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74

(2) Statement of Cash Flow

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The Statement of Financial PositionAssets

Current AssetsOperating

Noncurrent AssetsInvesting

Current LiabilitiesOperating

Noncurrent LiabilitiesFinancing

Contributed CapitalFinancing

Retained EarningsNet Income - Operating

Cash Dividends - Financing

Liabilities &ShareholdersEquity

CMA Accelerated Program 2012/2013 Lecture Student Weekly File - Week 2

1 of 28 CMA Ontario, 2012

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76

Statement of Cash Flow -

Components operations: arrives at cash flows by adjusting

net income for those items that have no effecton cash (indirect approach)i.e depreciation expense, gains/losses ondisposal 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

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Components (contd)

financing 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 flows from interest and dividends received and paidshall be disclosed separately - each shall be classified ina consistent manner from period to period as eitheroperating, investing or financing activities (IAS1.31)



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78

Statement of Cash Flow - Direct

vs. Indirect

the direct method is recommended but notmandatory; the majority of companies still usethe indirect approachonly affects the cash flow from operations

indirect approach takes net income and adjustsit for non cash items

direct approach considers all of the cash flowelements in the statement of income, line byline

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Statement of Cash Flow - Direct Method

cash flow from operations is a usually aminimum of four items:

cash received from customers cash paid out to for operating expenses*interest paidincome taxes paid

* can be broken out into separate line items



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80

Cash Flow from Operations - Direct

Cash collected from customers =Sales adjusted for the change in A/R andUnearned Revenues

Cash paid for interest =Interest expense adjusted for the change in

interest payable and amortization of bonddiscount/premium

Cash paid for income taxes =Income tax expense adjusted for the change

in income taxes payable

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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 thecash paid on purchases)

Cash paid for salaries = Salaries and wagesexpense adjusted for the change in salaries andwages payable

Cash paid for other operating expenses = otheroperating expenses adjusted for the change inother payables and/or prepaid expenses



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82


Definition of Cash / Short Term Loans cash includes cash and cash equivalents

cash equivalents are defined as short-term, highlyliquid investments that are readily convertible toknown amounts of cash and which are subject to aninsignificant risk of changes in value

equity investments are excluded from cashequivalents

treatment of short term bank loans: bank overdrafts may be included as a component of

cash and cash equivalents when the bank balancefluctuates frequently from being positive tooverdrawn;

otherwise, bank overdrafts and short term demandloans are considered as cash flow from financing

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ASPE Differences

dividends paid are classified as a financingactivity

interest expense, interest and dividendrevenues are classified as an operating activity



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84

Statement of Cash Flow - Example 1Given the following information, solve for cash collections

from customers:

Beginning accounts receivable $50,000Ending accounts receivable 60,000Sales 2,000,000Unearned revenues - beginning 30,000Unearned revenues - ending 35,000

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Statement of Cash Flow - Example 2

Given the following information, solve for cash payments tosuppliers:

Beginning inventory $270,00

0Ending Inventory 245,000Cost of goods sold 970,000Beginning accounts payable 165,000Ending accounts payable 185,000



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86

Statement of Cash Flow - Example 3Given the following information, solve for proceeds from the

sale of property, plant and equipment (there were noadditions during the year)

Cost of property, plant and equipment -

Beginning $1,200,000

Ending 1,030,000Accumulated Depreciation -

Beginning 660,000Ending 740,000

Loss on sale of equipment 25,000Depreciation expense 150,000

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Statement of Cash Flow - Example 4

Given the following information, solve for interest paid:

Interest expense $170,000Interest payable, beginning 6,700Interest payable, ending 7,700



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Problem 4 - Statement of Cash Flow

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

MILMAN COMPANYIncome Statement

year ended December 31, 20x8

Sales revenue $ 50,000

Amortization expense - patent $ 150Depreciation expense - equipment 1,000Cost of goods sold 28,000Income tax expense 3,500Interest expense 800Loss on sale of equipment 200

Miscellaneous expenses 400Salaries expense 9,500 43,550

Net income $ 6,450

MILMAN COMPANY

Statement of Financial Position

December 31, 20x8

20x8 20x7Cash $ 5,400 $ 4,500

Accounts receivable 11,000 7,400Allowance for doubtful accounts (500) (400)Inventory 13,000 11,000Equipment 29,000 31,650Accumulated amortization (4,500) (5,000)Patents 1,500 1,650Land 16,250 10,000

$ 71,150 $ 60,800

Accounts payable $ 13,000 $ 10,000Salaries payable 10,000 10,500

Income tax payable 7,000 5,000Long-term bonds payable 6,500 9,000Common shares 24,150 19,000Retained earnings 10,500 7,300

$ 71,150 $ 60,800



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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 theindirect method.

b. Prepare the operating section of the statement of cash flow using the directmethod.



