...First of all, this assignment is mainly talk about the indirect method for the cash flow statement. The key issues to be discussed in this assignment is about whether the option of using the indirect method of cash flow reporting is beneficial to the users of general purpose financial reports in Australia. Furthermore, the reasons for harmonization, accounting standard AASB 107 Statement of Cash Flows and the Conceptual Framework will also be discussed. In AASB 107, cash flow is defines as inflows of the cash and cash equivalents and ‘cash’ as cash on hand and demand deposits. (AASB 107, 2011) The statement of cash flow can be done using indirect method and direct method. Both methods have the three same categories which is cash flow from operating activities, investing activities and financing activities. However, the different between these methods are the ways that we calculate the net cash flow from the section operating activities. AASB 107 state that an entity using direct method shall report cash flows from operating activities are the major classes of gross cash receipts and gross cash payments are disclosed. For indirect method, profit or loss is adjusted for the effects of transactions of a non-cash nature, any deferrals or accruals of past or future operating cash receipts or payments, and items of income or expense associated with investing or financing cash flows. It also means reconciling from net income to cash provided by operating activities. (James collines,eHow...
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...In financial accounting, a cash flow statement, also known as statement of cash flows or funds flow statement,[1] is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. Essentially, the cash flow statement is concerned with the flow of cash in and cash out of the business. The statement captures both the current operating results and the accompanying changes in the balance sheet.[1] As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills. International Accounting Standard 7 (IAS 7), is the International Accounting Standard that deals with cash flow statements. People and groups interested in cash flow statements include: * Accounting personnel, who need to know whether the organization will be able to cover payroll and other immediate expenses * Potential lenders or creditors, who want a clear picture of a company's ability to repay * Potential investors, who need to judge whether the company is financially sound * Potential employees or contractors, who need to know whether the company will be able to afford compensation * Shareholders of the business. Contents [hide] * 1 Purpose * 2 History & variations * 3 Cash flow activities o 3.1 Operating activities o 3.2 Investing...
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...becomes the rules and regulations to govern the way in preparing financial statements. In these days, International Financial Reporting Standards (IFRS) are widely implemented, yet the underlying accounting practices are still unstandardized due to various factors of economic and cultural differences, just to name a few. In 2010, proposals were issued in Australia and New Zealand which aim to harmonize the standards as adopted in both countries (KPMG, 2010). The purpose of this paper is to study whether the given option of using the indirect method in reporting cash flow statement is beneficial to the users of general purpose financial reports. The paper is divided into five parts where it started off with a brief introduction of AASB 107, following by the reasons for harmonization, the arguments for and against the (in)direct method as well as some criticisms before moving into conclusion. Cash flow is vital to determine the potential of profitable firms as most firms under the basis of accrual accounting may still present favorable profits, despite having poor cash management. The objective of AASB 107 is to require the provision of information about the historical changes in cash and cash equivalents of an entity by means of cash flow statement (Australian Accounting Standards Board [AASB], 2013). In this paper, focus is concentrated in reporting cash flow from operating activities using either the direct method, whereby major classes of gross cash receipts and gross cash payments...
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...Introduction Many argue that the cash flow statement is the most important of the financial statements. This actually quite sound of an argument considering that once a business, particularly small and medium enterprises (SMEs), runs out of cash, it usually winds up out of business soon after. One other reason that cash flow statements are important is the comparability they offer. Cash flow statements can be used to clearly assess the health of one business from another largely because across most frameworks they are similar. Even though this is the case, the different frameworks, namely International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP), do have notable differences. These differences are significant enough to merit mentioning if only to ensure that investors are able to compare apples to apples. As mentioned earlier cash flow statements under both frameworks are very similar from the format to the content; however, the purpose of this paper is to highlight the similarities and differences by comparing both frameworks under various areas as they relate to cash flow statement preparation. Statement Preparation Methods To begin, we should address the specifics of cash flow preparation under IFRS and GAAP. Under IFRS, businesses are given the option to prepare statement of cash flows either using Direct method or Indirect method. That being said, the IFRS recommends preparing the cash flow statement using direct method but...
