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 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…
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…
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…
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…
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…
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…
Intangible assets are identifiable non-monetary assets without physical substance. An identifiable asset can be acquired on a standalone basis (i.e., can be separated from the entity) or arises from contractual or legal rights and privileges. Common examples include patents, licenses, trademarks, and customer lists. The most common intangible that is not separately identifiable is goodwill, which arises…
1 Which of the following is most likely found in the management commentary? A. Forward-looking disclosures B. Basis of preparation for the financial statements C. Reasonable assurance whether the financial statements as a whole are free from material misstatement Answer Feedback: A Correct because the management commentary, or MD&A, is a good starting place for understanding information…
Common-Size Analysis of the Income Statement Common-size analysis of the income statement can be performed by stating each line item on the income statement as a percentage of revenue. Common-size statements facilitate comparison across time periods (time series analysis) and across companies (cross-sectional analysis) because the standardisation of each line item removes the effect of…