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(3) Revenue Recognition

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IAS 18 - Revenue Recognition applies to:

sale of goods rendering of services interest, royalties and dividends

revenue is measured as the fair value of theconsideration received or receivable

if the consideration is to be received over time andprovides favorable financing terms to the buyer, then the

cash flows are discounted and the amount of revenue iscalculated based on the discounted value



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90

Sale of Goods revenue from the sale of goods shall be recognized when

all the following conditions have been satisfied:

the entity has transferred to the buyer thesignificant risks and rewards of ownership of thegoods;

the entity retains neither continuing managerialinvolvement to the degree usually associated withownership nor effective control over the goods sold;

the amount of revenue can be measured reliably; it is probable that the economic benefits associated

with the transaction will flow to the entity; and the costs incurred or to be incurred in respect of the

transaction can be measured reliably.

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Rendering of Services

service revenue is to be recognized on the percentage ofcompletion basis if the following conditions are present:

the amount of revenue can be measured reliably; it is probable that the economic benefits associated

with the transaction will flow to the entity;

the stage of completion of the transaction at thereporting date can be measured reliably; and

the costs incurred for the transaction and the coststo complete the transaction can be measuredreliably.

when the outcome of the transaction involving therendering of services cannot be estimated reliably,revenue shall be recognized only to the extent of theexpenses recognized that are recoverable



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92

Interest, royalties and dividends the criteria for recognizing interest, royalties and dividends

are:

it is probable that the economic benefits associated withthe transaction will flow 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 beendeclared).

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Bill and hold sales

transactions where delivery is delayed at thebuyers request, but the buyer takes title and

accepts billing

criteria:it is probable that delivery will be made the item is on hand, identified and ready fordelivery

the buyer specifically acknowledges thedeferred delivery instructions, and

the usual payment terms apply



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94

Franchises franchise revenue can take on the following

forms:

initial franchise fee - accrue over time asservices are rendered (i.e. when earned)

continuing franchise fee - accrue as earned acquisition of equipment, inventory andsupplies - accrue using general revenue

recognition principles

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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



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Long-term construction contracts -IAS 11

actual construction costs incurred areaccumulated in a construction-in-progress (CIP)account - an inventory account

accounts receivable is debited and a billingsaccount is credited

any profit or loss realized on the contract getsdebited/credited to the CIP account

when the contract is completed, final billingsare made to the customer, and construction in

progress should be equal to billings the completed contract method is not

permitted

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Application of the Percentage of

Completion method

% of completion = costs incurred to date /total estimated project costs

total estimated project costs = costs incurredto date + estimated costs to complete

the % of completion is applied against the totalestimated contract profit resulting in thecumulative profit that can be accrued on thecontract

the difference between the cumulative profitand the accumulated profit taken on thecontract to the beginning of the period = theprofit that can be taken on the contract in thecurrent period



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Percentage of Completion ExampleThe Jerome Company is ending the first 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 first year.

How much profit can be reported on this contract

in the first year. Prepare all journal entriesrelative to this contract.

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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 first 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



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Problem 7 - Revenue Recognition

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

20x1 20x2 20x3

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

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

Required -

(a) How much profit will be recognized on the construction contract during each ofthe three years?

(b) Prepare the asset side of the balance sheet for each of the three years. Omit thecash account.

(c) Assume that the Broadway Company is a private enterprise and is subject toASPE. The company has determined that the completed contract method is to beused for this project. Prepare the journal entries for the years 20x1 through to20x3 for this project.

