ACCT 1006 s1 2021 Lecture Week 11 PDF

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Summary

ACCT 1006Accounting and Financial ManagementWeek 11Janine CoupeAnalysing, Managing andReporting Cash Flows –PartIntroduction, GAAP & RevisionStatement of Profit or LossStatement of Financial PositionStatement of Cash FlowsInternalControlInternalControlAccrual Accounting ConceptsRecordingTransact...

Description

ACCT 1006 Accounting and Financial Management

Week 11 Analysing,Managingand ReportingCashFlows– Part1 Janine Coupe

Introduction,GAAP&Revision

RecordingTransactions

Merchandising AccountingSubsystems Receivables Non‐currentAssets Liabilities Equity

Statementof ProfitorLoss Statementof Financial Position Statementof CashFlows

FinancialStatementAnalysis

InternalControl

AccrualAccountingConcepts

Learning Objectives/Outcomes 1. Indicate the main purpose of the statement of cash flows. 2. Formats for the Statement of Cash Flows 3. Distinguish among operating, investing and financing activities. 4. Prepare a statement of cash flows using the direct method. Topic supports your REVISION for entire unit Readings: Chapter 11 The University of Sydney

Page 3

Not in student slides

Learning Objectives/Outcomes

1. Indicate the main purpose of the statement of cash flows. 2. Formats for the Statement of Cash Flows 3. Distinguish among operating, investing and financing activities. 4. Prepare a statement of cash flows using the direct method. Topic supports your REVISION for entire unit

The University of Sydney

Page 4

LO 1: THE STATEMENT OF CASH FLOWS: PURPOSE

Purpose of the statement of cash flows – To provide information about: – cash receipts – cash payments – net change in cash resulting from operating, investing and financing activities – To reconcile the beginning and ending cash balances

The University of Sydney

Page 5

Usefulness of the statement of cash flows – Helps management, investors, creditors and other interested parties evaluate the following about the entity: – Ability to generate future cash flows – Ability to pay dividends and meet obligations – Cash investing and financing transactions for the period – Explains difference between profit and net cash provided (used) by operating activities

The University of Sydney

Page 6

ACTIVE LEARNING OPPORTUNITY Revision Quiz

– Answer to the following questions: – What are the main types of cash inflows – Eg rent revenue,

– What are the main types of cash outflows – Eg interest expense

The University of Sydney

Page 7

Cash Inflows and Outflows

– Text Typical Cash Receipts & Payments Figure 11.1 – INFLOWS: – Sales – goods/services – Rent, interest or dividends received – Sale of non-current assets

– OUTFLOWS – – – –

Suppliers for cash purchases Employee wages paid Rent, interest or dividends paid Purchase non-current assets

The University of Sydney

Page 8

Not in student slides

Learning Objectives/Outcomes

1. Indicate the main purpose of the statement of cash flows. 2. Formats for the Statement of Cash Flows 3. Distinguish among operating, investing and financing activities. 4. Prepare a statement of cash flows using the direct method. Topic supports your REVISION for entire unit

The University of Sydney

Page 9

Classification of cash flows: LO3 STATEMENT OF CASH FLOWS

– The statement of cash flows shall report cash flows during the period classified by operating, investing and financing activities [AASB 107.10]. – Operating activities – Entity’s principal revenue-generating activities, and activities not regarded as investing or financing activities – Investing activities – Acquisition and disposal of long-term assets – Financing activities – Affect the size and composition of contributed equity and borrowing The University of Sydney

Page 10

Significant non-cash activities – Significant financing and investing activities that do not affect cash are not reported in the body of the statement of cash flows, but are reported in the notes [AASB 107.43]. – These include: – Issue of shares to purchase assets – Conversion of debt into ordinary shares – Issue of debt to purchase assets – Exchanges of property, plant & equipment The University of Sydney

Page 11

Not in student slides

Learning Objectives/Outcomes

1. Indicate the main purpose of the statement of cash flows. 2. Formats for the Statement of Cash Flows 3. Distinguish among operating, investing and financing activities. 4. Prepare a statement of cash flows using the direct method. Topic supports your REVISION for entire unit

The University of Sydney

Page 12

LO 2 Format of the statement of cash flows – Operating activities are reported using two methods: direct or indirect OUR FOCUS in Week 11 – The direct method presents: Cash receipts – cash payments = net cash provided/used by operating activities

– IAS 7/AASB 107 encourage companies to use the direct method for published financial statements [AASB 107.43]. Why?

