Financial Accounting Analysis Mid must above 85

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timer Asked: May 20th, 2021

Question Description

1:30 to 3:30 PM Atlantic Time (Canada)

Book:Financial Accounting Using IFRS. Cambridge Business Publishers (CBP). 2nd Edition by Wong

Chapter 1 to 5

lecture attached below

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FINANCIAL ACCOUNTING using IFRS 2nd Edition Franco Wong Thomas Dyckman Michelle Hanlon Robert Magee Glenn Pfeiffer CHAPTER 1 Introducing Financial Accounting ©Cambridge Business Publishers, 2017 Learning Objective 1 Identify the users of accounting information and discuss the costs and benefits of disclosure. ©Cambridge Business Publishers, 2017 2 What is Accounting? ▪ Accounting is… ▪ The process of recording, summarising, and analysing financial transactions ▪ To help people make economic decisions Financial Accounting Managerial Accounting Designed primarily for decision makers outside of the company Designed primarily for decision makers within the company ©Cambridge Business Publishers, 2017 3 Who Uses Accounting Information? Current Shareholders Management Customers Potential Shareholders Demand for Information Directors Suppliers Creditors ©Cambridge Business Publishers, 2017 Government Agencies Financial Analysts 4 Information Needs of Decision Makers Financial Accounting Managerial Accounting Who are the Decision Makers? ▪ Investors and analysts ▪ Top management ▪ Creditors ▪ Marketing teams ▪ Suppliers and customers ▪ Production and operations What Decisions are Made? ▪ Buy or sell shares? ▪ Develop new strategy? ▪ Lend or not? ▪ Launch a new product or not? ▪ Purchase/sell goods or not? ▪ Manage operations What Information is Needed? ▪ Sales and costs ▪ Cash in and cash out ▪ Assets and liabilities ©Cambridge Business Publishers, 2017 ▪ Product sales and costs ▪ Department performance ▪ Budgets and quality reports 5 Forms of Business Ownership CORPORATION A Legal Entity A large number of owners or shareholders not involved in managing day-to-day operations of the company SOLE PROPRIETORSHIP A single owner who typically manages the daily operations PARTNERSHIP Two or more owners who are usually involved in managing the business ©Cambridge Business Publishers, 2017 6 Shareholders ▪ The shareholders of large corporations… ▪ Provide resources such as cash to a corporation in exchange for equity ownership ▪ Not involved in day-to-day business operations ▪ Rely on financial statement information ▪ To evaluate management performance ▪ Assess the company’s financial condition ▪ Predict future success ©Cambridge Business Publishers, 2017 7 Growth of Corporations Expansion requires more capital for growth Begin as small, privately held businesses Publicly through organised stock exchanges Private funding ©Cambridge Business Publishers, 2017 Banks, investors 8 Creditors and Suppliers Creditors ▪ Banks and other lenders that provide money that must be repaid ▪ Use financial accounting information to assess loan terms, loan amounts, interest rates, collateral Suppliers ▪ Provide supplies, inventory, etc. needed for operations ▪ Use financial information to establish credit sales terms and to determine long-term commitment to supply-chain relations ©Cambridge Business Publishers, 2017 9 Managers and Directors Management ▪ Compensation often linked to financial performance through bonuses, share options and other incentive compensation Board of Directors ▪ Elected by shareholders to represent shareholder interest and oversee management ▪ Required by law for publicly traded companies ▪ Uses financial accounting to review the results of operations, evaluate future strategy, and assess management performance ©Cambridge Business Publishers, 2017 10 Other Users of Financial Information Financial Analysts Prospective employees Labor unions Customers Tax agencies Other government agencies ©Cambridge Business Publishers, 2017 11 Costs and Benefits of Disclosure ▪ What is disclosure? ▪ Providing financial information to external users ▪ Benefits ▪ May lower financing costs through lower borrowing rates ▪ May lower operating costs through better prices from suppliers who see a long-term relationship ▪ Costs ▪ Hiring accountants to prepare financial statements ▪ Cost of allowing competitors to see information ▪ Political costs–regulation and increased taxes ©Cambridge Business Publishers, 2017 12 Learning Objective 2 Describe a company’s business activities and explain how these activities are represented by the accounting equation. ©Cambridge Business Publishers, 2017 13 Business Activities A business plans activities, finances those activities, invests resources into those activities, and then engages in operating activities. ©Cambridge Business Publishers, 2017 14 Planning Activities Goals Planning Primary goal is to create value for the owners Strategies How a company plans to achieve its goals Strategic plan describes how the company plans to achieve its goals ©Cambridge Business Publishers, 2017 15 Investing Activities ▪ What are investing activities? ▪ Activities that consist of acquiring and disposing of resources (assets) that a company uses to produce and sell its products or provide its services Short-term Assets Long-term Assets Resources used quickly such as inventory Resources used over longer periods of time, such as equipment ©Cambridge Business Publishers, 2017 16 Mix of Assets Held by Companies Why might Qantas Airways and Unilever have high proportions of long-term assets? ©Cambridge Business Publishers, 2017 17 Financing Activities ▪ What are financing activities? ▪ Methods that companies use to fund investments ▪ What is financial management? ▪ Planning of resource needs, including the proper mix of financing sources Two Sources of External Financing Debt Financing (Creditors) ©Cambridge Business Publishers, 2017 Equity Financing (Owners) 18 Mix of Financing Sources Held by Companies Which company has the lowest proportion of liabilities? ©Cambridge Business Publishers, 2017 19 Financing Activities Investing = Creditor Financing + Owner Financing Assets Liabilities Equity Economic resources Nonowner claims on assets Owner claims on assets = + At fiscal year-end 2013, Roche reported (in millions of Swiss Francs): 62,167 CHF = 40,926 CHF + 21,241 CHF $14 ©Cambridge Business Publishers, 2017 20 Operating Activities ▪ The production, promotion, and selling of products and services Inventory Salaries Input Materials Markets Logistics Generate operating expenses Output Markets Customers Generate operating revenues and some operating expenses (marketing and distribution) In 2013, Roche reported: Income = Revenues – Expenses 11.4 million CHF ©Cambridge Business Publishers, 2017 = 46.8 million CHF – 35.4 million CHF 21 Learning Objective 3 Introduce the four key financial statements including the balance sheet, income statement, statement of shareholders’ equity, and statement of cash flows. ©Cambridge Business Publishers, 2017 22 Financial Statement Links Reports the company’s financial position at a point in time. ©Cambridge Business Publishers, 2017 Reports performance over a period of time. 23 Reporting Periods ▪ Can be annual, semiannual, quarterly, or monthly reporting periods ▪ Fiscal year ▪ A one-year reporting period ▪ Often called an accounting year ▪ Sometimes ends on a date other than December 31 Roche’s fiscal year ends on December 31. ©Cambridge Business Publishers, 2017 24 Balance Sheet Lists the company’s investments and sources of financing using the accounting equation. Assets = Liabilities + Equities A.K.A. Statement of Financial Position or Statement of Financial Condition ©Cambridge Business Publishers, 2017 Liabilities Assets + Equities 25 Roche’s Balance Sheet Roche’s owner financing totals 21,241 million CHF, while creditor financing totals 40,926 million CHF. ©Cambridge Business Publishers, 2017 26 Income Statement Reports the results of a company’s operating activities over a period of time. Revenues – Expenses = Net Income A.K.A. Statement of Income and the Statement of Earnings and the Statement of Operations and the Statement of Profit and Loss ©Cambridge Business Publishers, 2017 Covers a specified period of time 27 Roche’s Income Statement Roche’s profit is 11,373 million CHF for its fiscal year ending December 31, 2013. Income Statement (in millions of CHF) A more detailed format…… Income Statement with Gross Profit Subtotal (in millions of CHF) ©Cambridge Business Publishers, 2017 28 Statement of Changes in Equity ▪ Reports on changes in equity over a period of time ▪ Contributed capital ▪ Amounts from issuing new shares during the period ▪ Share capital and contributed surplus ▪ Retained earnings ▪ Cumulative income since the company began business minus dividends paid out to shareholders ▪ Other equity changes ©Cambridge Business Publishers, 2017 29 Roche’s Statement of Changes in Equity Statement of shareholder Equity (in millions of CHF) Roche’s paid out 6,238 million CHF of its profit as dividends to shareholders during its fiscal year ending December 31, 2013. ©Cambridge Business Publishers, 2017 30 Statement of Cash Flows ▪ Reports net cash flows from operating, investing, and financing activities over a period of time ▪ Operating cash flows differ from net income ▪ Due to differences in the time that revenues and expenses are recorded and the time the cash is received and paid ©Cambridge Business Publishers, 2017 31 Roche’s Statement of Cash Flows Statement of Cash Flows ($ millions) Roche generated 15,772 million CHF of cash from operations during the year ending December 31, 2013. ©Cambridge Business Publishers, 2017 32 Comparison of Net Income to Operating Cash Flows Comparison of Net Income to Operating Cash Flows ©Cambridge Business Publishers, 2017 33 Financial Statement Links Reports the company’s financial position at a point in time. ©Cambridge Business Publishers, 2017 Reports performance over a period of time. 34 Financial Statement Linkages A central feature of accounting is the linkage