Accounting: The Language of Business - Vol. 2 (Intermediate: Part 84)

Even something as complex as the eye has appeared several times; for example, in the squid, the vertebrates, and the arthropods. It's bad enough accounting for the origin of such things once, but the thought of producing them several times according to the modern synthetic theory makes my head swim

Frank B. Salisbury

Statements of Financial Position and Cash Flows and the Annual Report (Part V)

by

Charles Lamson

Reporting Cash Flows from Investing and Financing Activities 

As discussed in previous posts, the statement of cash flows also includes a section showing the cash flows related to investing activities and a section showing the cash flows related to financing activities. Cash flows from investing activities relate to the acquisition and disposition of productive property, investments in debt and equity securities, and making and collecting loans. Financing activities involve the cash receipts and payments from debt and equity financing.

EXAMPLE 6A.3 Investing and Financing Activities

PROBLEM: Consider Aries Endoscope, Inc. from Example 68.2 in Part 83. In addition to the information presented in that example, Aries also received and paid the following amounts:

Aries Endoscope had a beginning cash balance of $120,000 and an ending cash balance of $402,090. Prepare the statement of cash flows (using the direct method for the operating activities section) for Aries Endoscope, Inc.

SOLUTION: We have already prepared the operating section of the cash flow statement in Part 83 and reintroduced above. We include the cash receipt from the sale of property, plant, and equipment and the cash payment for the acquisition of investment securities in the investing activities section. We include all cash transactions related to the loans in the financing activities section.

Aries Endoscope statement of cash flows is as follows:

*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING,2ND ED. PP. 306-307*

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Training Vlog: Day 250 of Year 2 of Operation Great Reset - Build Back B...

“This work indicates that the fourth industrial revolution is unique, driven as it is by a global network of smart (network-driven) cities, countries and regional clusters, which understand and leverage the opportunities of this revolution – top down and bottom up – acting from a holistic and integrated perspective.” ― Klaus Schwab, The Fourth Industrial Revolution

Accounting: The Language of Business - Vol. 2 (Intermediate: Part 83)

Many of the Kiwis appearing in powerful business circles around the world come from accounting backgrounds. Yet often people have preset ideas of how an accountant walks, talks, smells - although not in the business community. For me it is a career that offers a lot of variety and challenges and I love it.

Philip Roth

Statements of Financial Position and Cash Flows and the Annual Report (Part U)

by

Charles Lamson

EXAMPLE 6A.2 Operating Cash Flows: Direct Method

PROBLEM: Aries Endoscope, Inc. presents the following income statement and select balance sheet accounts. Prepare the operating cash flows section of the cash flow statement using the direct method.

 SOLUTION: Under the direct method, we compute each line separately, as follows. 

Aries has no taxes payable. Therefore, taxes paid must equal tax expense. The operating activities section of the cash flow statement is as follows: 

Notice that the net cash provided by operating activities under the direct approach ($202,090) is the same as the net cash provided by operating activities under the indirect approach in Example 6A.1 (from Part 81). 

*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 305-306*

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Training Vlog: Day 249 of Year 2 of Operation Great Reset - Build Back B...

“Technology is not an exogenous force over which we have no control. We are not constrained by a binary choice between “accept and live with it” and “reject and live without it”. Instead, take dramatic technological change as an invitation to reflect about who we are and how we see the world. The more we think about how to harness the technology revolution, the more we will examine ourselves and the underlying social models that these technologies embody and enable, and the more we will have an opportunity to shape the revolution in a manner that improves the state of the world.” ― Klaus Schwab, The Fourth Industrial Revolution

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Training Vlog: Day 247 of Year 2 of Operation Great Reset - Build Back B...

“My concern, however, is that decision makers are too often caught in traditional, linear (and nondisruptive) thinking or too absorbed by immediate concerns to think strategically about the forces of disruption and innovation shaping our future.” ― Klaus Schwab, The Fourth Industrial Revolution

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Accounting: The Language of Business - Vol. 2 (Intermediate: Part 82)

There is no other proposition in economics that has more solid empirical evidence supporting it than the Efficient Market Hypothesis... In the literature of finance, accounting, and the economics of uncertainty, the EMH is accepted as a fact of life.

Michael Jensen

Statements of Financial Position and Cash Flows and the Annual Report (Part T)

by

Charles Lamson

Reporting Cash Flows from Operating Activities: Direct Method

Under the direct method, companies report actual cash inflows and outflows in the operating section of the statement of cash flows by converting each income statement line item from the accrual basis to the cash basis.

Cash Collected from Customers

To compute cash collected from customers, examine the activity in accounts receivable, which increases with sales revenue and decreases with collections.

This approach focuses on the change in the receivables balance. An increase in accounts receivable indicates that the firm has recorded more revenue than the amount of cash it received. 