The University of Sydney

Page 13

Format of the statement of cash flows continued

– The indirect method goes from an accrual basis to a cash basis FOCUS OF WEEK 12 – Net profit after tax is adjusted by changes in non-cash items affecting net profit to determine net cash provided/used by operating activities – Prior to 2011 IAS 7 / AASB 107 required the indirect method by way of a note as a reconciliation if the direct method was used. The requirement was removed in 2011 but many entities still provide this reconciliation on a voluntary basis. The University of Sydney

Page 14

Format of the statement of cash flows continued COMPANY NAME Statement of Cash Flows Period covered Cash flows from operating activities (List of individual items) Net cash provided (used) by operating activities Cash flows from investing activities (List of individual inflows and outflows) Net cash provided (used) by investing activities Cash flows from financing activities (List of individual inflows and outflows) Net cash provided (used) by financing activities Net increase (decrease) in cash Cash at beginning of period Cash at end of period

xx xxx xx xxx xx xxx xxx xxx xxx

Format of the statement of cash flows continued

Refer Lecture Example handout Week 11 & Template NAME OF COMPANY Statement of Cash Flows For the year ended Cash flows from operating activities Receipts from customers Payments to suppliers Income tax paid Net cash provided/ (used) by operating activities ETC… see handout

Based on example from the text book - adapted The University of Sydney

Page 16

Summary of main points LO 1, LO 2, LO 3 LO 1 Indicate the main purpose of the statement of cash flows. – To provide information about cash receipts & cash payments – To reconcile the beginning and ending cash balances LO 3 Distinguish among operating, investing and financing activities. – Operating activities – Entity’s principal revenue-generating activities, and activities not regarded as investing or financing activities – Investing activities – Acquisition and disposal of long-term assets – Financing activities – Affect the size and composition of contributed equity and borrowing LO 2 Formats for the Statement of Cash Flows – Direct method (week 11) – Indirect method (week 12) Differ for ‘Operating’ activities and are the same for Investing & Financing The University of Sydney

Page 17

Not in student slides

Learning Objectives/Outcomes

1. Indicate the main purpose of the statement of cash flows. 2. Formats for the Statement of Cash Flows 3. Distinguish among operating, investing and financing activities. 4. Prepare a statement of cash flows using the direct method. Topic supports your REVISION for entire unit

The University of Sydney

Page 18

LO 4 PREPARING THE STATEMENT OF CASH FLOWS

– There are 3 sources of information to prepare the statement of cash flows: – Statement of Financial Position COMPARATIVE – Current period Statement of Profit or Loss – Additional information (about transactions that occurred during the period)

The University of Sydney

Page 19

Study Hint

NOTE: preparing a Statement of Cash Flows is complex and long process. This lecture is an overview and introduction we will complete selected sections only today Practice, practice and more practice will help you master this topic Demonstration Problem 2 is Comprehensive

The University of Sydney

Page 20

PREPARING THE STATEMENT OF CASH FLOWS continued

– There are 4 steps in the preparation Determine: 1. net increase/decrease in cash 2. net cash provided/used by operating activities 3. net cash provided/used by investing activities 4. net cash provided/used by financing activities The University of Sydney

Page 21

ExtractStatementOfFinancialPosition2017: 20172016↑OR↓ Cash 191000159000↑32000 AccountsReceivable120000100000↑20000 Inventory

130000160000↓30000

AccountsPayable5200060000↓8000 Equipment160000‐↑160000 AccumDepn–Equip(16000)↑16000 DividendPayable5000‐↑5000 RetainedEarnings

9400042000

↑52000





AdditionalInformationfor2017: Notespayabletotalling$30000wereconvertedtoshares EquipmentwaspurchasedforcashandEquipmentwithacarryingamountof$18000wassoldforcash Baddebtswrittenoff$45000 Profitfortheperiodwas$84000 Cashdividendswerepaid The University of Sydney