among the 4 primary statements ▪ Called articulation of financial statements How did cash (on the balance sheet) change? Look at Statement of Cash Flows How did equity (on the balance sheet) change? Look at Statement of Changes in Equity How did operations affect retained earnings (on the balance sheet)? Look at Statement of Income ©Cambridge Business Publishers, 2017 35 Roche’s Statement Articulation ©Cambridge Business Publishers, 2017 36 Information Beyond Financial Statements Extensive review of company information is communicated in these reports. Management Discussion and Analysis (MD&A) Independent Auditor Report Financial Statement Notes Regulatory filings, including proxy statements ©Cambridge Business Publishers, 2017 37 Learning Objective 4 Describe the institutions that regulate financial accounting and their role in establishing generally accepted accounting principles. ©Cambridge Business Publishers, 2017 38 Generally Accepted Accounting Principles ▪ Standards and accepted practices designed to guide the preparation of financial statements ▪ Based on underlying principles ▪ Allows considerable discretion in preparation ▪ Enables external users to rely on audited financial statements These financial statements were prepared in accordance with GAAP and were audited! ©Cambridge Business Publishers, 2017 39 International Accounting Standards Board Globalisation of capital markets + The diversity of international accounting principles ….has led to an effort to increase comparability of financial information across countries. ▪ IASB is charged with creating “a single set of high quality, understandable, enforceable and globally accepted financial reporting standards based upon clearly articulated principles Referred to as IASB by the accounting profession ©Cambridge Business Publishers, 2017 40 International Accounting Standards Board ▪ Created International Financial Reporting Standards (IFRS) ▪ Developed a Conceptual Framework to serve as a guide for accounting issues not covered by standards ▪ Has no legal authority to impose accounting standards in any country ©Cambridge Business Publishers, 2017 41 International Financial Reporting Standards ▪ As of December 2015, 116 of the 140 jurisdictions surveyed by the IASB had adopted International Financial Reporting Standards (IFRS) ▪ Of the remaining 24 jurisdictions • 12 permit IFRS (e.g., India, Japan, and Switzerland) • 2 require IFRS for financial institutions (Saudi Arabia and Uzbekistan) • 1 is in the process of adopting IFRS (Thailand) • 8 use their own GAAP (Bolivia, China, Egypt, GuineaBissau, Macao, Niger, United States, and Vietnam). The United States has allowed foreign companies with securities traded on its stock exchanges to use IFRS since 2007. ©Cambridge Business Publishers, 2017 42 Regulator, Management, and Auditors MANAGEMENT ▪ Prepares the financial statements ▪ Takes responsibility for what is disclosed in the financial statements Independent auditors ‘audit’ financial statements As assurance of accuracy and completeness, financial statements of publicly traded companies must be audited by an independent audit firm. An audit opinion is not a guarantee. ©Cambridge Business Publishers, 2017 43 Regulator, Management, and Auditors ©Cambridge Business Publishers, 2017 44 Learning Objective 5 Compute two key ratios that are commonly used to assess profitability and risk— return on equity and the debt-to-equity ratio. ©Cambridge Business Publishers, 2017 45 Profitability Analysis Profitability reveals whether a company is able to bring its product or service to the market in an efficient manner, and whether the market places value on that product or service. Return on Equity (ROE) = Net Income Average Total Equity Roche’s ROE decreased between 2012 and 2013. Roche’s profitability is lower than GSK in 2013. ©Cambridge Business Publishers, 2017 46 Credit Risk Analysis Solvency refers to the ability of a company to remain in business and avoid bankruptcy or financial distress; a risk measure. Debt-to-Equity Ratio = Total Liabilities Total Equity Roche’s Debt-to-Equity Ratio decreased between 2012 and 2013. GSK has significantly more credit risk than Roche. ©Cambridge Business Publishers, 2017 47 Learning Objective 6 Appendix 1A Explain the conceptual framework for financial reporting. ©Cambridge Business Publishers, 2017 48 Conceptual Framework Objectives of Financial Reporting Financial accounting should provide information that is useful to investors, creditors, and other decision makers. ▪ Information to help investors and creditors assess the amount, timing, and uncertainty of cash flows. ▪ Information that allows decision makers to monitor company management to evaluate their effectiveness, efficiency, and ethical stewardship of company resources. ©Cambridge Business Publishers, 2017 49 Conceptual Framework Qualitative Characteristics of Useful Financial Information Identify the types of information that are likely to be useful to the users. ▪ Information must be both relevant and faithfully represented for it to be useful ▪ The usefulness of information is enhanced if it is comparable, verifiable, timely, and understandable ▪ However, these enhancing characteristics cannot make information useful if it is irrelevant or not faithfully represented ©Cambridge Business Publishers, 2017 50 Conceptual Framework Fundamental Qualitative Characteristics Relevance Must have the ability to make a difference in a decision ▪ Predictive value ▪ Confirmatory value Materiality Information is material if its omission or misstatement would influence the judgement of a reasonable decision maker Faithful Representation Should reflect the underlying economic events it purports to capture ▪ Complete ▪ Neutral ▪ Free from error ©Cambridge Business Publishers, 2017 51 Conceptual Framework Enhancing Qualitative Characteristics Comparability Should enable users to identify similarities and differences between sets of economic phenomena Verifiability Users should be able to examine the economic phenomena and reach conclusions that are similar to those of management Timeliness Must be available before it loses its capacity to influence decisions Understandability Should be presented so that a knowledgeable reader can understand how it relates to the decision process ©Cambridge Business Publishers, 2017 52 Conceptual Framework Qualitative Characteristics Underlying Assumptions Going Concern Companies are assumed to have continuity Reporting Frequency Operations must be reported periodically, each fiscal year, and interim reports supplement the annual reports Consistency Should exhibit conformity from one reporting period to the next with unchanging policies and procedures Cost Constraint ©Cambridge Business Publishers, 2017 Reported accounting information must be cost effective 53 The End ©Cambridge Business Publishers, 2017 FINANCIAL ACCOUNTING using IFRS 2nd Edition Franco Wong Thomas Dyckman Michelle Hanlon Robert Magee Glenn Pfeiffer CHAPTER 2 Constructing Financial Statements ©Cambridge Business Publishers, 2017 Learning Objective 1 Describe and construct the balance sheet and understand how it can be used for analysis. Assets Assets are resources controlled by a company and which are expected to provide the company with future economic benefits.  It is probable that the future economic benefits will flow to the company.  It has a cost or value that can be measured reliably. Characteristics required for an asset to be placed (capitalised) on the balance sheet. ©Cambridge Business Publishers, 2017 4 Assets ▪ Why do companies acquire assets? ▪ To yield a return for shareholders ▪ Assets generate revenue ▪ Directly through selling inventory, or ▪ Indirectly through manufacturing inventory that will be sold ▪ Income in excess of the cost of funds used to acquire assets creates shareholder value ©Cambridge Business Publishers, 2017 5 Categories of Assets Current assets ▪ Assets expected to be converted into cash or used in operations within the next year, or within the next operating cycle, whichever is longer. ▪ Usually listed in descending order of liquidity in Australia, Canada, and the United States (ascending order in Asia and Europe) Noncurrent assets ▪ Listed after current assets on the balance sheet ▪ Not expected to expire or be converted into cash within one year, or within the next operating cycle, whichever is longer. ▪ Referred to as long-term assets ©Cambridge Business Publishers, 2017 7 Common Current Assets ▪ Cash—currency, bank deposits, certificates of deposit and other cash equivalents ▪ Marketable securities—short-term investments that can be quickly sold to raise cash ▪ Accounts receivable—amounts due to the company from customers arising from the sale of products or services on credit ▪ Inventory—goods purchased or produced for sale to customers ▪ Prepaid expenses—costs paid in advance for rent, insurance, or other services ©Cambridge Business Publishers, 2017 8 Common Noncurrent Assets ▪ Long-term financial investments—investments in debt or equity securities of other firms that management does not intend to sell in the near future ▪ Property, plant and equipment (PPE)—land, factory buildings, warehouses, office buildings, machinery, office equipment, and other items used in the operations of the company ▪ Intangible and other assets—patents, trademarks, franchise rights, goodwill, and other items that provide future benefits, but do not possess physical substance ©Cambridge Business Publishers, 2017 9 Measuring Assets ▪ Assets intended to be used are reported on the balance sheet at historical cost. ▪ Advantage: Historical cost is reliable ▪ Disadvantage: Often significantly undervalued ▪ Some assets are reported at current fair value. ▪ Example: Marketable securities ▪ Reliable and objective because obtained from real time stock quotes ©Cambridge Business Publishers, 2017 10 Liabilities and Equity ▪ Represent sources of capital to the company ▪ Used to finance the acquisition of assets Liabilities Equity Borrowed funds such as Capital that has been invested by shareholders, either ▪ Accounts payable ▪ Accrued liabilities ▪ Obligations to lenders, bond investors, suppliers ©Cambridge Business Publishers, 2017 ▪ Directly via share purchase, or ▪ Indirectly in the form of retained earnings that reflect earnings that are reinvested in the business 11 Reporting Liabilities A liability is a present obligation arising from past events. The settlement of the obligation will result in future sacrifice—can be a future cash payment or an obligation to deliver goods or services. Amounts are reported as liabilities on the balance sheet when two conditions are met:  A future economic sacrifice is probable.  