Ch22 â Cash Flows
ACC514
SPRING/SUMMER 2013
Ch22 – Cash Flows -
Operating = daily (income statement) Financing = debt + equity Investing = long term assets & investments (left side balance sheet)
Difference between DIRECT (IFRS) & INDIRECT method = only in operating section -
IFRS choice for interest & dividends classified as paid/receive = operating, received = investment, paid = financing ASPE PE GAAP – interest & dividends as operating, if against retained earnings = financing
Operating Activities -
Collections from customers Payments to suppliers Payments to employees Payments to CRA for tax
Investing Activities -
Acquisition & disposal of long term assets & investments o Purchase/disposal of capital assets o Acquire interest in another corporation
Financing Activities -
Changes in long term debt/equity capital o Issuing/repaying debt o Issuing/repurchase shares
Non-cash Transactions = NOT REPORTED, if significant = include in notes -
Asset purchased, paid for by debt/issue shares Exchange of non-monetary assets Conversion of debt to equity
Indirect Method – accrual basis - Income statement items & changes in CA & CL = Operating, adjust net income for accruals, noncash charges, non-operating gains/loss - Balance sheet changes in long term assets = investing - Debt & equity = financing
ACC514
SPRING/SUMMER 2013
DIRECT METHOD Cash flows from operating activities: Cash received from customers (cash or on account) Cash paid: To employees XX To suppliers XX For interest XX For taxes XX Net cash flow from operating activities Cash flows from investing activities: Proceeds from sale of long-term investments Purchase of equipment Net cash flow from investing activities
XX (XX)
Cash flows from financing activities: Proceeds from issue common shares Payment to retire bonds payable Dividends paid Net cash flow from financing activities
XX (XX) (XX)
Change in Cash (net cash inflow) Cash beginning Cash end of year
XX
(XX) XX
XX
XX XX XX XX XX
Cash from customers = Revenue from credit sales – increase in A/R Cash paid to suppliers = Cost of goods sold – increase in A/P – decrease in inventory Cash for taxes = income tax expense – increase in tax payable Current receivables/payable Prepaid/assets=
: ADD decreases add increase
SUBTRACT increases subtract decrease
Add things you PAID for (eg. Inventory, prepaids) Dividends: IFRS choice for interest & dividends classified as paid/receive = operating, received = investment, paid = financing ASPE PE GAAP – interest & dividends as operating, if against retained earnings = financing
ACC514
SPRING/SUMMER 2013
Ch20 – Leases Lease payments @ BEGINNING = annuity due
Discount Rates -
IFRS use % of lessor PE GAAP use % LOWEST you (lessee) know; implicit rate
Residual -
Lessor always considers PV residual guarantee/unguarantees, want to recover @ end a % Lessee only concern if WE guaranteed residual for lessor If 3rd party guarantee, lessee DON’T need to consider If unguaranteed residual = no care
Capital Lease – Depreciation only for lessee, otherwise lessor Sales Lease: Lessor -> residual NOT guaranteed -> account in COGS/Sales Minimum Lease Payment = Lease payment + bargain purchase option (use life of asset) + residual (if guaranteed, use life of lease) – Operating (executory) Costs
Lease Classification Capital/Financing Lease (risk & ownership transfer, lessee accounts depreciation, has BPO, all economic benefits (GAAP 75%+ life), PV lease pmt = FV of leased asset or paid 90% of cost (GAAP), specialized asset) Lessee:
Lessor:
Leased Equipment Lease Obligation
XX
Lease Receivable (net) Equipment
XX
XX
XX
Operating Lease (rental, risk & ownership not transfer) Lessee:
Lessor:
Rent Expense Cash
XX
Cash
XX Rental Income
XX
XX
ACC514
SPRING/SUMMER 2013
Lessor calculate lease payments for required rate of return Cost/FMV of asset to be recovered
100,000
Less: PV Residual value (A-2)
-0-
Amount recovered through lease payments
Payments (A-5) n = #, i = #
100,000
amount recovered / discount factor = pmt
Total Lease payments = n x pmt
Lessee: Capital Lease Entries (4) Record asset & liability @ LOWER of PV min lease pmt OR FMV leased asset Depreciation LIFE of asset if BPO or ownership transfers; Life of lease if title no transfer Initial Lease:
Asset under capital lease Obligations under capital lease
XX
Record Interest:
Interest Expense Interest payable
obligation carry value * % obligation carry value * %
Depreciation:
Depreciation Expense Accumulated Depreciation -
XX
Interest payable Obligations under capital lease Cash
XX Lease pmt XX
Lease payment:
XX
XX
Lessee: Operating Lease Entries Lease payment:
Rent Expense Cash
Lessor: Classification Capital/finance lease - Sales-type & finance-type = capital/finance lease - Sales-type lease = manufacturer/dealer’s profit
XX XX
ACC514
SPRING/SUMMER 2013
Lessor: Financing-type lease (3) replace asset with receivable Initial Lease
Lease Payments Receivable pmts *n + residual Unearned Interest Income – Leases difference Equipment for lease FMV asset
First Payment
Cash
pmt + costs Executory cost Lease payment receivable
Year End
Unearned interest income – Leases Interest Income Balance outstanding = FMV – investment recovery investment recovery = lease pmt – interest
costs pmt balance outstanding * % bal out * %
Lessor: Sales-type lease (3) Initial Lease
Lease payment receivable Unearned interest income Sales
pmt * n difference FMV asset
Cost of goods sold XX Inventory XX If residual guaranteed, included in Sales & COGS Unguaranteed residual value sales & COGS reduced by PV unguaranteed residual value First Payment
Cash
pmt + costs Executory cost Lease payment receivable
Year End
Unearned interest income – Leases Interest Income Gross investment = payments x n = lease payment receivable Unearned interest income = gross investment – FMV asset Net Investment Lease = Gross – unearned interest income
costs pmt balance outstanding * % bal out * %
Lessor: Operating Lease Lease Payments
Cash
XX Rental Income
Depreciation
Depreciation expense Accumulated Depreciation
XX XX XX
ACC514
SPRING/SUMMER 2013
Ch23 – Full Disclosure Segments look @ organizational chart = management approach Operating Segment - Engages business activities from which earns revenues & incurs expenses - Has senior management regularly review results (assess performance, review resource allocation decisions made) - Has discrete financial info available Aggregate Operating segments if: - Nature of products & services provided - Nature of production process - Type/class of customer - Methods of product/service distribution - Nature of regulatory environment
Reportable Segments
Revenue – 10%+ of combined revenue of all operating segments Profit/Loss – 10%+ of GREATER ___, THEN TAKE ABSOLUTE AMOUNT o Combined profit of all operating segments not showing loss o Combined loss of all operating segments reporting a loss Identifiable assets – 10%+ combined assets of all operating segments
Related Party Transactions -
Companies/individuals with control Investors & investees with significant influence 20%+ or joint control Company management Immediate family
Carrying Value when: NOT in normal operations, no ownership change, - Difference DR Retained Earnings or CR Contributed Surplus Recognize gain/loss if normal operations
ACC514
SPRING/SUMMER 2013
Subsequent Events Adjustments: - Conditions EXISTED @ balance sheet date, require adjustment o Loss on account receivables due to customer bankruptcy o Settlement of litigation Disclose only, no adjustment: - Events that DID NOT EXIST @ balance sheet date o Bond/share issuance o Fire/floor resulting a loss o Changes in foreign exchange rates o Purchase of a business
Auditor’s Opinion -
Unqualified (clean) opinion = best Qualified opinion = contains exception to standard Adverse opinion = qualified opinion not justified
Ch21 – Accounting Changes & Error Analysis Change in Policy -
Primary source (GAAP to IFRS) Voluntary change by corporation, must be RELEVANT & RELIABLE; retrospectively (go back to fix) Eg. Inventory method
Change in Estimate -
If uncertain, usually change in estimate Prospectively (go forward/remaining time) Eg. Depreciation – find carry value, calculate expense based on new residual & life remaining
Errors -
Retrospectively (go back to fix)
To fix retrospectively (if year is closed, goes to Retained Earnings) Asset
XX Retained Earnings – Change in accounting policy Future income tax liability
