IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

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Wiley IFRS: Practical Implementation Guide and Workbook

Example

Cash Flow Statement-s-Direct Method (Operating Activities Section)

Cash flows from operating activities: Cash collections f rom customers Cash dividends received Cash paid to employees Cash paid to suppliers Cash paidfor other operating expenses III come taxes paid Interest paid Net cash flows from operating activities

$900.000 100.000

(300.000) (200,000) (/50.000) ( 100.000) (/50000)

Case Study 3

Facts XYZ Inc. is prepari ng its cash flow statement under the direct method and has provided this information: Net credit sales $5,000,000 Accounts receivable, end of the year 1,500,000 Accounts receivable, beginning of the year 2,500,000 Purchases (on account) 4,000,000 Trade payable, end of the year 1,900,000 Trade payable, beginning of the year 2,000,000 Operatingexpenses 3,000,000 Accrued expenses, beginning of the year 500,000 Accruedexpenses, end of the year 400,000 Depreciation on property, plant, and equipment 600,000 Required For the purpose s of the cash flow statement under the direct method, you are requ ired to compute the cash collectio ns from customers, payments to suppliers, and cash paid for operating expenses. Solution a. Cash collections from customers Net sales Add: Accounts receivables, beginning of the year

$3,000,000 500000 3,500,000 (400,000) (600 000) $2 500 000 $4,000,000 1900 000 5,900,000 (2 000 000) $3 900 000 $5,000,000 2500000 7,500,000 (1.500000) $6000000

Less: Accounts receivables, end of the year Cash collections from customers

b. Cash paid to suppliers Purchases

Add: Accounts payable, end of the year

Less: Accounts payable, beginningof the year Payments to suppliers

c. Cash paid for operating expenses Operating expenses

Add: Accrued expenses, beginning of the year

Less: Accrued expenses, end of year Less: Depreciation on property, plant, and equipment Cash paid toward operatingexpenses

11.3 The indirect method is th e more popular of the two methods despite th e recommendati on by lAS 7 to present the cash flows from operating ac tivities under the di rect method . A pos sibl e rea– son for this cou ld be th at the indire ct method is easier to use tha n th e direct method becau se it de– rives net cash fl ows fro m operating ac tivities from the net operating results for the year as re ported in th e income sta teme nt. Under the indirect me tho d, the first item presented is the net income (o r loss) for the year as reported in the income statement. Noncash items of revenue and ex pe nse are adde d or deduct ed to arrive at net cash provide d by ope rating ac tivities. For insta nce, depreciation on propert y, pl ant, and equipme nt is added back because these ex pe nses reduce (increase) net in– come (lo ss) for th e year wi thout affecting cash fro m operating ac tivities. Similarl y , ga in on sa le of property, pl ant, and equ ipment is ded uc ted fro m net income for the year because it does not affect cash flow fro m opera ting ac tivities. Changes in inventory, accounts recei vabl e, and othe r operating