The amount of the obligation is known or can be reasonably estimated. Executory Contract When the two conditions are satisfied, but the transaction that caused the obligation has not occurred. No liability is reported on balance sheet. ©Cambridge Business Publishers, 2017 13 Categories of Liabilities Current liabilities ▪ Reported as current liabilities on the balance sheet if due within one year or within one operating cycle, whichever is longer. ▪ Usually listed in ascending order of maturity in Australia, Canada, and the United States (descending order in Asia and Europe). Noncurrent liabilities ▪ Reported as long-term liabilities on the balance sheet if not due within one year or one operating cycle, whichever is longer. ©Cambridge Business Publishers, 2017 14 Common Current Liabilities ▪ Accounts payable—amounts owed to suppliers for goods and services purchased on credit ▪ Accrued liabilities—obligations for expenses that have been recorded but not yet paid ▪ Short-term borrowings—short-term debt payable to banks or other creditors ▪ Deferred (unearned) revenue—an obligation created when the company accepts payment in advance for goods or services it will deliver in the future ▪ Current maturities of long-term debt—the portion of long-term debt that is due to be paid within one year ©Cambridge Business Publishers, 2017 15 Common Noncurrent Liabilities ▪ Long-term debt—amounts borrowed from creditors that are scheduled to be repaid more than one year in the future ▪ Other long-term liabilities—various obligations, such as warranty and deferred compensation liabilities, long-term tax liabilities ©Cambridge Business Publishers, 2017 16 Reporting Equity Reflects capital provided by the owners of the company; residual interest. Contributed Capital Earned Capital ▪ Share capital—the par value or stated value of shares issued to the primary owners of the company ▪ Contributed surplus—amounts received from the primary owners in addition to the par value or stated value of the common shares ▪ Treasury shares—the amount paid to reacquire the company’s own common shares ▪ Retained earnings—the accumulated earnings that have not been distributed to shareholders as dividends ▪ Accumulated other comprehensive income or loss— accumulated changes in equity that are not reported in the income statement ©Cambridge Business Publishers, 2017 17 Retained Earnings Retained earnings links the income statement to the balance sheet. Beginning retained earnings + Net income (or – Net loss) – Dividends Ending retained earnings Net income increases retained earnings. A net loss decreases retained earnings. Reported on the balance sheet in the equity section. ©Cambridge Business Publishers, 2017 18 Learning Objective 2 Use the financial statement effects template (FSET) to analyse transactions. Analysing and Recording Transactions The balance sheet is the foundation of the accounting system. Assets = Liabilities + Equity Used to assess the financial impact of transactions ©Cambridge Business Publishers, 2017 20 Financial Statement Effects Template (FSET) The FSET template is used to capture transactions and their effects on the four financial statements. Balance Sheet Transaction Income Statement Cash Noncash Contrib. Earned Net Revenues – Expenses = + = Liabilities + + Income Asset Asset Capital Capital = = ©Cambridge Business Publishers, 2017 – – = = 21 The Account ▪ What is an account? ▪ A record of increases and decreases for each asset, liability, equity, revenue, or expense ▪ Chart of accounts ▪ Listing of account titles and identification codes ▪ The role of the account in transaction analysis ▪ What accounts are affected by the transaction? ▪ Must affect at least two accounts to maintain equality ▪ What is the direction and amount of each effect? ▪ Increase or decrease ▪ Dollar amount ©Cambridge Business Publishers, 2017 22 Transaction Analysis: Share Issuance (1) On May 1, investors contributed $10,000 cash to start Jana Juice which sells energy drinks to retailers and individuals, in exchange for 500 common shares. Balance Sheet Cash Asset Transaction Issued shares for $10,000 cash + Noncash Asset +10,000 Cash Income Statement = Liabilities + Contrib. Capital = +10,000 Share Capital + Earned Capital Revenues – Expenses = ‒ = Net Income Both assets (cash) and equity (share capital) increase and the accounting equation is in balance. ©Cambridge Business Publishers, 2017 23 Transaction Analysis: Bank Loan (2) On May 1, Jana Juice borrowed $4,000 cash by signing a note to be repaid on May 31 plus interest of $40. Balance Sheet Cash Asset Transaction Signed a note and received $4,000 cash + Noncash Asset +4,000 Cash = Liabilities + = +4,000 Note Payable Income Statement Contrib. Capital + Earned Capital Revenues – Expenses = ‒ = Net Income Both assets (cash) and liabilities (note payable) increase and the accounting equation is in balance. ©Cambridge Business Publishers, 2017 24 Transaction Analysis: Rental Agreement (3) On May 1, Jana Juice signed a rental agreement for a store location and paid $1,800 as a security deposit. Balance Sheet Transaction Signed a rental agreement and paid an $1,800 deposit Cash Asset –1,800 Cash + Noncash Asset +1,800 Security Deposit = Liabilities + = Income Statement Contrib. Capital + Earned Capital Revenues – Expenses = ‒ Net Income = Because the security deposit will likely be returned to Jana Juice in the future, it is an asset. Assets (cash and security deposit) increase and decrease by the same amount. The accounting equation is in balance. ©Cambridge Business Publishers, 2017 25 Transaction Analysis: Purchase Inventory (4) On May 1, Jana Juice purchased $2,000 of inventory on account, consisting of energy drinks. Balance Sheet Transaction Purchase Inventory on account for $2,000 Cash Asset + Noncash Asset +2,000 Inventory = Liabilities + +2,000 Accounts = Payable Income Statement Contrib. Capital + Earned Capital Revenues – Expenses = ‒ Net Income = Both assets (inventory) and liabilities (accounts payable) increase and the accounting equation is in balance. ©Cambridge Business Publishers, 2017 26 Jana Juice’s Balance Sheet Assets Cash Inventory Security deposit Total current assets Total assets $12,200 2,000 1,800 16,000 $16,000 Liabilities Accounts payable Note payable Total current liabilities Equity Share capital Total liabilities & equity $ 2,000 4,000 6,000 10,000 $16,000 Assets = Liabilities + Equity No income statement transactions have occurred so there is no income statement. ©Cambridge Business Publishers, 2017 27 Learning Objective 3 Describe and construct the income statement and discuss how it can be used to evaluate management performance. Reporting Financial Performance Income Statement ▪ Reports the results of operations as net income or loss for a period of time ▪ General income statement format Revenues – Cost of goods sold Gross profit – Expenses = Net income (earnings) ©Cambridge Business Publishers, 2017 Revenues are increases in net assets that result from business activities. Expenses are the outflow or use of assets to generate revenues. 29 Operating Revenues and Expenses ▪ Revenues ▪ Result from increases in net assets ▪ Caused by the company’s operating activities ▪ Expenses ▪ Result from decreases in net assets ▪ Caused by the company’s revenue-generating activities ▪ Cost of products and services sold ▪ Operating costs ▪ Nonoperating costs Revenues – Expenses = Net income (Net loss) ©Cambridge Business Publishers, 2017 31 Nonoperating Revenues and Expenses ▪ Relate to the company’s financing and investing activities ▪ Interest revenue ▪ Interest expense ▪ Usually segregated as they offer different insights into company performance ▪ Recurring items—persist in the future ▪ Nonrecurring items—unlikely to arise in the future; not relevant to future performance ©Cambridge Business Publishers, 2017 32 Learning Objective 4 Explain revenue recognition, accrual accounting, and their effects on retained earnings. Learning Objective 5 Illustrate equity transactions and the statement of changes in equity. Accrual Accounting Accrual accounting is required by IFRS, and states that . . . Revenues Expenses Increases in net assets that are earned by delivering goods and services to customers. Decreases in net assets from generating revenue and supporting operations. Did these activities increase or decrease the net assets of the company? ©Cambridge Business Publishers, 2017 35 Accrual Accounting for Revenues Revenue recognition requires that revenue be recognised (recorded) only when earned. Example 1: Indigo purchases inventories during May for $80,000, and sells half during May for $140,000 cash. How much revenue will Indigo recognise during May? Revenue for May = $140,000 Example 2: If Indigo collected $130,000 during May and customers promised to pay the $10,000 balance during June, how much revenue will Indigo recognise during May? Revenue for May = $140,000 Revenue is earned when delivered to the customer— even if not yet received in cash. ©Cambridge Business Publishers, 2017 36 Accrual Accounting for Expenses Expenses are matched when incurred against the related revenue amounts. Example: Indigo purchased inventories during May for $80,000. It sold $70,000 of the inventory for $120,000 during May. How much cost of goods sold expense should Indigo recognised during May? Expenses for May = $70,000 Cost of goods sold