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... Businesses in the Food Manufacturing Industry are in constant competition with one another where their products are sold right in front of the view of the customer. The competition in the industry is fueled by limited shelf space in retail stores. So, all of the food manufacturing companies must compete with each other to ‘get into’ stores and stay there. In the soft-drink market, for example, this often leads to self-cannibalization of shelf space by the creation of new products. It is better for Coke space to be replaced by Vanilla Coke than for it to be replaced by Pepsi. Threat of buyer power: Medium (5). The buyer power is a product of the industry competition and readily available substitutions. Buyers have a large degree of indirect influence. Everyday people will respond to price changes by simply switching to the many alternatives created by rival firms causing the retail stores to buy less of a product to put on their shelves. In a sense, Food Manufacturers are both business-to-business and business-to-consumer. Also, if a dominant retail store arrives, they will directly negotiate prices down to their liking. Threat of new entrants: Low(3). Anyone can produce food. However, to mass-manufacture it, there is a huge initial outlay involved with PPE. Even with using only excess capacity, it cost $200,000 to set up super project in 1967. Adding in inflation, the 2013 equivalent of this is $1,400,461.08. Also, many food...
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...“Financial Accounting, sixth edition”, cash flow “permits a company to expand operations, replace worn assets, take advantage of new investment opportunities, and pay dividends to its owners”. Analyzing cash flow enables one to understand what happened to cash and cash equivalents throughout a specific period – how to the beginning balance of cash become the ending balance. The statement classifies cash flow in three different categories; operating activities, investing activities, and financing activities. To better understand and prepare the statement manipulating the balance sheet equation is a must. Assets can be further broken down into cash/cash equivalents and noncash asset. It is important to note that any change in cash also results in a change of liabilities, stockholder’s equity or noncash assets. With all of this, the “new” equation follows, change in cash = change in liabilities + change in SE – change in noncash assets. Cash flows from operating activities relate directly to revenues and expenses on the income statement. Examples of cash inflow activities include cash received from customers, dividends and interest on investments. Examples of outflows would be salaries, wages and income taxes. There are two methods in which one can present operating activities on the statement. It is important to note that both methods will provide the same number. The first is the direct method. This method “reports components of cash flow as gross receipts and gross payment...
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...Chapter 11: Reporting and Interpreting Stockholders’ Equity * Corporate Ownership * Shares of stock can be purchased in small amounts. * Ownership interests are transferable. * Stockholders are not liable for the corporation’s debts * Common stock – the basic voting stock issued by a corporation to stockholders. * Voting rights * Dividends * Residual claim – if the company ceases operations, stockholders share in any assets remaining after creditors have been paid. * Preemptive Rights – existing stockholders may be given the first chance to buy newly issued stock before it is offered to others. * Equity vs. Debt Financing * Equity financing – issuing new stock to investors * Debt financing – borrowing money from lenders * All transactions between a company and its stockholders affect the company’s balance sheet accounts only. * Common Stock Transactions * Contributed capital – reports the amount of capital the company received from investors’ contributions, in exchange for the company’s stock. * Retained earnings – reports the cumulative amounts of net income earned by the company less the cumulative amount of dividends declared since the corporation was first organized. * Treasury stock – reports shares that were previously owned by stockholders but have been reacquired and are now held by the corporation * Authorization, Issuance, and Repurchase of Stock ...
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...Dividends, if cash, is shown in the financing section. | GENERAL rules for the Statement of Cash Flows (Indirect Method) Cash provided by op. activities: Net Income (from Income Statement) + Depreciation, amortization, and/or depletion (From Income Statement) + Decrease in CURRENT Asset accounts other than cash (calculate the difference between this period and last period from Balance Sheet) - Increase in CURRENT Asset accounts other than cash (calculate the difference between this period and last period from Balance Sheet) + Increase in CURRENT Liabilities accounts (calculate the difference between this period and last period from Balance Sheet) - Decrease in CURRENT Liabilities accounts (calculate the difference between this period and last period from Balance Sheet)+ Loss on Disposal of PPE/Fixed Assets used in normal operations (From Income St.)- Gain on Disposal of PPE/Fixed Assets used in operations (From Income Statement) = cash provided by op. activities Cash provided by investing activities: - Increase in PPE and LONG-TERM Assets if paid cash (calculate the difference between this period and last period from Balance Sheet) + Decrease in PPE and LONG-TERM Assets if received cash (calculate the difference between this period and last period from Balance Sheet) - Increase in Investments Assets if paid cash (calculate the difference between this period and last period from Balance Sheet) + Decrease in Investments Assets if received cash (calculate the...