XX XX
SPRING/SUMMER 2013
Ch22 – Cash Flows -
Operating = daily (income statement) Financing = debt + equity Investing = long term assets & investments (left side balance sheet)
Difference between DIRECT (IFRS) & INDIRECT method = only in operating section -
IFRS choice for interest & dividends classified as paid/receive = operating, received = investment, paid = financing ASPE PE GAAP – interest & dividends as operating, if against retained earnings = financing
Operating Activities -
Collections from customers Payments to suppliers Payments to employees Payments to CRA for tax
Investing Activities -
Acquisition & disposal of long term assets & investments o Purchase/disposal of capital assets o Acquire interest in another corporation
Financing Activities -
Changes in long term debt/equity capital o Issuing/repaying debt o Issuing/repurchase shares
Non-cash Transactions = NOT REPORTED, if significant = include in notes -
Asset purchased, paid for by debt/issue shares Exchange of non-monetary assets Conversion of debt to equity
Indirect Method – accrual basis - Income statement items & changes in CA & CL = Operating, adjust net income for accruals, noncash charges, non-operating gains/loss - Balance sheet changes in long term assets = investing - Debt & equity = financing
ACC514
SPRING/SUMMER 2013
DIRECT METHOD Cash flows from operating activities: Cash received from customers (cash or on account) Cash paid: To employees XX To suppliers XX For interest XX For taxes XX Net cash flow from operating activities Cash flows from investing activities: Proceeds from sale of long-term investments Purchase of equipment Net cash flow from investing activities
XX (XX)
Cash flows from financing activities: Proceeds from issue common shares Payment to retire bonds payable Dividends paid Net cash flow from financing activities
XX (XX) (XX)
Change in Cash (net cash inflow) Cash beginning Cash end of year
XX
(XX) XX
XX
XX XX XX XX XX
Cash from customers = Revenue from credit sales – increase in A/R Cash paid to suppliers = Cost of goods sold – increase in A/P – decrease in inventory Cash for taxes = income tax expense – increase in tax payable Current receivables/payable Prepaid/assets=
: ADD decreases add increase
SUBTRACT increases subtract decrease
Add things you PAID for (eg. Inventory, prepaids) Dividends: IFRS choice for interest & dividends classified as paid/receive = operating, received = investment, paid = financing ASPE PE GAAP – interest & dividends as operating, if against retained earnings = financing
ACC514
SPRING/SUMMER 2013
Ch20 – Leases Lease payments @ BEGINNING = annuity due
Discount Rates -
IFRS use % of lessor PE GAAP use % LOWEST you (lessee) know; implicit rate
Residual -
Lessor always considers PV residual guarantee/unguarantees, want to recover @ end a % Lessee only concern if WE guaranteed residual for lessor If 3rd party guarantee, lessee DON’T need to consider If unguaranteed residual = no care
Capital Lease – Depreciation only for lessee, otherwise lessor Sales Lease: Lessor -> residual NOT guaranteed -> account in COGS/Sales Minimum Lease Payment = Lease payment + bargain purchase option (use life of asset) + residual (if guaranteed, use life of lease) – Operating (executory) Costs
Lease Classification Capital/Financing Lease (risk & ownership transfer, lessee accounts depreciation, has BPO, all economic benefits (GAAP 75%+ life), PV lease pmt = FV of leased asset or paid 90% of cost (GAAP), specialized asset) Lessee:
Lessor:
Leased Equipment Lease Obligation
XX
Lease Receivable (net) Equipment
XX
XX
XX
Operating Lease (rental, risk & ownership not transfer) Lessee:
Lessor:
Rent Expense Cash
XX
Cash
XX Rental Income
XX
XX
ACC514
SPRING/SUMMER 2013
Lessor calculate lease payments for required rate of return Cost/FMV of asset to be recovered
100,000
Less: PV Residual value (A-2)
-0-
Amount recovered through lease payments
Payments (A-5) n = #, i = #
100,000
amount recovered / discount factor = pmt
Total Lease payments = n x pmt
Lessee: Capital Lease Entries (4) Record asset & liability @ LOWER of PV min lease pmt OR FMV leased asset Depreciation LIFE of asset if BPO or ownership transfers; Life of lease if title no transfer Initial Lease:
Asset under capital lease Obligations under capital lease
XX
Record Interest:
Interest Expense Interest payable
obligation carry value * % obligation carry value * %
Depreciation:
Depreciation Expense Accumulated Depreciation -
XX
Interest payable Obligations under capital lease Cash
XX Lease pmt XX
Lease payment:
XX
XX
Lessee: Operating Lease Entries Lease payment:
Rent Expense Cash
Lessor: Classification Capital/finance lease - Sales-type & finance-type = capital/finance lease - Sales-type lease = manufacturer/dealer’s profit
XX XX
ACC514
SPRING/SUMMER 2013
Lessor: Financing-type lease (3) replace asset with receivable Initial Lease
Lease Payments Receivable pmts *n + residual Unearned Interest Income – Leases difference Equipment for lease FMV asset
First Payment
Cash
pmt + costs Executory cost Lease payment receivable
Year End
Unearned interest income – Leases Interest Income Balance outstanding = FMV – investment recovery investment recovery = lease pmt – interest
costs pmt balance outstanding * % bal out * %
Lessor: Sales-type lease (3) Initial Lease
Lease payment receivable Unearned interest income Sales
pmt * n difference FMV asset
Cost of goods sold XX Inventory XX If residual guaranteed, included in Sales & COGS Unguaranteed residual value sales & COGS reduced by PV unguaranteed residual value First Payment
Cash
pmt + costs Executory cost Lease payment receivable
Year End
Unearned interest income – Leases Interest Income Gross investment = payments x n = lease payment receivable Unearned interest income = gross investment – FMV asset Net Investment Lease = Gross – unearned interest income
costs pmt balance outstanding * % bal out * %
Lessor: Operating Lease Lease Payments
Cash
XX Rental Income
Depreciation
Depreciation expense Accumulated Depreciation
XX XX XX
ACC514
SPRING/SUMMER 2013
Ch23 – Full Disclosure Segments look @ organizational chart = management approach Operating Segment - Engages business activities from which earns revenues & incurs expenses - Has senior management regularly review results (assess performance, review resource allocation decisions made) - Has discrete financial info available Aggregate Operating segments if: - Nature of products & services provided - Nature of production process - Type/class of customer - Methods of product/service distribution - Nature of regulatory environment
Reportable Segments
Revenue – 10%+ of combined revenue of all operating segments Profit/Loss – 10%+ of GREATER ___, THEN TAKE ABSOLUTE AMOUNT o Combined profit of all operating segments not showing loss o Combined loss of all operating segments reporting a loss Identifiable assets – 10%+ combined assets of all operating segments
Related Party Transactions -
Companies/individuals with control Investors & investees with significant influence 20%+ or joint control Company management Immediate family
Carrying Value when: NOT in normal operations, no ownership change, - Difference DR Retained Earnings or CR Contributed Surplus Recognize gain/loss if normal operations
ACC514
SPRING/SUMMER 2013
Subsequent Events Adjustments: - Conditions EXISTED @ balance sheet date, require adjustment o Loss on account receivables due to customer bankruptcy o Settlement of litigation Disclose only, no adjustment: - Events that DID NOT EXIST @ balance sheet date o Bond/share issuance o Fire/floor resulting a loss o Changes in foreign exchange rates o Purchase of a business
Auditor’s Opinion -
Unqualified (clean) opinion = best Qualified opinion = contains exception to standard Adverse opinion = qualified opinion not justified
Ch21 – Accounting Changes & Error Analysis Change in Policy -
Primary source (GAAP to IFRS) Voluntary change by corporation, must be RELEVANT & RELIABLE; retrospectively (go back to fix) Eg. Inventory method
Change in Estimate -
If uncertain, usually change in estimate Prospectively (go forward/remaining time) Eg. Depreciation – find carry value, calculate expense based on new residual & life remaining
Errors -
Retrospectively (go back to fix)
To fix retrospectively (if year is closed, goes to Retained Earnings) Asset
XX Retained Earnings – Change in accounting policy Future income tax liability
XX XX