expenses are matched against the revenue they helped to earn. If Indigo had paid for $65,000 of the $80,000 inventory purchase, and planned to pay the $15,000 balance during June, how much expense will Indigo recognise during May? Expenses for May = $70,000 ©Cambridge Business Publishers, 2017 37 P2-65 Schrand Aerobics Schrand Aerobics, Inc., rents studio space (including a sound system) and specialises in offering aerobics classes. On January 1, 2013, its beginning account balances are as follows: • • • • • • • Cash, $5,000; Accounts Receivable, $5,200; Equipment, $0; Notes Payable, $2,500; Accounts Payable, $1,000; Share Capital, $5,500; Retained Earnings, $1,200 Services Revenue, Rent Expense, Advertising Expense, Wages Expense, Utilities Expense, & Interest Expense all have balances of $0. ©Cambridge Business Publishers, 2017 39 P2-65 Schrand Aerobics – con’t The follow-ing transactions occurred during January: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Paid $600 cash toward accounts payable. Paid $3,600 cash for January rent. Billed clients $11,500 for January classes. Received $500 invoice from supplier for T-shirts given to January class members as an adver-tising promotion. Collected $10,000 cash from clients previously billed for services rendered. Paid $2,400 cash for employee wages. Received $680 invoice for January utilities expense. Paid $20 cash to bank as January interest on notes payable. Declared and paid $900 cash dividend to shareholders. Paid $4,000 cash on January 31 to purchase sound equipment to replace the rental system ©Cambridge Business Publishers, 2017 40 P2-65 Schrand Aerobics – req’d a. Using the financial statement effects template, enter January 1 beginning amounts in the appropriate columns of the first row. (Hint: Beginning balances for columns can include amounts from more than one account.) b. Report the effects for each of the separate transactions 1 through 10 in the financial statement effects template set up in part a. Total all columns and prove that (1) assets equal liabilities plus equity at January 31, and (2) revenues less expenses equal net income for January. c. Prepare its income statement for January 2013. d. Prepare its statement of changes in equity for January 2013. e. Prepare its balance sheet at January 31, 2013 ©Cambridge Business Publishers, 2017 41 Learning Objective 6 Use journal entries and T-accounts to analyse and record transactions. T-Accounts Accountants use a graphic representation of an account called a T-account. Always on the Left Account Title Debits Credits (Dr) (Cr) Always on the Right One side of the T-account is used to record increases to the account and the other side is used to record decreases. ©Cambridge Business Publishers, 2017 58 Debit and Credit System Increases and decreases are described as debits and credits. Double-entry accounting requires that debits = credits. Accounts that increase on the debit side have a normal debit balance. ©Cambridge Business Publishers, 2017 Accounts that increase on the credit side have a normal credit balance. 59 Expanded Accounting Equation The equity section is expanded to reflect increases from share capital and revenues, and decreases from dividends and expenses. ©Cambridge Business Publishers, 2017 60 Summary of Debits and Credits ©Cambridge Business Publishers, 2017 61 Posting to T-Accounts T-accounts are labeled by letter abbreviations for type Increases in the Cash account + Beg. balance (a) (d) End. balance Ending Cash balance ©Cambridge Business Publishers, 2017 Cash (A) 2,500 4,000 1,500 200 500 1,000 3,700 Specific transactions – (b) (c) (e) Decreases in the Cash account 62 Learning Objective 7 Compute net working capital, the current ratio, and the quick ratio, and explain how they reflect liquidity. Evaluating Liquidity ▪ Liquidity ▪ Ability to pay debts when due ▪ The larger current assets are when compared to current liabilities, the more liquid a company is. ▪ Measured by ▪ Net working capital ▪ Current ratio ▪ Quick ratio ©Cambridge Business Publishers, 2017 81 Net Working Capital Net working capital is defined as the difference between current assets and current liabilities. Net Working Capital = Current Assets ‒ Current Liabilities Indigo’s Net Working Capital Indigo’s net working capital decreased from 2012 to 2014. ©Cambridge Business Publishers, 2017 82 Current Ratio The current ratio is defined as the ratio of current assets to current liabilities. Current Ratio = Current Assets ÷ Current Liabilities Indigo’s Current Ratio Indigo’s current ratio is deemed to represent a strong current liquidity position since it exceeds 1.0 for each year. ©Cambridge Business Publishers, 2017 83 Quick Ratio ▪ The ratio of quick assets to current liabilities ▪ Quick assets include cash, short term securities and accounts receivable. Quick Ratio = Quick Assets ÷ Current Liabilities Indigo’s Quick Ratio Based on its quick ratio, Indigo’s liquidity has decreased to 0.83 in 2014 from around 1.00 in 2012 and 2013. ©Cambridge Business Publishers, 2017 84 Operating Cycle ▪ Operating cycle is the time between paying cash for goods or employee services rendered and receiving cash from the customers ▪ The amount of working capital required for a company’s operations depends on the operating cycle. ©Cambridge Business Publishers, 2017 85 P2-52 - Analysing and Interpreting the Financial Performance of Competitors Air Canada (Cdn$ mil.) 9,470 10 12,382 10,867 3,288 3,190 WestJet (Cdn$ mil.) $4,143 269 3,662 2,554 1,526 1,406 Total liabilities and equity ....... Net income............................... Net sales .................................. Total liabilities .......................... Current assets ........................... Current liabilities ...................... Required a. What is the total amount of assets invested in (1) Air Canada and (2) WestJet? What are the total expenses for each company (1) in dollars and (2) as a percentage of sales? b. What is the net working capital and current ratio for (1) Air Canada and (2) WestJet? ©Cambridge Business Publishers, 2017 86 The End ©Cambridge Business Publishers, 2017 ACCT 3343 May 11 - Agenda ▪ Discussion Board Post re “purpose” of the corporation created – create one thread respond to at least one other post. ▪ Finish Ch 2 - P2-52 ▪ Ch 3 – Adjusting Entries ©Cambridge Business Publishers, 2017 1 P2-52 - Analysing and Interpreting the Financial Performance of Competitors Air Canada (Cdn$ mil.) 9,470 10 12,382 10,867 3,288 3,190 WestJet (Cdn$ mil.) $4,143 269 3,662 2,554 1,526 1,406 Total liabilities and equity ....... Net income............................... Net sales .................................. Total liabilities .......................... Current assets ........................... Current liabilities ...................... Required a. What is the total amount of assets invested in (1) Air Canada and (2) WestJet? What are the total expenses for each company (1) in dollars and (2) as a percentage of sales? b. What is the net working capital and current ratio for (1) Air Canada and (2) WestJet? ©Cambridge Business Publishers, 2017 2 FINANCIAL ACCOUNTING using IFRS 2nd Edition Franco Wong Thomas Dyckman Michelle Hanlon Robert Magee Glenn Pfeiffer CHAPTER 3 Adjusting Accounts for Financial Statements ©Cambridge Business Publishers, 2017 Learning Objective 6 Appendix 1A Explain the conceptual framework for financial reporting. ©Cambridge Business Publishers, 2017 4 Conceptual Framework Objectives of Financial Reporting Financial accounting should provide information that is useful to investors, creditors, and other decision makers. ▪ Information to help investors and creditors assess the amount, timing, and uncertainty of cash flows. ▪ Information that allows decision makers to monitor company management to evaluate their effectiveness, efficiency, and ethical stewardship of company resources. ©Cambridge Business Publishers, 2017 5 Conceptual Framework Fundamental Qualitative Characteristics Relevance Must have the ability to make a difference in a decision ▪ Predictive value ▪ Confirmatory value Materiality Information is material if its omission or misstatement would influence the judgement of a reasonable decision maker Faithful Representation Should reflect the underlying economic events it purports to capture ▪ Complete ▪ Neutral ▪ Free from error ©Cambridge Business Publishers, 2017 6 Conceptual Framework Enhancing Qualitative Characteristics Comparability Should enable users to identify similarities and differences between sets of economic phenomena Verifiability Users should be able to examine the economic phenomena and reach conclusions that are similar to those of management Timeliness Must be available before it loses its capacity to influence decisions Understandability Should be presented so that a knowledgeable reader can understand how it relates to the decision process ©Cambridge Business Publishers, 2017 7 8 Recognition/Derecognition (5 of 7) 3. Revenue Recognition Principle (ASPE) • Revenue is recognized when: LO 4 o Risks and rewards have passed or the earnings process is substantially complete o Revenue is measurable and o Revenue is collectible (realized or realizable) Copyright ©2019 John Wiley & Sons, Canada, Ltd. 9 Recognition/Derecognition (7 of 7) 4. Matching Principle • Expenses are matched with revenues that they produce • Illustrates a “cause and effect relationship” between money spent to earn revenues, and the revenues themselves • If the expense benefits future periods and meets the definition of asset, it is recorded as an asset • This asset’s cost is then systematically and rationally matched to future revenues through amortization/depreciation LO 4 Copyright ©2019 John Wiley & Sons, Canada, Ltd. Learning Objective 1 Identify the major steps in the accounting cycle. Abbreviated Accounting Cycle ▪ A sequence of activities to accumulate and report financial statements ▪ Steps in the accounting cycle Continuously End of Accounting Period (Monthly, Quarterly, Annually) ▪ Steps performed daily, monthly, quarterly, or