(d) Assume now that the costs incurred during the year and estimated costs tocomplete are as follows:

20x1 20x2 20x3Costs incurred during the year $1,000 $4,880 $3,000Estimated costs to complete 7,000 3,800 2,000

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



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When the outcome of a constructioncontract cannot be estimated reliably?

revenue shall be recognized only to the extentof 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 profit!

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ASPE Differences

revenues from the sale of goods and servicesare to be recognized when specific performancerequirements are met provided that ultimatecollection is reasonably assured

sales of goods and services criteria are similarexceptthe existence of contractual arrangementswill be a determining factor whenrecognizing revenues

the completed contract method is allowed inthe determination of service andconstruction contract revenues



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102

ASPE Differences - cont

d completed contract method:

used when performance consists of theexecution of a single act or when you cannot

reasonably estimate the extent towards

completion

all costs are accumulated in the CIPaccount, billings accumulated in the billings

account until the time the contract iscomplete at which time both accounts are

closed to cost of construction and revenue

on the income statement

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ASPE Differences - contd

interest, royalties and dividendsinterest revenue can be recognized usingeither the effective interest method or any

systematic method of allocation, i.e.

straight-line



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(4) Cash

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Cash

accounting for petty cash the bank reconciliation:

First, record any transactions that went through thebank statement that were not recorded on thecompany books;

Second, reconcile the bank statement balance to thebook balance:

Cash in Bank- Outstanding Cheques+ Outstanding Deposits

Bank errors= Cash per books



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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 yetbeen 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 ofaccounts in the amount of $1,985. The correct amount (and the amount thatcleared 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 waswritten 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.



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106

(5) Accounts Receivable

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Valuation of Accounts Receivable

Two approaches:

statement of financial position approach: we estimatethe amount needed in the allowance for doubtfulaccounts; any remainder goes to bad debt expense

income statement approach: we estimate the amount ofbad debt expense directly (usually as a % of creditsales); any remainder goes to the allowance for doubtfulaccounts

we cannot simultaneously estimate the allowance fordoubtful account and bad debt expense



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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 expensecr. Allowance for doubtful accounts

when accounts are actually written off, they reduceboth accounts receivable and allowance for doubtfulaccounts;

dr. Allowance for doubtful accountscr. Accounts receivable

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Application of the Allowance

Method - contd

when a previously written-off accountsubsequently gets recovered, we first 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. Cashcr. Accounts receivable



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Accounts Receivable - Example 1

Assume that the allowance for doubtful accounts at the endof 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 37,000Account recoveries during the year 4,500

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Accounts Receivable - Example 2

Given the following information, solve for cash collections

from customers:

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



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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. Thefollowing information is available for 20x3 and 20x4:

20x4 20x3

Cash sales $ 360,000 $ 260,000Credit 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 receivedon account of credit sales) $5,000 0

Required -

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



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Problem 10 Accounts Receivable

M Ltd. uses the allowance method, based on 5% of accounts receivable, for estimating itsannual allowance for uncollectible accounts. Selected balances from M Ltd.'s December31 trial balance are as follows:

Accounts receivable $420,000 drAllowance for uncollectible accounts 22,000 crSales 2,500,000 crBad 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 drRecovery 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?



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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. Itwill be taken up in class next week (this

problem is located on the next page and is alsoreplicated 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.



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Problem 5 Statement of Cash Flow

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

WORSLEY LTD.

Statement of Financial Positionas at December 31

20x3 20x2

Current assets

Cash $ 137,000 $ 116,000Accounts receivable 371,000 364,000Inventory 460,000 486,000Prepaid expenses 26,000 17,000

994,000 983,000

Property, plant and equipment 2,836,000 2,445,000Accumulated 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 $ 492,000Unearned revenues 56,000 78,000Interest payable 104,000 99,000Income taxes payable 31,000 35,000Dividends payable 35,000 23,000

662,000 727,000Bonds payable 800,000 1,000,000Mortgage payable 400,000 250,000

1,200,000 1,250,000

Shareholders equity

Common shares 500,000 100,000Retained earnings 347,000 317,000

847,000 417,000

$ 2,709,000 $ 2,394,000



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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 3,000Loss 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, plantand equipment. The property, plant and equipment acquired had a current marketvalue 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 theindirect approach to report the operating activities.

b. Prepare the cash flow from operations using the direct approach.


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