Cash Flows from Financing Activities
Cash flow from financing activities: Long-term debt and common stock Computing dividends paid Beginning retained earnings + Net income – Dividend = Ending retained earnings
Cash Flows from Investing Activities
Cash flows from investing activities The second and third steps in preparing the cash flow statement are to determine the total cash flows from investing activities and from financing activities. The presentation of this information is identical, regardless of whether the direct or indirect method is used for operating cash flows.
Conversion from the Indirect to Direct Method
If a direct-format statement is not available, cash flows from operating activities reported under the indirect method can be converted to the direct method. Accuracy of conversion depends on adjustments using data available in published financial reports. Method to Convert Cash Flow from Indirect to Direct The three-step conversion process:
The Indirect Method for Cash Flows from Operating Activities
Operating Activities: Indirect Method Net income is adjusted for the following: Changes in working capital accounts include increases and decreases in the current operating asset and liability accounts. The changes in these accounts arise from applying accrual accounting—that is, recognising revenues when they are earned and expenses when they are incurred instead of when the…
The Direct Method for Cash Flows from Operating Activities
The first step in preparing the cash flow statement is to determine cash flows from operating activities, which can be presented using the direct or indirect method. Cash flows from investing activities and from financing activities are identical regardless of whether the direct or indirect method is used to present operating cash flows. Companies often…
Linkages between the Financial Statements
The primary financial statements are as follows: Relationship between Financial Statement Linkages Between Current Assets and Current Liabilities The income statement and statement of cash flows also provide key linkages between the current assets and current liabilities sections of the balance sheet. Differences between the accrual and cash accounting recognition of operating activities result in…
Ratios and Common-Size Analysis
Analysis of a company’s balance sheet can provide insight into the company’s liquidity and solvency—as of the balance sheet date—as well as the economic resources the company controls. Liquidity refers to a company’s ability to meet its short-term financial commitments. Assessments of liquidity focus on a company’s ability to convert assets to cash to pay for…
Non-Current Liabilities
Long-Term Financial Liabilities Typical long-term financial liabilities include loans (i.e., borrowings from banks) and notes or bonds payable (i.e., fixed-income securities issued to investors). Liabilities such as loans payable and bonds payable are usually reported at amortised cost on the balance sheet. At maturity, the amortised cost of the bond (carrying amount) will be equal…
Financial Instruments
IFRS defines a financial instrument as a contract that gives rise to a financial asset of one entity, and a financial liability or equity instrument of another entity. Derivatives are financial instruments for which the value is derived based on some underlying factor (Interest rate, exchange rate, commodity price, security price or credit rating) and…
Goodwill
When one company acquires another, the purchase price is allocated to all of the identifiable assets (tangible and intangible) and liabilities acquired, based on fair value. If the purchase price is greater than the fair value of the identifiable assets and liabilities acquired, the excess amount is recognised as an asset, goodwill. The subject of…