end of fiscal year; not all at the same time ©Cambridge Business Publishers, 2017 11 Learning Objective 2 Review the process of journalising and posting transactions. Charts of Accounts Lists the titles and numbers of all accounts found in the general ledger. ©Cambridge Business Publishers, 2017 13 Review of Accounting Documents ▪ General journal ▪ Tabular, chronological record where business activities are captured in debits and credits ▪ General ledger ▪ Listing of all accounts and their balances ▪ Accounts are grouped in five elements ▪ ▪ ▪ ▪ ▪ Assets Liabilities Equity Revenues Expenses ©Cambridge Business Publishers, 2017 14 Journalising and Posting ▪ Journalise ▪ Recording a transaction in a journal ▪ Posting ▪ Occurs after transactions are journalised ▪ Debits and credits in each journal entry are transferred to their related general ledger accounts Record in Journal ©Cambridge Business Publishers, 2017 Post to the Ledger 15 Record a Note Signed (1) On June 1, Jana Juice signed a 2-year note to borrow $12,000 and agreed to pay 12% annual interest on the first day of each month with the principal due at the end of two years. Balance Sheet Transaction Sign note and received $12,000 cash Cash Asset +12,000 Cash + Noncash Asset = Liabilities + = +12,000 Notes Payable Income Statement Contrib. Capital + Earned Capital Revenues – Expenses = – = Cash (+A) Notes payable (+L) Borrow $12,000 on a two-year note 12,000 Cash (A) 12,000 Notes Payable (L) 12,000 (1) ©Cambridge Business Publishers, 2017 Net income 12,000 (1) 16 Record Purchase of Long-Term Assets (2) On June 1, Jana Juice purchased and installed new fixtures and equipment for $10,200. Balance Sheet Transaction Pay $10,200 cash for fixtures and equipment Cash Asset ‒10,200 Cash + Noncash Asset = Liabilities + Income Statement Contrib. Capital +10,200 = Fixtures and Equip. Fixtures and equipment (+A) Cash (‒A) Purchase fixtures and equipment for cash. Fixtures and Equipment (A) (2) 10,200 ©Cambridge Business Publishers, 2017 + Earned Capital Revenues – Expenses = – Net income = 10,200 10,200 Cash (A) 10,200 (2) 17 Record Advertising Expense (3) On June 8, Jana Juice paid $800 to advertise in the local newspaper for June. Balance Sheet Transaction Cash Asset Pay $800 for advertising -800 Cash + Noncash Asset = Liabilities + = Advertising expense (+E, -SE) Cash (-A) To purchase advertising for June Advertising Expense (E) (3) 800 ©Cambridge Business Publishers, 2017 Income Statement Contrib. Capital + Earned Capital -800 Retained Earnings Revenues – Expenses = – +800 = Advertising Expense Net income -800 800 800 Cash (A) 800 (3) 18 Record Sale of Products (6a) During June, Jana Juice sold energy drinks costing $600 to retail customers for $3,100 cash. Balance Sheet Transaction Cash Asset Sold $3,100 of products for cash +3,100 Cash + Noncash Asset = Liabilities + = Cash (+A) Sales revenue (+R, +SE) To record sales during June (6a) Cash (A) 3,100 ©Cambridge Business Publishers, 2017 Income Statement Contrib. Capital + Earned Capital +3,100 Retained Earnings Revenues – Expenses = +3,100 – Sales Revenue Net income = +3,100 Net income 3,100 3,100 Sales Revenue (R) 3,100 (6a) 21 General Ledger Before Adjustments Bal. (1) (6a) (8) (10) Assets Cash (A) 6,460 12,000 10,200 (2) 3,100 800 (3) 600 500 (4) 2,000 1,400 (9) 700 (11) 100 (12) 10,460 Accounts Receivable (A) Bal. 1,700 (7a) 4,400 2,000 (10) Bal. 4,100 Bal. (5) Bal. Inventory (A) 700 2,600 600 (6b) 1,100 (7b) 1,600 Bal. Bal. Prepaid Insurance (A) 800 800 Bal. Bal. Security Deposit (A) 1,800 1,800 Fixtures and Equipment (A) (2) 10,200 10,200 ©Cambridge Business Publishers, 2017 (4) Accounts Payable (L) 500 Bal. 500 2,600 (5) 2,600 Bal. Unearned Revenue (L) 300 Bal. 600 (8) 900 Bal. Note Payable (L) 12,000 12,000 Liabilities Share Capital (SE) 10,000 Bal. 10,000 Bal. Equity Retained Earnings (SE) (12) 100 660 Bal. 560 Bal. Sales Revenue (R ) 3,100 (6a) 4,400 (7a) 7,500 Bal. (1) Bal. (6b) (7b) Bal. Cost of Goods Sold (E) 600 1,100 1,700 (9) Bal. Wages Expense (E) 1,400 1,400 Rent Expense (E) (11) 700 Bal. 700 Advertising Expense (E) (3) 800 Bal. 800 Income statement accounts 30 Learning Objective 3 Describe the adjusting process and illustrate adjusting entries. The Adjusting Process ▪ Account balances must be reviewed to determine if adjustments are required ▪ Caused by accrual accounting ▪ Adjusting occurs before the financial statements are prepared ▪ After all regular transactions have been recorded and posted ADJUSTING ENTRIES ▪ Almost never affect Cash, and ▪ Usually affect at least 1 balance sheet and 1 income statement account ©Cambridge Business Publishers, 2017 32 Unadjusted Trial Balance First Step in adjusting process ▪ What is a trial balance? ▪ A list of all general ledger accounts with their respective balances ▪ Unadjusted means prior to completing the adjusting entries ▪ Purpose ▪ To be sure the general ledger is in balance before adjusting the accounts ▪ Listing all accounts in one place eases the review of accounts in determining which need adjustment ©Cambridge Business Publishers, 2017 33 Preparing an Unadjusted Trial Balance Cash Accounts Receivable Inventory Prepaid Insurance Security Deposit Fixtures and Equipment Accounts Payable Unearned Revenue Long-term Notes Payable Share Capital Retained Earnings Sales Revenue Cost of Goods Sold Wages Expense Rent Expense Advertising Expense Totals Jana Juice Unadjusted Trial Balance 30-June-16 Debit $10,460 ©Cambridge Business Publishers, 2017 Accounts are listed in accounting equation order: Credit Assets 4,100 1,600 800 1,800 10,200 Liabilities Equities $ 2,600 900 12,000 10,000 560 7,500 Expenses The totals of debits and credits must be equal. 1,700 1,400 700 800 $33,560 Revenues $33,560 34 Types of Adjustments Deferrals ▪ Deals with an amount previously recorded in a balance sheet account ▪ Decreases a balance sheet account and increases an income statement account Accruals ▪ Deals with an amount NOT previously recorded in a balance sheet account ▪ Increases both a balance sheet account and an income statement account Both types allow a period’s revenues and expenses to be measured properly. ©Cambridge Business Publishers, 2017 35 Four Types of Adjustments Deferrals Accruals ©Cambridge Business Publishers, 2017 36 Deferred Revenue The process of allocating unearned revenue to revenue ▪ Amounts received in advance are recorded as liabilities ▪ Because an obligation exists to provide future services or assets (such as inventory or a refund of cash) ▪ Situations requiring adjusting entries: ▪ Prepaid property casualty insurance is earned over time ▪ Subscriptions to newspaper and magazines received in advance are earned ©Cambridge Business Publishers, 2017 37 Allocating Unearned Revenue to Revenue Example (a) In May, customers prepaid $300 for a three month membership (June, July and August) to an online health program. One month of this prepaid membership was earned in June. Balance Sheet Transaction Cash Asset + Noncash Asset Adjust to recognise earned revenue from online membership = Liabilities + = Income Statement Contrib. Capital ‒100 Unearned Revenue Unearned revenue (‒L) Sales revenue (+R, +SE) To record earned membership revenue. Unearned Revenue (L) (a) 100 ©Cambridge Business Publishers, 2017 + Earned Capital +100 Retained Earnings Revenues – Expenses = +100 – Sales Revenue = Net income +100 100 100 Sales Revenue (R) 100 (a) 38 Prepaid Expenses The process of allocating prepaid assets to expenses ▪ Amounts paid in advance of using assets that benefit more than one period ▪ Situations requiring adjusting entries ▪ Equipment, buildings, or vehicles become used up over time ▪ Prepayment of advertising, insurance, or rent becomes used up over time ▪ Supplies are used over time ▪ Purchased intangibles may be used over time ©Cambridge Business Publishers, 2017 39 Allocating Assets to Expense Example - Prepaid Insurance (b) One month of Jana Juice’s insurance expired during June. The original payment was $800 covering June through September. ($800 ÷ 4 months = $200) Balance Sheet Transaction Adjust for expiration of one month of insurance Cash Asset + Noncash Asset = Liabilities + = ‒200 Prepaid Insurance Insurance expense (+E, ‒SE) Prepaid insurance (‒A) To record insurance expense for June. Insurance Expense (E) (b) 200 ©Cambridge Business Publishers, 2017 Income Statement Contrib. Capital + Earned Capital ‒200 Retained Earnings Revenues – Expenses = – = +200 Insurance Expense Net income ‒200 200 200 Prepaid Insurance (A) 200 (b) 40 Depreciation The process of allocating equipment, buildings, and vehicles to expenses ▪ The asset cost must be allocated to accounting periods that the cost benefits ▪ Annual straight-line depreciation Annual depreciation expense = Asset cost Estimated useful life ▪ Accumulated depreciation ▪ Special account used instead of reducing the asset account directly ▪ A contra asset account ©Cambridge Business Publishers, 2017 41 Allocating Assets to Expense Example Depreciation (c) Jana Juice’s equipment originally cost $10,200 and was expected to benefit the company for 5 years. Depreciation expense = $10,200 ÷ 5 years × 1/12 = $170 Balance Sheet Cash Asset Transaction + Noncash Asset Adjust for depreciation on fixtures & equipment - Income Statement Contra Contrib. = Liabilities + + Asset Capital +170 = Accum. Deprec. Earned Capital ‒170 Retained Earnings Revenues – Expenses = – Depreciation expense-fixtures & equipment (+E, ‒SE) Accumulated depreciation- fixtures & equip. (+XA, ‒A) To record depreciation expense for June (c) Depreciation Expense – Fixtures & Equipment (E) 170 ©Cambridge Business Publishers, 2017 +170 Deprec. Expense = Net income ‒170 170 170 Accumulated DepreciationFixtures & Equipment (XA) 170 (c) 42 Depreciation and Related Assets on the Balance Sheet Book Value of Long-term Assets at June 30, 2016 Fixtures and Equipment $10,200 Less: Accumulated depreciation 170 Fixtures and Equipment, net $10,030 Net book value of assets Portion of the equipment’s cost that has been allocated to expense