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...constitution: The 1999 constitution of the federal Republic of Nigeria Is one of the legal frameworks that regulate the receipts and pa;yments of public funds. (b) Audit Ordinance of 1956 or Act of 1956: section 13,sub- sections 1-3 mandate the accountant General of the Federation to finish the Auditor- general for the federation with the country’s financial statements. The Auditor- general shall within 60 days of the Accountant – General’s financial statements submit his report to each House of the National Assemble. (c) Finance (control & management) Act of 1958: This governs the management and operation of all government funds. It regulates the accounting system, the books of account to be kept and the procedures to be followed in the preparation of accounts and financial statements. (d) Financial Regulations: these are the accounting manual of the government ministries / Extra ministerial Departments which deals with financial and accounting matters. It set out the procedures and steps to be followed in treating most of government transctions. (e) Finance/ Treasury Circulars: These are administration tools which are used to amend the provisions of financial Regulations,Public service rules and the introduction of new policy guildelines. The sections of the constitution quoted above authorize the receipts and payment of government, the allocation of revenue, the audit of public accounts and other financial matters. For ease of reference, some...
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...of Cash Flows The statement of cash flows reports the cash receipts, cash payments, and the net change in cash resulting from the operating, investing, and financing activities of a company during the period. The information in a statement of cash flows should help investors, creditors, and others assess: ▪ The company’s ability to generate future cash flows. By examining relationships between items in the statement of cash flows, investors and others can better predict the amounts, timing, and uncertainty of future cash flows. ▪ The company’s ability to pay dividends and meet obligations. Employees, creditors, stockholders, and customers should be particularly interested in this statement because it alone shows the flows of cash in a business. ▪ The reasons for the difference between net income and net cash provided (used) by operating activities. Many financial statement users investigate the reasons for the difference between net income and cash provided by operating activities and then they can assess for themselves the reliability of the income numbers. ▪ The investing and financing transactions during the period. By examining a company’s investing activities and financing activities, a financial statement reader can better understand why assets and liabilities increased or decreased during the period. Study Objective 2 - Distinguish Among Operating, Investing, and Financing Activities The statement of cash flows classifies cash receipts...
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...Dividends, if cash, is shown in the financing section. | GENERAL rules for the Statement of Cash Flows (Indirect Method) Cash provided by op. activities: Net Income (from Income Statement) + Depreciation, amortization, and/or depletion (From Income Statement) + Decrease in CURRENT Asset accounts other than cash (calculate the difference between this period and last period from Balance Sheet) - Increase in CURRENT Asset accounts other than cash (calculate the difference between this period and last period from Balance Sheet) + Increase in CURRENT Liabilities accounts (calculate the difference between this period and last period from Balance Sheet) - Decrease in CURRENT Liabilities accounts (calculate the difference between this period and last period from Balance Sheet)+ Loss on Disposal of PPE/Fixed Assets used in normal operations (From Income St.)- Gain on Disposal of PPE/Fixed Assets used in operations (From Income Statement) = cash provided by op. activities Cash provided by investing activities: - Increase in PPE and LONG-TERM Assets if paid cash (calculate the difference between this period and last period from Balance Sheet) + Decrease in PPE and LONG-TERM Assets if received cash (calculate the difference between this period and last period from Balance Sheet) - Increase in Investments Assets if paid cash (calculate the difference between this period and last period from Balance Sheet) + Decrease in Investments Assets if received cash (calculate the...