Page 22

Step 1: Determining the net increase (decrease) in cash

Page 1 handout Cash

Extract 2017 SOFP 2017 2016 ↑ OR ↓ 191 000 159 000 ↑32 000

– The difference between the beginning and ending cash balances can be easily calculated from comparative statement of financial position data – Reports opening cash balance compared to closing balance – Enter on Statement The University of Sydney

Page 23

NAMEOFCOMPANY StatementofCashFlows FortheyearendedXX/XX/XX Cashflowsfromoperatingactivities  Receiptsfromcustomers  ___________  Paymentstosuppliers ____________   Incometaxpaid (XXX)   Netcashprovided/(used)byoperatingactivities$XXX Cashflowsfrominvestingactivities  Purchaseofland (XX)   Purchaseofequipment (__________)   Proceedsfromsaleofequipment ___________   Netcashprovided/(used)byinvestingactivitiesXXX Cashflowsfromfinancingactivities  Proceedsfromissueofshares XXX   Cashfromborrowings XXX   Dividendspaid ()   Netcashprovided/(used)byinvestingactivitiesXXX 32 000 Netincrease/(decrease)incashheld  ___________ 159 000 Cashatthebeginningofthefinancialyear___________ 191 000 Cashattheendofthefinancialyear  ___________  Note1:Non‐cashinvestingandfinancingactivities Conversionofnotespayableintoordinaryshares__________ TheNote2:Reconciliationindirectmethod(seenextpage)  University of Sydney Page 24 

Step 1: Determining the net increase (decrease) in cash

Cash

Extract 2017 SOFP 2017 2016 191 000 159 000

↑ OR ↓ ↑32 000

– Once an amount for cash flows is entered on the Statement put a line through the amounts before moving to the next entry

The University of Sydney

Page 25

Step 2: Determining net cash provided (used) by operating activities

– This step involves analysing not only the current year’s statement of Profit or Loss but also comparative statement of financial position data and selected additional data – Aims to adjust activities reported in the Statement of P or L from accrual to cash basis – Remember some activities are non-cash and are not included (e.g. depreciation, loss or gain on sale of assets) The University of Sydney

Page 26

Step 2 continued

– Uses only major classes of operating receipts and payments: – cash receipts from customers – Cash receipts from interest or dividends – cash payments to suppliers – cash payments for operating expenses – cash payments for income tax – cash payments for interest The University of Sydney

Page 27

Step 2 continued

Cash receipts from customers

– Use sales and comparative accounts receivable account balances – Assume all sales made on credit – How? – Reconstruct Accounts Receivable or – Use Formula – to calculate cash receipts from customers The University of Sydney

Page 28

ExtractStatementOfFinancialPosition2017: 20172016↑OR↓ Cash 191000159000↑32000 AccountsReceivable120000100000↑20000 Inventory

130000160000↓30000

AccountsPayable5200060000↓8000 Equipment160000‐↑160000 AccumDepn–Equip(16000)↑16000 DividendPayable5000‐↑5000 RetainedEarnings

9400042000

↑52000





AdditionalInformationfor2017: Notespayabletotalling$30000wereconvertedtoshares EquipmentwaspurchasedforcashandEquipmentwithacarryingamountof$18000wassoldforcash Baddebtswrittenoff$45000 Profitfortheperiodwas$84000 Cashdividendswerepaid The University of Sydney

Page 29

Step 2 continued RECONSTRUCT ACCOUNTS

Accounts Receivable Balance Sales

100 Bad debts w/off 900 Cash at Bank Closing Bal 390

Opening Bal

120

The University of Sydney

45 835 120 390

Page 30

Step 2 continued RECONSTRUCT ACCOUNTS

Page 1 handout

Extract 2017 SOFP 2017 2016 ↑ OR ↓ Accounts Receivable 120 000 100 000 ↑20 000 EReconstruct A/Rec by putting in the Sinformation that you know and solve for the 900 000 Bmissing info.- cash received from customers 45 000