since acquired Accumulated depreciation increases and the net book value declines over the life of the equipment. ©Cambridge Business Publishers, 2017 43 Accrued Revenues The process of recognising amounts earned before the cash is received ▪ Amounts earned from providing services or selling products must be recognised in the period earned ▪ Creates an increase in an asset and an increase in revenues ▪ Examples requiring adjusting entries ▪ Completed services or delivered goods that, for any number of reasons, have not been billed to customers. ▪ A company earned interest revenue from the bank on its checking account and had not yet recorded it. ©Cambridge Business Publishers, 2017 44 Accruing Revenues Example (d) At the end of June, Jana Juice learned that its bank has decided to provide interest on checking accounts for small businesses. The interest is paid into the checking account on the 5th day of the following month. Jana Juice earned $60 interest in June. Balance Sheet Transaction Adjust for interest income earned Cash Asset + Noncash Asset = Liabilities + = +60 Interest Receivable Interest receivable (+A) Interest Income (+R, +SE) To record accrued interest income. (d) Interest Receivable (A) 60 ©Cambridge Business Publishers, 2017 Income Statement Contrib. Capital + Earned Capital +60 Retained Earnings Revenues – Expenses = +60 Interest Income – = Net income +60 60 60 Interest Income (R) 60 (d) 45 Accruing Expenses The process of recognising expenses before the cash is paid ▪ Examples requiring adjusting entries ▪ Utility bill received in the mail for the month just completed ▪ Employees earned wages before the month ended, to be paid in the following month ▪ Amounts borrowed from a bank have interest that is not due until the note is paid off ▪ Income taxes are paid quarterly and the company earned a profit during the first month of the quarter ©Cambridge Business Publishers, 2017 46 Accruing Expenses Example—Wages (e) Jana Juice’s employees earned $550 during the last week of June that will be paid on July 6. Balance Sheet Transaction Adjust for accrued wages expense Cash Asset + Income Statement Noncash Contrib. Earned = Liabilities + + Asset Capital Capital = +550 ‒550 Retained Wages Earnings Payable Revenues – Expenses = Wages expense (+E, ‒SE) Wages payable (+L) To record accrued wages earned for the last week of June. (e) Wages Expense (E) 550 ©Cambridge Business Publishers, 2017 – = +550 Wages Expense Net income ‒550 550 Wages Payable (L) 550 550 (e) 47 Accruing Expenses Example—Interest (f) The $12,000 loan borrowed by Jana Juice on June 1 carries a 12% annual interest rate. Interest expense = $12,000 × 12% × 1/12 = $120 Balance Sheet Transaction Cash Asset + Adjusting entry to record interest owed not yet paid Noncash Contrib. = Liabilities + + Asset Capital = +120 Interest Payable Income Statement Earned Capital ‒120 Retained Earnings Interest expense (+E, ‒SE) Interest payable (+L) To record June interest owed on the note payable. (f) Interest Expense (E) 120 ©Cambridge Business Publishers, 2017 Revenues – Expenses = – = +120 Interest Expense Net income ‒120 120 Interest Payable (L) 120 120 (f) 48 Calculating Income Before Taxes Revenue and expense account balances prior to accruing income taxes: Sales Revenue (R ) 7,500 Bal. 100 (a) 7,600 Adj.Bal Rent Expense (E) 700 Bal. 700 Adj.Bal Depreciation Expense (E) 170 (c) 170 Adj.Bal Cost of Goods Sold (E) 1,700 Bal. 1,700 Wages Expense (E) 1,400 Bal. 550 (e) 1,950 Adj.Bal Advertising Expense (E) 800 Bal. 800 Adj. Bal Insurance Expense (E) 200 (b) 200 Adj.Bal Adj. Bal Interest Income (R) 60 (d) 60 Adj. Bal Interest Expense (E) 120 (f) 120 Adj. Bal Income before taxes: $7,600 ‒ $1,700 ‒ $1,950 ‒ $700 ‒ $800 ‒ $200 ‒ $170 + 60 ‒ $120 = $2,020 ©Cambridge Business Publishers, 2017 49 Calculating Income Tax Expense To determine income tax expense: Step 1: Journalise all adjusting entries (except for income taxes) and post to T-accounts Step 2: Calculate income before taxes based on the balances of the revenue and expense accounts Income before taxes = $2,020 From the revenue and expense T-accounts (on the previous slide): Step 3: Multiply income before taxes by the income tax rate, in this case, 30%: $2,020 × 30%* = $606 *Assumed tax rate Net income = $2,020 - $606 = $1,414 ©Cambridge Business Publishers, 2017 50 Accruing Expenses Example—Income Taxes (g) Income taxes are paid during the month after accrual, and have not been paid for June. Balance Sheet Transaction Cash Asset + Adjust for taxes owed but not yet paid Noncash Asset = Liabilities + = +606 Income Tax Payable Income Statement Contrib. + Capital Earned Capital ‒606 Retained Earnings Income tax expense (+E, ‒SE) Income tax payable (+L) To record estimated income tax for the month of June. Income Tax Expense (E) (g) 606 ©Cambridge Business Publishers, 2017 Revenues – Expenses = – = +606 Income Tax Expense Net income ‒606 606 606 Income Tax Payable (L) 606 (g) 51 P3-43 ©Cambridge Business Publishers, 2017 52 Summary of Adjustments ©Cambridge Business Publishers, 2017 53 Ethics and Adjusting Entries ▪ Adjusting entries are dependent upon estimates ▪ Management’s estimates are affected by corporate pressures ▪ Desire to meet analysts expectations ▪ Desire to disguise a planned course of action ▪ Controls are imposed by the financial reporting environment ©Cambridge Business Publishers, 2017 54 QUALITY SPECTRUM OF FINANCIAL REPORTS 55 QUALITY SPECTRUM OF FINANCIAL REPORTS • Biased accounting choices, assumptions, estimates: - “Aggressive” choices increase a company’s reported performance and financial position in the current period. - “Conservative” choices decrease current reported performance but may increase future reported. • Biased presentation choices: - Obscure unfavorable information and/or - Emphasize favorable information. 56 QUALITY SPECTRUM OF FINANCIAL REPORTS Earnings Management: Deliberate actions to influence reported earnings - Real Earnings Management, for example: Defer R&D expenses into the next quarter in order to meet earnings targets. - Accounting Earnings Management, for example: Change accounting estimates in order to meet earnings targets. 57 QUALITY SPECTRUM OF FINANCIAL REPORTS 58 Learning Objective 4 Prepare financial statements from adjusted accounts. Preparing an Adjusted Trial Balance ▪ Lists all ledger balances after adjustments ▪ Prepared from the balances in the general ledger accounts T-Accounts supporting the balances are found on the next three slides. Cash Accounts Receivable Inventory Prepaid Insurance Interest Receivable Security Deposit Fixtures and Equipment Accum. Depr - Fixt. & equip. Accounts Payable Unearned Revenue Wages Payable Interest Payable Income Tax Payable Long-Term Notes Payable Share Capital Retained Earnings Sales Revenue Interest Income Cost of Goods Sold Wages Expense Rent Expense Advertising Expense Insurance Expense Depreciation Expense Interest Expense Income Tax Expense Totals ©Cambridge Business Publishers, 2017 Unadjusted Balances Debit Credit 10,460 4,100 1,600 800 Adjustments Debit Credit (d) (b) 200 ( c) 170 (e) (f) (g) 550 120 606 (a) (d) 100 60 60 1,800 10,200 2,600 900 (a) 100 12,000 10,000 560 7,500 1,700 1,400 700 800 $33,560 $33,560 (e) 550 (b) ( c) (f) (g) 200 170 120 606 $1,806 $1,806 Adjusted Trial Balance Debit Credit 10,460 4,100 1,600 600 60 1,800 10,200 170 2,600 800 550 120 606 12,000 10,000 560 7,600 60 1,700 1,950 700 800 200 170 120 606 $35,066 $35,066 60 Preparing Financial Statements ©Cambridge Business Publishers, 2017 64 Income Statement The income statement is prepared first. Jana Juice reported net income of $1,414 for the month ending June 30, 2016. ©Cambridge Business Publishers, 2017 Jana Juice Income Statement For Month Ended June 30, 2016 Revenues Sales revenue Expenses Cost of goods sold Wages expense Rent expense Advertising expense Insurance expense Depreciation expense Operating expenses Income from operations Interest expense Interest income Income before taxes Income tax expense Net income $7,600 $1,700 1,950 700 800 200 170 5,520 2,080 (120) 60 2,020 606 $1,414 65 Statement of Changes in Equity The amount of net income from the income statement is linked to the statement of changes in equity. Balance, June 1, 2016 Net income Common shares issued Cash dividends Balance, June 30, 2016 ©Cambridge Business Publishers, 2017 Contributed Capital $10,000 $10,000 Earned Capital $ 660 1,414 (100) $1,974 Total Equity $10,660 1,414 (100) $11,974 66 Balance Sheet The amount of retained earnings from the statement of changes in equity is linked to the balance sheet. Jana Juice Balance Sheet June 30, 2016 Assets Cash Accounts receivable Interest receivable Inventory Prepaid insurance Security deposit Current assets Fixtures and equipment Less: Accumulated depreciationFixt./equipment Equipment, net Total assets ©Cambridge Business Publishers, 2017 Liabilities $10,460 4,100 60 1,600 600 1,800 18,620 $10,200 Accounts payable Unearned revenue Wages payable Interest payable Income tax payable Current liabilities Notes payable Total liabilities $ 2,600 800 550 120 606 4,676 12,000 16,676 Equity (170) 10,030 $28,650 Share capital Retained earnings Total liabilities & equity 10,000 1,974 $28,650 67 Statement of Cash Flows Cash flows are reported in three primary business activities: Cash flows from operating activities Cash from the company’s transactions and events that relate to primary operations Cash flows from investing activities Cash from the acquisitions and divestitures of investments and long-term assets Cash flows from financing activities Cash from issuances of and payments toward equity, borrowings, and long-term debt ©Cambridge Business Publishers, 2017 68 Statement of Cash Flows Jana Juice Statement of Cash Flows For Month Ended June 30, 2016 Cash Flows from Operating Activities Cash received from customers Cash paid for inventory Cash paid for wages Cash paid for rent Cash paid for advertising Net cash provided by operating activities $ 5,700 (500) (1,400) (700) (800) 2,300 Cash Flows from Investing Activities Cash paid for fixtures and equipment Net cash used by investing activities (10,200) (10,200) Cash Flows from Financing Activities Cash received from loans Cash paid for dividends Net cash provided by financing activities Net change in cash Cash balance, June 1, 2016 Cash balance, June 30, 2016 ©Cambridge Business Publishers, 2017 12,000 (100) 11,900 4,000 6,460 $ 10,460 The amount of cash at June 30 is linked to the balance sheet. 