downstream) are treated as constructive retirements and both intercompany
receivables/payables and amortizations of premiums and discounts are eliminated (this means no effect on cash flows)
o
Intercompany payments to the MI will be reflected as uses of Cash under Operating Activities
Unconsolidated Subsidiaries
o
No special treatment (this means that the transactions are fully reflected in the statement of cash flows)