Accounts Receivable

The University of Sydney

Page 31

Step 2 continued RECONSTRUCT ACCOUNTS

Page 1 handout

Extract 2017 SOFP 2017 2016 ↑ OR ↓ Accounts Receivable 120 000 100 000 ↑20 000 Extract Statement of Profit or Loss Sales 900 000 Bad Debts Written-off 45 000

Accounts Receivable

The University of Sydney

Page 32

Step 2 continued RECONSTRUCT ACCOUNTS

Accounts Receivable Opening Bal

100 000

Closing Bal

Opening Bal The University of Sydney

120 000

120 000 Page 33

Step 2 continued RECONSTRUCT ACCOUNTS

Page 1 handout

Extract 2017 SOFP 2017 2016 ↑ OR ↓ Accounts Receivable 120 000 100 000 ↑20 000 Extract Statement of Profit or Loss Sales 900 000 Bad Debts Written-off 45 000

The University of Sydney

Page 34

Step 2 continued RECONSTRUCT ACCOUNTS

Dr A/Rec 900 000 Cr Sales 900 000

Accounts Receivable Opening Bal Sales

100 000 900 000 Closing Bal

Opening Bal The University of Sydney

120 000

120 000 Page 35

Step 2 continued RECONSTRUCT ACCOUNTS

Page 1 handout

Extract 2017 SOFP 2017 2016 ↑ OR ↓ Accounts Receivable 120 000 100 000 ↑20 000 Extract Statement of Profit or Loss Sales 900 000 Additional information: Bad Debts Written-off

The University of Sydney

45 000

Page 36

Step 2 continued RECONSTRUCT ACCOUNTS

Dr Allow DD 45 000 Cr A/Rec 45 000

Accounts Receivable Opening Bal

100 000 Allow for DD

45 000

Sales

900 000 Closing Bal

120 000

Opening Bal The University of Sydney

120 000 Page 37

Step 2 continued RECONSTRUCT ACCOUNTS

Accounts Receivable Opening Bal

100 000 Allow for DD

Sales

900 000 Closing Bal 1000 000

Opening Bal The University of Sydney

120 000

45 000

120 000 1000 000 Page 38

Step 2 continued RECONSTRUCT ACCOUNTS

Dr Cash ? Account Cr A/Rec ? Opening Bal

100 000 Allow for DD

Sales

900 000 * Cash Closing Bal 1000 000

Opening Bal The University of Sydney

120 000

45 000 ? 120 000 1000 000 Page 39

Step 2 continued Page 1 handout

Extract 2017 SOFP 2017 2016 ↑ OR ↓ Accounts Receivable 120 000 100 000 ↑20 000 Extract Statement of Profit or Loss Sales 900 000 Bad Debts Written-off 45 000

Accounts Receivable Opening Bal

100 000 Allow for DD

Sales

900 000 * Cash Closing Bal 1000 000

Opening Bal The University of Sydney

120 000

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NAMEOFCOMPANY StatementofCashFlows FortheyearendedXX/XX/XX Cashflowsfromoperatingactivities  Receiptsfromcustomers   835 000  Paymentstosuppliers ____________   Incometaxpaid (XXX)   Netcashprovided/(used)byoperatingactivities$XXX Cashflowsfrominvestingactivities  Purchaseofland (XX)   Purchaseofequipment (__________)   Proceedsfromsaleofequipment ___________   Netcashprovided/(used)byinvestingactivitiesXXX Cashflowsfromfinancingactivities  Proceedsfromissueofshares XXX   Cashfromborrowings XXX   Dividendspaid ()   Netcashprovided/(used)byinvestingactivitiesXXX Netincrease/(decrease)incashheld  ___________ 32 000 Cashatthebeginningofthefinancialyear___________ 159 000 Cashattheendofthefinancialyear  ___________ 191 000  Note1:Non‐cashinvestingandfinancingactivities Conversionofnotespayableintoordinaryshares__________   Note2:Reconciliationindirectmethod(seenextpage)  The University of Sydney

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Step 2 continued USING FORMULA

Cash receipts from customers – Formula to calculate cash

receipts from customers:

Revenue from sales ADD SUBTRACT SUBTRACT

The University of Sydney

↓ Accounts Receivable ↑ Accounts Recei...