Tutorial 16

Tutorial 16 - Chapter 16 Reporting the Statements of Cash...

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Chapter 16: Reporting the Statements of Cash Flow – Indirect method (HKAS7) Appendix 16B: Preparing cash flow statement – Direct method A NOTE ON READING: Appendix 16B (TB562 – 567) is WITHIN THE READING LIST 1. Classification of cash flow (Paragraph 6 HKAS 7) Operating activity: are the principal revenue-producing activities of the entity and other activities that are not investing or financing activities. Investing activity: are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Financing activity: are activities that result in changes in the size and composition of the contributed equity and borrowings of the entity. Definition of cash and cash equivalent (HKAS7 Paragraph 6 and 7) Cash comprises cash on hand and demand deposits. Cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes. For an investment to qualify as a cash equivalent it must be readily convertible to a known amount of cash and be subject to an insignificant risk of changes in value . Therefore, an investment normally qualifies as a cash equivalent only when it has a short maturity of, say, three months or less from the date of acquisition . Equity investments are excluded from cash equivalents unless they are, in substance, cash equivalents, for example in the case of preferred shares acquired within a short period of their maturity and with a specified redemption date. 2. *****Application of direct and indirect method in preparing cash flow statement Indirect method for operating cash flow Starting with the net income in the income statement (note: in HK, we usually start with EBIT: earnings before interest and tax. The reason is that HKAS 7 requires separate disclosure of cash flow for interest and tax – Paragraph 31 and 35) Step 1: Adjustment for non cash and non operating gain / loss (disposal of fixed assets, bad debts, depreciation) Step 2: Adjustment for changes in current assets and current liabilities For indirect method on operating cash flow: Increase in current asset Decrease in cash flow Increase in current liabilities Increase in cash flow Direct method for operating cash flow You need to draw out the T-account to find out the cash flow What you have: Income statement (accrual basis) + Balance sheet 1
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Example: if you find $1000 wages expense in an income statement and wages payable account balance in the balance sheet with $500 opening and $400 closing. What is the cash flow for wages Recall: Journal entries for accrued wages Dr. Wages Cr. Accrued wages (adjusting entries) But remember the opening wages payable settle in the current year but not reflect on the income statement (Dr. Wages payable Cr. Cash) Total cash payment = (1000-400) + 500 = 1100 Cash flow from investing activity 1. Disposal of fixed asset Very often, you will find the gain / loss on disposal of fixed asset in the income statement (which you will exclude in the operating cash flow part)
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Tutorial 16 - Chapter 16 Reporting the Statements of Cash...

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