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...A. Corporate finance is important to all managers because they must generate enough cash to compensate the investors who provide necessary capital to help company by evaluating any proposal, whether it relates to marketing, production, strategy, or any other area, and implement only products that will add value to company investors. B. The organizational forms of a company is proprietorship, partnership, and corporation: Proprietorship is an unincorporated business owned by one individual. The three advantages are easily and inexpensively form, subject to few government regulations, and income is not subject to corporate taxation but taxed as part of the proprietor’s personal income. The three disadvantages are difficult for a proprietorship to obtain capital for growth, proprietor has unlimited personal liability for business’s debts, which can result in losses that may exceed money invested in company, and life of proprietorship is limited to life of its founder. Partnership two or more persons or entities associate to conduct a non-corporate business for profit. It may operate under different degrees of formality, ranging from informal, oral understandings to formal agreements filed with the secretary of state in which the partnership formed. The disadvantages of partnership is the liability were partners can potentially lose all of their personal assets, even assets not invested in the business due to partnership law stating that each partner is liable for the...
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...off have been introduced. This chapter will deal with project cash flow to predict the actual flow of money during the contract duration. Also, this chapter will introduce the means for finalizing a contract price. A project's cash flow is basically the difference between the project's income and its expense. The difference between a company's total income and its total expense over a period of time is the company cash flow. 9.1 Contract Cash Flow At the project level, a project’s cash flow is the difference between the project’s expense and income. At the construction company level, the difference between company’s total expense and its total income over a period of time is the company’s cash flow. Cash flow = Cash in – Cash out = Income - Expense Forecasting cash flow is necessary for a construction company for the following reasons: To ensure that sufficient cash is available to meet the demands. It shows the contractor the maximum amount of cash required and when it will be required. Thus, the contractor can made arrangements to secure the required cash. It provides a reliable indicator to lending institutions that loans made can be repaid according to an agreed program. It ensures that cash resources are fully utilized to the benefit of the owner and investors in the company. Construction Management 182 Dr. Emad Elbeltagi The three main ingredients in determination of cash flow are: Expenses (cash out) which represents the aggregate of the payments which the...
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...Pre-Test 1. Financial accounting is an information system that: tracks and records an organization's business transactions 2. Jeff Brown is the sole owner of Shoe Central, a small shoe shop. One day, he buys a used car for his personal use, and pays $2,000 from his checking account. The fact that this transaction has no effect on Shoe Central's financial accounts is an application of the: 3. Jeff Brown, owner of Shoe Central, a small shoe store, buys cleaning supplies for his store once every six months. The fact that his accountant writes off, or records as expenses, the full cost of the cleaning supplies when they are purchased, rather than each monthly accounting period as they are used, is an application of the: 4. Oliver Enterprises buys a new stamping machine for $10,000 at an auction held by a company in bankruptcy proceedings. The machine is a very good deal; Oliver would have paid about $12,000 to buy it in the open market. Which of the following statements best describes the application of the historical cost concept? 5. Tournas Sports receives a special order for 100 team jerseys. The customer pays the full amount, $2,000, at the time of the order. The jerseys will be delivered in two weeks. Choose the statement that best reflects the application of the revenue recognition concept at the time of the order: 6. On April 30, Jemison Engineering receives a special order for a swing set, to be delivered to the customer in a month's time. Jemison...
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...CHAPTER 5 QUESTIONS 1. Cash flow from operations can offer a clearer picture of a company's performance than does net income when: • A company reports large noncash expenses, such as write-offs, depreciation, and provisions for future obligations. Earnings may give an overly pessimistic view of the firm. • A company is growing rapidly. Reported earnings may be positive, but operations are actually consuming rather than generating cash. • A company badly needs to report favorable earnings, as is the case before a major loan application or before a stock offering. In these cases, cash flow from operations provides an excellent reality check for reported earnings. 2. To qualify as a cash equivalent when preparing a statement of cash flows, an item must be (a) readily convertible to cash, and (b) so near its maturity that there is insignificant risk of changes in value due to changes in interest rates. As a general rule, only investments with original maturities of 3 months or less qualify. The original maturity is determined from the date of acquisition of the investment by the entity, not the date of original issuance of the security. 3. Operating activities include those transactions and events that enter into the determination of net income. Cash receipts from selling goods or from providing services are the major cash inflow for most businesses. Major cash outflows include payments to purchase inventory and to...
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