69 Learning Objective 6 Analyse changes in balance sheet accounts. Using Information on Levels and Flows ▪ Levels ▪ Portrayed on the balance sheet as levels of resources and claims to those resources ▪ Point in time ▪ Flows ▪ Portrayed on the income statement as changes in the levels of resources ▪ Period of time ©Cambridge Business Publishers, 2017 71 Using Information on Levels and Flows Suppose a service business has an inventory of office supplies: ▪ On July 1, an inventory count determines $2,400 of supplies on hand. ▪ During the third quarter, office supplies costing $5,700 were purchased and received. ▪ On Sept 30, an inventory count determines $1,900 of supplies on hand. ▪ What amount of supplies expense should be recognised for the quarter? 6,200 6,200 6,200 ©Cambridge Business Publishers, 2017 72 E3-36 ©Cambridge Business Publishers, 2017 73 Learning Objective 5 Describe the process of closing temporary accounts. Closing Temporary Accounts ▪ Closing process ▪ Occurs at the end of the accounting period ▪ Balances in temporary accounts are transferred to permanently update Retained Earnings ©Cambridge Business Publishers, 2017 75 Closing Temporary Accounts Two transactions to close temporary accounts. 1. Close revenue accounts Debit each revenue account for an amount equal to its balance, and credit Retained Earnings for the total of revenues. 2. Close expense accounts Credit each expense account for an amount equal to its balance, and debit Retained Earnings for the total of expenses. ©Cambridge Business Publishers, 2017 76 Closing Process Individual Expenses Credit to Close 2 Individual Revenues Debit to Close Retained Earnings Close expenses to Retained Earnings 1 Close revenues to Retained Earnings Retained earnings is a permanent account reported on the balance sheet. ©Cambridge Business Publishers, 2017 77 Closing Jana Juice’s Accounts Sales Revenue (R ) 7,600 7,600 June 30 Adj.Bal Interest Income (R ) 60 60 Adj.Bal June 30 Cost of Goods Sold (E) Adj.Bal 1,700 1,700 Adj.Bal Wages Expense (E) 1,950 1,950 Adj.Bal Rent Expense (E) 700 700 Advertising Expense (E) Adj.Bal 800 800 Insurance Expense (E) Adj.Bal 200 200 Depreciation Expense (E) Adj.Bal 170 170 ©Cambridge Business Publishers, 2017 Sales revenue (–R) Interest income (-R) Retained earnings (+SE) 7,600 60 Retained earnings (–SE) Cost of goods sold (–E) Wages expense (–E) Rent expense (–E) Advertising expense (–E) Insurance expense (–E) Depreciation expense (–E) Interest expense (–E) Income tax expense (–E) 6,246 Interest Expense (E) Adj.Bal 120 120 Income Tax Expense (E) Adj.Bal 606 606 (12) 7,660 1,700 1,950 700 800 200 170 120 606 Retained Earnings (SE) 100 660 Beg.Bal 6,246 7,660 1,974 78 Preparing a Post-Closing Trial Balance Jana Juice Post-Closing Trial Balance June 30, 2016 Debit Cash Credit Accounts Receivable 4,100 Inventory 1,600 Prepaid Insurance 600 Interest Receivable 60 Security Deposit Fixtures and Equipment Prepared after the closing process. $10,460 1,800 10,200 Accum. Depreciation-Fixtures & equip. $ 170 Accounts Payable 2,600 Unearned Revenue 800 Wages Payable 550 Interest Payable 120 Income Tax Payable 606 Notes Payable 12,000 Share Capital 10,000 Retained Earnings Totals ©Cambridge Business Publishers, 2017 ▪ All temporary accounts have zero balances ▪ Contains only balance sheet (permanent) accounts 1,974 $28,820 $28,820 79 Summarising the Accounting Cycle ▪ Occurs each fiscal year (period) ▪ Represents a systematic process for accumulating and reporting a company’s financial data ©Cambridge Business Publishers, 2017 80 The End ©Cambridge Business Publishers, 2017 ACCT 3343 May 13 - Agenda ▪ Mid-term Test – Thursday May 20 (Ch’s 1-4) ▪ Discussion Board Post re “purpose” of the corporation created – create one thread respond to at least one other post. ▪ Due Sunday May 16 @ 11:59pm ▪ Ch 4 Statement of Cash Flows ▪ Preparation using the Indirect method ▪ Analysis and Interpretation ▪ May 18 – Case 4-57 & Chapter 5 ©Cambridge Business Publishers, 2017 1 FINANCIAL ACCOUNTING using IFRS 2nd Edition Franco Wong Thomas Dyckman Michelle Hanlon Robert Magee Glenn Pfeiffer CHAPTER 4 Reporting and Analysing Cash Flows ©Cambridge Business Publishers, 2017 Learning Objective 1 Explain the purpose of the statement of cash flows and classify cash transactions by type of business activity: operating, investing, or financing. Purpose of the Statement of Cash Flows ▪ Provides information about how a company generates cash and how it uses cash ▪ Enables investors and creditors ▪ To better assess a firm’s ability to settle its liabilities and pay dividends ▪ To determine a company’s need for outside financing ▪ Permits users to observe and assess management’s investing and financing policies ©Cambridge Business Publishers, 2017 4 Cash and Cash Equivalents ▪ Short-term, highly liquid investments that are ▪ Easily convertible into a known amount of cash, and ▪ Close enough to maturity that their market value is not sensitive to interest rate changes ▪ Generally investments with initial maturities of three months or less ▪ Examples of cash equivalents ▪ Money market accounts ▪ Short-term fixed deposits ▪ Short-term government bonds ©Cambridge Business Publishers, 2017 5 Cash and Cash Equivalents ▪ On the statement of cash flows ▪ Cash equivalents are added to cash ▪ Treated as a single sum ▪ Why? ▪ The purchase and sale of investments in cash equivalents are considered to be part of a firm’s overall management of cash rather than a source or use of cash ▪ Managers refer to cash and cash equivalents as ‘cash’ Same label used in the textbook ©Cambridge Business Publishers, 2017 6 Qantas’s Statement of Cash Flows Operating Activities Section Qantas generated €1,417 million of cash from operations during its year ending June 30, 2013. ©Cambridge Business Publishers, 2017 7 Qantas’s Statement of Cash Flows Investing and Financing Sections Qantas used cash from operations for financing activities and investing activities during its year ending June 30, 2013. ©Cambridge Business Publishers, 2017 8 Framework for the Statement of Cash Flows Cash receipts and payments are classified into one of three categories: Operating Activities Investing Activities Financing Activities Change in cash and cash equivalents ©Cambridge Business Publishers, 2017 9 Operating Activities ▪ The focus is on selling goods or rendering services ▪ Defined broadly enough to include any cash receipts or payments that are not classified as investing or financing activities Where are operating activities reported? Income Statement Statement of Cash Flows Accrual Basis Cash Basis ©Cambridge Business Publishers, 2017 10 Examples of Operating Activities Operating activities include cash received and paid related to selling goods and rendering services and are directly related to the company’s primary day-to-day business activities. ©Cambridge Business Publishers, 2017 11 Investing Activities Cash Flows Involving… 1. Acquiring and disposing of property, plant, and equipment and intangible assets 2. Purchasing and selling government securities including other company’s shares, bonds, and other non cash-equivalent securities 3. Lending and subsequent collection of money ©Cambridge Business Publishers, 2017 12 Financing Activities Cash Flows Involving… 1. 2. 3. 4. Receiving cash from shareholders Returning cash to shareholders Borrowing from creditors Repaying amounts borrowed from creditors ©Cambridge Business Publishers, 2017 13 Usefulness of Classifications Three competitors generated $100,000 of cash: Summary Information for Three Competitors A likely recurring source that can sustain the company. ©Cambridge Business Publishers, 2017 Not likely to recur. Will replacement assets be needed? Repayment required. 14 Learning Objective 2 Construct the operating activities section of the statement of cash flows using the direct method. (Part 1) Learning Objective 3 Reconcile cash flows from operations to net income and use the indirect method to compute operating cash flows. Summary of Adjustments to Convert Income Statement Items to Cash from Operations Revenues, expenses, gains, and losses in the income statement are converted to cash receipts and payments. Adjustments to Convert Income Statement Items to Cash Flows From Operating Activities Net income Adjustments: Add back depreciation expense = Sales revenue Cost of goods sold - Operating expenses Depreciation Dividend and - expense + interest income - Interest expense + Depreciation expense Subtract (add) non-operating gains (losses) Gains Subtract change in operating assets Change in accounts receivable Change in inventory Change in related prepaid expenses Add change in operating liabilities Change in unearned revenue Change in accounts payable Change in related accrued liabilities Cash from operations Gains Income tax - Losses - expense Receipts from Payments for = customers - merchandise - ©Cambridge Business Publishers, 2017 Payments for expenses Losses Change in dividend and interest receivable Change in interest payable - 0 Receipts from dividends and + interest Payments - for interest + Change in income tax payable 0 - 0 Payments for income tax 35 Operating Activities Section of the Statement of Cash Flows Cash Flows from Operating Activities Cash received from customers Cash paid for inventory Cash paid for wages Cash paid for rent Cash paid for advertising Net cash provided by operating activities $5,700 ($500) ($1,400) ($700) ($800) $2,300 There was no cash received or paid for interest, insurance, or taxes, and depreciation expense is never a cash flow, so these items are not listed. This presentation uses the direct method because it lists all of the cash flows directly. ©Cambridge Business Publishers, 2017 36 Operating Activities Section of the Statement of Cash Flows— Indirect Cash flows provided by operating activities Net income Adjustments: Add back depreciation expense 170 Subtract: Change in accounts receivable 2,400 Change in inventory 900 Change in prepaid insurance (200) Change in interest receivable 60 Add: Change in accounts payable 2,100 Change in unearned revenue 500 Change in wages payable 550 Change in interest payable 120 Change in income tax payable 606 Total adjustments Cash flow from operating activities $1,414 Net cash provided by operating activities is the same amount calculated using either the direct or the indirect methods. 