CBACTG01-CHAPTER 2 MODULE PDF

CHAPTER 2 STATEMENT OF CASH FLOWS Objectives: 1. Define the statement of cash flows 2. Differentiate the accounting policies, changes in accounting estimates and errors PAS 7 Statement of Cash Flows...

CHAPTER 2 STATEMENT OF CASH FLOWS Objectives: 1. Define the statement of cash flows 2. Differentiate the accounting policies, changes in accounting estimates and errors PAS 7 Statement of Cash Flows The statement of cash flows provides information about the sources and utilization (i.e., historical changes) of cash and cash equivalents during the period. The statement of cash flows presents cash flows according to the following classifications: a. Operating activities include transactions that enter into the determination of profit or loss. These transactions normally affect income statement accounts b. Investing activities include transactions that affect long-term assets and other non-operating assets c. Financing activities include transactions that affect equity and non-operating liabilities 1 Examples of cash flows from Operating Activities - cash receipts from the sale of goods, rendering of services, or other forms of income - cash payments for purchases of goods and services - cash payments for operating expenses, such as employee benefits, insurance, and the like, and payments or refunds of income taxes - cash receipts and payments from contracts held for dealing or trading purpose The statement of cash flows provides information about the sources and utilization (i.e., historical changes) of cash and cash equivalents during the period. The statement of cash flows presents cash flows according to the following classifications Operating activities include transactions that enter into the determination of profit or loss. Examples of cash flows from Investing Activities - cash receipts and cash payments in the acquisition and disposal of property, plant and equipment, investment property, intangible assets and other noncurrent assets - cash receipts and cash payments in the acquisition and sale of equity or debt instruments of other entities (other than those that are classified as cash equivalents or held for trading) - cash receipts and cash payments on derivative assets and liabilities (other than those that are held for trading or classified as financing activities) 2  - loans to other parties and collections thereof (other than loans made by a financial institution) Examples of cash flows from Financing Activities - cash receipts from issuing shares or other equity instruments and cash payments to redeem them - cash receipts from issuing notes, loans, bonds and mortgage payable and other short-term or long-term borrowings, and their repayments - cash payments by a lessee for the reduction of the outstanding liability relating to a lease Interests and Dividends 3 Reporting cash flows from operating activities Direct method - shows each major class of gross cash receipts and gross cash payments Indirect method - adjusts accrual basis profit or loss for the effects of changes in operating assets and liabilities and effects of non-cash items PAS 8 Accounting Policies, Changes in Accounting Estimates and Errors PAS 8 prescribes the criteria for selecting, applying, and changing accounting policies and the accounting and disclosure of changes in accounting policies, changes in accounting estimates and correction of prior period errors Accounting policies are “the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.” (PAS 8.5) Accounting policies are the relevant PFRSs adopted by an entity in preparing and presenting its financial statements Philippine Financial Reporting Standards (PFRSs) are Standards and Interpretations adopted by the Financial Reporting Standards Council (FRSC). They comprise the following: a. Philippine Financial Reporting Standards 4  (PFRSs) b. Philippine Accounting Standards (PASs) c. Interpretations 5  When it is difficult to distinguish a change in accounting policy from a change in accounting estimate, the change is treated as a change in an accounting estimate An entity shall change an accounting policy only if the change: - is required by a PFRS - results to a more relevant and reliable information about an entity’s financial position, performance, and cash flows Examples of changes in accounting policy - Change from FIFO cost formula for inventories to the Average cost formula - Change in the method of recognizing revenue from long-term construction contracts - Change to a new policy resulting from the requirement of a 6  new PFRS - Change in financial reporting framework, such as from PFRS for SMEs to full PFRSs - Initial adoption of the revaluation model for property, plant, and equipment and intangible assets - Change from the cost model to the fair value model of measuring investment property - Change in business model for classifying financial assets resulting to reclassification between financial asset categories Examples of changes in accounting estimate - Change in depreciation or amortization methods - Change in estimated useful lives of depreciable assets - Change in estimated residual values of depreciable assets - Change in required allowances for impairment losses and uncollectible accounts - Changes in fair values less cost to sell of non-current assets held for sale and biological assets Errors Errors include the effects of - Mathematical mistakes - Mistakes in applying accounting policies - Oversights or misinterpretations of facts - Fraud 7 Events after the Reporting Period Events after the reporting period are “those events, favorable or unfavorable, that occur between the end of the reporting period and the date that the financial statements are authorized for issue.” (PAS 10) Two types of events after the reporting period - Adjusting events after the reporting period – are those that provide evidence of conditions that existed at the end of the reporting period - Non-adjusting events after the reporting period – those that are indicative of conditions that arose after the reporting period Date of authorization of the financial statements This date is the date when management authorizes the financial statements for issue regardless of whether such authorization for issue is for further approval or for final issuance to users Examples of adjusting events: - The settlement after the reporting period of a court case that confirms that the entity has a present obligation at the end of reporting period 8  - The receipt of information after the reporting period indicating that an asset was impaired at the end of reporting period. For example: d. The bankruptcy of a customer that occurs after the reporting period may indicate that the carrying amount of a trade receivable at the end of reporting period is impaired. e. The sale of inventories after the reporting period may give evidence to their net realizable value at the end of reporting period - The determination after the reporting period of the cost of asset purchased, or the proceeds from asset sold, before the end of reporting period - The discovery of fraud or errors that indicate that the financial statements are incorrect Examples of non-adjusting events normally requiring disclosures - Changes in fair values, foreign exchange rates, interest rates or market prices after the reporting period - Casualty losses (e.g., fire, storm, or earthquake) occurring after the reporting period but before the financial statements were authorized for issue - Litigation arising solely from events occurring after the reporting period - Major ordinary share transactions and potential ordinary share transactions after the reporting period - Major business combination after the reporting period 9 - Announcing a plan to discontinue an operation after the reporting period For further discussion please refer to the link provided: PAS 7 – Statement of Cash Flows https://www.youtube.com/watch?v=lxeFyzC2u5I For further discussion please refer to the link provided : PAS 8 – Accounting Policies https://www.youtube.com/watch?v=BP49bwQcBvk For further discussion please refer to the link provided: PAS 10 –Events After Reporting Period https://www.youtube.com/watch?v=f989U5Ju_iA Reference Book: Conceptual Framework and Accounting Standards By: Zeus Vernon B. Millan, 2019 10