Cash Paid for Merchandise

The computation of cash paid for merchandise requires two steps. First, determine the purchases on an accrual basis. Second, determine how much cash the firm spent on these purchases.

Next, review the activity in accounts payable because purchases are usually made on account. Use the purchases computed above to obtain cash paid for merchandise.

                                                 

The beginning and ending balances are obtained from the balance sheet [For more on the balance sheet, see Accounting: The Language of Business - Vol. 2 (Intermediate: Part 64)], and cost of goods sold is reported on the income statement [For more on the income statement, see Accounting: The Language of Business (Part 8)].

Again, we focus on the changes in the balance sheet accounts to determine the cash flow related to acquiring merchandise. If inventory increases, purchases are higher than cost of goods sold. If inventory decreases, purchases are lower than cost of goods sold. In other words, a decrease in inventory indicates that some of the units sold this year were purchased and possibly paid for in prior years.

An increase in accounts payable represents invoices for inventory not paid in the current year. A decrease in accounts payable represents invoices for inventory paid for in the current year but not purchased in the current year.

*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 302-303*

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“On the societal front, a paradigm shift is underway in how we work and communicate, as well as how we express, inform and entertain ourselves.” ― Klaus Schwab, The Fourth Industrial Revolution

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Training Vlog: Day 245 of Year 2 of Operation Great Reset - Build Back B...

“when two people are talking, the mere presence of a phone on the table between them or in their peripheral vision changes both what they talk about and their degree of connectedness.” ― Klaus Schwab, The Fourth Industrial Revolution

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Accounting: The Language of Business - Vol. 2 (Intermediate: Part 81)

All that Lenin learned about business from the tales of his comrades who occasionally sat in business offices was that it required a lot of scribbling, recording, and ciphering. Thus, he declares that accounting and control are the chief things necessary for the organizing and correct functioning of society. . . . Here we have the philosophy of the filing clerk in its full glory.

Ludwig von Mises

 Statements of Financial Position and Cash Flows and the Annual Report (Part S)

by

Charles Lamson

Example 6A.1 provides a comprehensive illustration of the preparation of the operating activities section of the statement of cash flows under the indirect method.

EXAMPLE 6A.1

Operating Cash Flows:

Indirect Method 

PROBLEM: Aries Endoscope, Inc. presents the following income statement and select balance sheet accounts. Prepare the operating cash flows section of the cash flow statement using the indirect method:

Additional information:

SOLUTION: We begin with net income and adjust for noncash expenses. From the income statement [See Accounting: The Language of Business (Part 8)] and additional information, we identify depreciation expense of $27,000 as a noncash expense. We add this noncash expense back to net income. There are no cash revenues to include in the adjustments.

We then adjust for changes in the current assets and liabilities, according to Exhibit 6A.1, from Part 80 and a little too lengthy and cumbersome, for the sake of brevity and ease of reading, to reintroduce in this post. The following table identifies the balance sheet accounts, the change in each account, and how the change is presented in the operating cash flow section of the statement of cash flows. 

The completed operating activities section of the statement of cash flows under the indirect method follows. 

The Indirect Statement of Cash Flows: International Financial Reporting Standards (IFRS). IFRS does not specify the income level to use as the first line in the reconciliation of income to operating cash flows. As a result, a company can begin the reconciliation with net income or operating income. An in-depth discussion of this difference in the preparation of the statement of cash flows will be provided in a future post. 

*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 300-302*

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Accounting: The Language of Business - Vol. 2 (Intermediate: Part 80)

Some of the scientists, I believe, haven't they been changing their opinion a little bit on global warming? There's a lot of differing opinions and before we react I think it's best to have the full accounting, full understanding of what's taking place.

George W. Bush

Statements of Financial Position and Cash Flows and the Annual Report (Part R)

by

Charles Lamson

Overview of the Preparation of the Statement of Cash Flows

 In the preceding parts of this analysis, the purpose of the statement of cash flows and its classifications were outlined. In the next few posts, an overview of the preparation of the statement is provided. An in-depth discussion of the preparation of the statement of cash flows is provided in upcoming posts.

Reporting Cash Flows from Operating Activities: Indirect Method

The indirect method begins with net income from the income statement (see Accounting: The Language of Business - Vol. 1 (Part 8)) and then reconciles the net income to net cash provided by operating activities. Reconciling items are separated into two groups:

• Adjustments for items such as depreciation expense and unrelated gains and losses.

• Changes in operating assets and liabilities such as increases in accounts payable or decreases in inventory.

Exhibit 6A.1 shows the effects of changes in specific common current assets and current liabilities.

EXHIBIT 6A.1 The Effect of Changes in Current Assets and Current Liabilities

Part 81 will show an example that provides a comprehensive illustration of the preparation of the operating activities section of the statement of cash flows under the indirect method. Stay tuned . . .

*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 299-300*

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