886 2,300 This is the indirect method because it begins with net income and converts the accrual basis net income to cash flows. ©Cambridge Business Publishers, 2017 37 Cash Flows From Operating Activities Direct vs. Indirect Method Direct or indirect method? ▪ Differ only in the operating activities format ▪ Both report the same cash flows from operating activities Survey finds that the direct method is used by less than 15% of the large companies. Why is the indirect method preferred? 1) Easier and less expensive 2) Companies that use the direct method are required to present a supplemental disclosure showing the reconciliation of net income to cash from operations. ©Cambridge Business Publishers, 2017 38 Learning Objective 4 Construct the investing and financing activities sections of the statement of cash flows. Cash Flows From Investing Activities ▪ Cause changes in noncash asset accounts, typically, ▪ Noncurrent operating assets—property, plant, and equipment ▪ Investing assets—marketable securities and long-term financial assets ▪ Analyse changes in all noncash asset accounts not used in computing net cash flow from operating activities Cash flows decrease due to: An increase in assets Cash flows increase due to: A decrease in assets ©Cambridge Business Publishers, 2017 40 Cash Flows From Investing Activities Any changes in the Fixtures and Equipment account in the balance sheet is usually the result of one or both of the following transactions: 1) Buying assets, or 2) Selling assets Jana Juice had only one investing transaction during June ‒the purchase of fixtures and equipment. Balance Sheet Transaction (2) Pay $10,200 cash for fixtures and equipment Cash Asset + Noncash Contrib. = Liabilities + Asset Capital ‒10,200 Cash +10,200 = Income Statement + Earned Capital Revenues – Expenses = – Net income = Fixtures and Equip. The resulting $10,200 cash outflow is listed in the statement of cash flows under cash flow used for investing activities. ©Cambridge Business Publishers, 2017 41 Financing Activities Cash Flows ▪ Cause changes in financing liabilities and equity accounts ▪ Long-term liabilities and some short-term notes payable ▪ Equity ▪ Analyse changes in all liability and equity accounts not used in computing net cash flow from operating activities Cash flows increase due to: An increase in liabilities or equity Cash flows decrease due to: A decrease in liabilities or equity ©Cambridge Business Publishers, 2017 42 Cash Flows From Financing Activities Jana Juice had two financing activities during June: Balance Sheet Transaction (1) Sign note and received $12,000 cash (12) Paid $100 cash dividends to shareholders Cash Asset +12,000 + Noncash Contrib. =Liabilities + Asset Capital Cash + Earned Capital = +12,000 Revenues – Expenses = – = – = Net Income Notes Payable Cash -100 Income Statement = -100 Retained Earnings ▪ The $12,000 cash inflow from the loan is listed in the statement of cash flows under cash flow from financing activities. ▪ The dividend payment is a financing activity cash outflow and would be deducted from cash flow from financing activity. ©Cambridge Business Publishers, 2017 43 Cash Flows From Financing Activities Retained earnings can be analysed for increases and decreases: Retained Earnings 660 1,414 Net income 100 1,974 Cash decreased by $100 as a result of the dividend payment. Cash paid for dividends ©Cambridge Business Publishers, 2017 $100 44 Gains and Losses ▪ IASB requires that financing and investing items be included at gross cash amounts in the statement of cash flows ▪ Gains ▪ Result when plant assets are sold for more than their book value ▪ Are special revenue accounts ▪ Losses ▪ Result when plant assets are sold for less than their book value ▪ Are special expense accounts ©Cambridge Business Publishers, 2017 45 Jana Juice’s Statement of Cash Flows The operating activities section was prepared using the indirect method. The statement of cash flows shows the change in ‘cash’ during June 2016. ©Cambridge Business Publishers, 2017 Jana Juice Statement of Cash Flows For Month Ended June 30, 2016 Cash flows provided by operating activities Net income Adjustments: Add back depreciation expense 170 Subtract: Change in accounts receivable 2,400 Change in inventory 900 Change in prepaid insurance (200) Change in interest receivable 60 Add: Change in accounts payable 2,100 Change in unearned revenue 500 Change in wages payable 550 Change in interest payable 120 Change in income tax payable 606 Total adjustments Cash flow from operating activities Cash Flows from Investing Activities Cash paid for fixtures and equipment Net cash used by investing activities Cash Flows from Financing Activities Cash received from loans Cash paid for dividends Net cash provided by financing activities Net change in cash Cash balance, June 1, 2016 Cash balance, June 30, 2016 $1,414 1 886 2,300 (10,200) (10,200) 12,000 (100) 11,900 4,000 6,460 $10,460 2 3 46 Noncash Investing and Financing Activities ▪ Not all significant investing and financing events affect current cash flows ▪ Examples ▪ Issue shares in exchange for land ▪ Purchase a building with notes payable Noncash investing and financing transactions are supplemental to the statement of cash flows. ©Cambridge Business Publishers, 2017 47 Supplemental Disclosures Three disclosures are required: ▪ Cash paid for interest and for income taxes if the indirect method is used ▪ A schedule of all noncash investing and financing activities ▪ Policy for determining which highly liquid, short-term investments are treated as cash equivalents ©Cambridge Business Publishers, 2017 48 Participation Exercise - Poll This poll has ten transactions. For each you are asked to: 1. Classify the transaction as Operating (O), Investing (I) or Financing (F); and 2. Indicate whether the transaction will result in an Increase (+) or Decrease (-) You have 10 minutes to complete it ©Cambridge Business Publishers, 2017 49 E4-40 – Gastown Enterprises Reconciling Changes in Balance Sheet Accounts Gastown Enterprises reported expenditures for property and equipment of $5,559,183 in 2015. a. What was the original cost of the property and equipment that Gastown Enterprises sold during 2015? b. What was the accumulated depreciation on that property and equipment at the time of sale? c. Compute the cash proceeds from the sale of property and equipment in 2015. d. Prepare the journal entry to describe the sale of property and equipment. e. Determine the cash dividends paid in 2015. ©Cambridge Business Publishers, 2017 50 P4-52 – Rainbow Company Preparing a Statement of Cash Flows (Indirect Method) Required a. Compute the change in cash and cash equivalents that occurred during 2013. b. Prepare a 2013 statement of cash flows using the indirect method (classify interest income as operating cash flow). c. Prepare separate schedules showing (1) cash paid for interest and for income taxes and (2) noncash investing and financing transactions. d. Compute its (1) operating cash flow to current liabilities ratio, (2) operating cash flow to capital expenditures ratio, and (3) free cash flow. ©Cambridge Business Publishers, 2017 51 Learning Objective 5 Compute and interpret ratios that reflect a company’s liquidity and solvency using information reported in the statement of cash flows. Operating Cash Flow to Current Liabilities A measure of the ability to liquidate current liabilities Applying the Operating Cash Flow to Current Liabilities Ratio to Qantas: ©Cambridge Business Publishers, 2017 53 Operating Cash Flow to Current Liabilities Over the past three years, Qantas’s OCFCL ratio is consistently lower than that of Singapore Airlines. ©Cambridge Business Publishers, 2017 54 Operating Cash Flow to Capital Expenditures and Free Cash Flow Helps assess if a firm is able to replace, and expand property, plant, and equipment. Applying the Operating Cash Flow to Capital Expenditures Ratio and Free Cash Flow to Qantas: ©Cambridge Business Publishers, 2017 55 Operating Cash Flow to Capital Expenditures OCFCX increased over the last three years for Qantas, and surpassed that of Singapore Airlines in 2013. ©Cambridge Business Publishers, 2017 56 P4-54 - Interpreting AstraZeneca Plc Cash Flows Statement Required a. AstraZeneca begins its cash from operations with profit before taxes, then adds $4,583 million for depreciation, amortisation, and impairment. Why are they adding depreciation, amortisation, and impairment compute cash from operations? b. How should the $(383) for trade and other receivables and the $135 for inventories under cash from operations be interpreted? Explain. c. AstraZeneca shows a positive $414 for trade and other payables and provisions. Does this mean theyreceived $414 for trade payables in 2013? Explain. d. What was AstraZeneca’s net investment in property and equipment and intangible assets? Was it enough to cover the wear and tear on these assets? e. How much cash did AstraZeneca return to its shareholders in 2013? f. Overall, does AstraZeneca generate a healthy cash flow from its operations? How is AstraZeneca using the cash generated by its operations? Explain ©Cambridge Business Publishers, 2017 57 The End ©Cambridge Business Publishers, 2017
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