İNTERMEDIATE

ACCOUNTING
3044.1
Indirect Method Example:
Big Company started its operations on January 1, 2017
Big Company
Comparative Balance Sheets
December 31, 2017 January 1, 2017
Cash CU 174,000 -0-
Accounts Receivable 30,000 -0-
Inventory 175,000 -0-
Prepaid expenses 23,000 -0-
PPE(net) 105,000 -0-
Accounts payable 75,000 -0-
Accrued expenses 35,000 -0-
 STATEMENT OF CASH FLOWS

Indirect Method:
Big Company
Income Statement
December 31,2017
Sales CU 795,000
CGS 465,000
Gross Profit 330,000
Operating Expenses 175,000
Depreciation Exp. 25,000
Income Before Tax 130,000
Tax Expense 63,000
Net Income CU 67,000

Additional Info:
- CU 85,000 of dividends were paid.
 STATEMENT OF CASH FLOWS

Net Cash From Operations:

Net Income
+Depreciation Expense - Gain on sale of assets
+Loss on Sale of Assets - Inc. in Accounts Receivable
+ Dec. İn Accounts Receivable - Inc. in Inventories
+ Dec. İn Inventories - Inc. in Prepaid Expenses
+ Dec. İn Prepaid Expenses - Dec. İn Accounts Payable
+ Inc. in Accounts Payable- Dec. İn Accrued Liabilities
+Inc. in Accrued Liabilities
STATEMENT OF CASH FLOWS

Big Company
Statement of Cash Flows (partial)
For the Year Ended Dec 31, 2017
Cash Flows From Operating Activities
Net Income CU 67,000
Inc. in Acc.Rec (30,000)
Inc. in Inventories (175,000)
Inc. in Prepayments ( 23,000)
Inc. in Acc. Payable 75,000
Inc. in Accrued Exp. 35,000
Depreciation Exp. 25,000 (93,000)
Net Cash Used by Operating Activities (26,000)
STATEMENT OF CASH FLOWS

IFRS/ GAAP Comparison

- Both IFRS and US GAAP require that the statement of cash flows has three sections(operating, investing, and financing).
-Both allow the use of either the direct or the indirect method in preparing the statement of cash flows. Indirect method is more widespread
under both of them.
- Under US GAAP, cash and cash equivalents include certain short-term investments which is not the case under IFRS.
- Under US GAAP, bank overdrafts are included in financing activities. Under IFRS, they are reported as part of cash and cash equivalents in
certain situations.
- Under US GAAP, non-cash investing and financing activities may be reported on the statement of cash flows. IFRS requires them to be
excluded from the statement of cash flows.
- Under US GAAP, interest and dividends received, and interest paid are required to be included in operating activities. Dividends paid are
included in financing activities section. Under IFRS, alternative treatments are permitted .
STATEMENT OF CASH FLOWS

Important Non-Cash Transactions:

- Exchanges of non-monetary assets
- Refinancing long-term debt
- Acquiring assets by assuming liabilities
- Issuance of equity securities to retire debt
STATEMENT OF CASH FLOWS

Questions:
1. Which of the following could be classified as an operating cash flow?
a. Repayment of borrowings
b. Proceeds from payment of intangibles
c. Impairment losses
d. Both c and d
e. None of the above
STATEMENT OF CASH FLOWS

2. Dividends paid are classified as

a.Operating cash flow
b. Financing cash flow
c. Both a and b
d. None of the above
STATEMENT OF CASH FLOWS

3. Income taxes should be classifed under which section?

a. Operating activities
b. Investing activities
c. Financing activities
d. All of the above
STATEMENT OF CASH FLOWS

4. Explain the effect (if any) of each of the follwing transactions on an entity’s profit or loss
and on its cash flows:
a. the purchase of new equipment
b. the payment of a dividend
c. the purchase of inventory for cash
d. the payment of a supplier’s invoice