Cash Flow Statement

DEFINITION :-
Cash flow statement does not include amount of future cash dealings that are on credit. Cash is not same as net income in income statement and balance sheet. There are 3 types of business activities regarding cash dealings. operating , investing and financing activities.
The document provides aggregate data regarding all cash inflows a company receives from both its ongoing operations and external investment sources, as well as all cash outflows that pay for business activities and investments during a given quarter.

Structure of the Cash Flow Statement

The most commonly used format for the cash flow statement is broken down into three sections:  cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities.

Cash flows from operating activities are related to your principal line of business and include the following:

Cash receipts from sales or for the performance of services

Payroll and other payments to employees

Payments to suppliers and contractors

Rent payments

Payments for utilities

Tax payments

Methods of Cash flow statement:

There are 2 basic methods to make cash flow statements;

1.             Direct Method.

2.            Indirect Method...


There are three main sections on the statement of cash flow:

1.        Operating activities

2.        Investing activities

3.        Financing activities

 



SAMPLE :-

OTHER :-
Under the direct method, you are basically analyzing your cash and bank accounts to identify cash flows during the period.  You could use a detailed general ledger report showing all the entries to the cash and bank accounts, or you could use the cash receipts and disbursements journals.  You would then determine the offsetting entry for each cash entry in order to determine where each cash movement should be reported on the cash flow statement.
Another way to determine cash flows under the direct method is to prepare a worksheet for each major line item, and eliminate the effects of accrual basis accounting in order to arrive at the net cash effect for that particular line item for the period
Indirect method the cash flows from operating activities section under the indirect method, you start with net income per the income statement, reverse out entries to income and expense accounts that do not involve a cash movement, and show the change in net working capital.  Entries that affect net income but do not represent cash flows could include income you have earned but not yet received, amortization of prepaid expenses, accrued expenses, and depreciation or amortization.  Under this method you are basically analyzing your income and expense accounts, and working capital...

Propertyplant and equipment

DEFINITION:-
A  company asset that is vital to business operations but cannot be easily liquidated. The value of property, plant and equipment is typically depreciated over the estimated life of the asset, because even the longest-term assets become obsolete or useless after a period of time.
The principal issues in accounting for property, plant and equipment are the recognition of the assets, the determination of their carrying amounts and the depreciation charges are to be recognized.

·        Property, plant and equipment are tangible

·        Cost of an item of property, plant and equipment shall be recognized as an asset;

·        Cost of property, plant and equipment includes;

(a)   Its purchase price,

(b) Including import duties

(c) Non-refundable purchases taxes, after deducting trade Discounts and rebates.

(d) Cost incurred to bring it to the point of allocation...

 OBJECTIVES :-

           The objective of this Standard is to prescribe the accounting treatment for property, plant and equipment so that users of the financial statements can discern information about an entity’s investment in its property, plant and equipment and the changes in such investment.
The objective of this Standard is to prescribe the accounting treatment for property, plant and equipment so that users of the financial statements can discern information about an entity’s investment in its property, plant and equipment and the changes in such investment.

Property, plant and equipment are tangible items that:

(a)  These items are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes;

(b)  Expected to be used during more than one period.

The cost of an item of property, plant and equipment shall be recognized as an asset if, and only if: 

(a)  It is probable that future economic benefits associated with the item will flow to the entity; and

(b)  The cost of the item can be measured reliably..

 
SCOPE :-

Certain assets have unlimited useful life such as land and they are not depreciated. Other assets such as buildings, vehicles, etc. lose their value over their useful life and are called depreciable fixed assets.

Since fixed assets are used for a period of more than one year, we must have a mechanism to expense out the cost of the fixed assets on some systematic basis. This process of allocation of fixed asset cost over period is called depreciation.

Each fixed asset has some useful life, for example say 2 year in case of a computer. Most assets are scraped but some may have certain value at the end of their life, for example we may expect to get considerable proceeds from selling a vehicle at the end of its useful life, this value at the end of the useful life is of an asset is called its residual value, salvage value or scrap value. We only depreciate that portion of cost which exceeds the salvage value. In other words the depreciable amount is cost minus salvage value...

Recognition:

The cost of an item of property, plant and equipment shall be recognised as an asset if, and only if:

1.                     it is probable that future economic benefits associated with the item will flow to the entity;  and 

2.                     the cost of the item can be measured reliably.  

Bank reconciliation statement

Bank reconciliation statement :-
                 
               A form that allows individuals to compare their personal bank account records to the bank's records of the individual's account balance in order to uncover any possible discrepancies. Since there are timing differences between when data is entered in the banks systems and when data is entered in the individual's system, there is sometimes a normal discrepancy between account balances. The goal of reconciliation is to determine if the discrepancy is due to error rather than timing.

How to Prepare a Bank Reconciliation Statement :-

     To prepare the bank reconciliation statement, the following rules may be useful for the students:

1.  Check the cash book receipts and payments against the bank statement.

2.  Items not ticked on either side of the cash book will represent those which have not yet passed through the bank statement.

3.  Make a list of these items.

4.  Items not ticked on either side of the bank statement will represent those which have not yet been passed through the cash book.

5.  Make a list of these items.

6.  Adjust the cash book by recording therein those items which do not appear in it but which are found in the bank statement, thus computing the correct balance of the cash book.

7.  Prepare the bank reconciliation statement reconciling the bank statement balance with the correct cash book balance in either of the following two ways:

(i)  First method (Starting with the cash book balance)
(ii) Second method (Starting with the bank statement balance)

Example :-

On December 31 1991 the balance of the cash at bank as shown by the cash book of a trader was $1,401 and the balance as shown by the bank statement was 2,253.

On checking the bank statement with the cash book it was found that a cheque for $116 paid in on the 31st December was not credited until the 1st January, 1992 and the following cheques drawn prior to 31 December were not presented at the bank for payment until the 5th January 1992. Rashid & Sons $29, Bashir & Co. $801, MA Jalil $6, Khalid Bros., $132.

Prepare a statement recording the two balances:

Solution:

Bank Reconciliation Statement on 31st December 1991
First Method:
Balance as per cash book - Dr.		1,401
Less cheques paid in but not collected		116
		1,285
Add cheques drawn but not presented:
Rashid & Sons	29
Bashir & Co.	801
MA Jalil	6
Khalid Bros.	132	968
Balance as per bank statement - Cr.		2,253
Second Method:
Balance as per bank statement - Cr.		2,253
Less cheques drawn but not presented		968
		1,285
Add cheques paid in but not collected		116
Balance as per cash book - Dr.		1,401

IAS-2 inventories ...

Definition:-
                 “ IAS defines entries and specifies requirement for the recognition of and entry as an expense or as an asset the measurement of inventories and disclosures about inventories ”

Reasons for Revising IAS 2 :-
                       The International Accounting Standards Board developed this revised IAS 2 as part of its project on Improvements to International Accounting Standards. The project was undertaken in the light of queries and criticisms raised in relation to the Standards by securities regulators, professional accountants and other interested parties. The objectives of the project were to reduce or eliminate alternatives, redundancies and conflicts within the Standards, to deal with some convergence issues and to make other improvements..
SCOPE:-
               The Standard clarifies that some types of inventories are outside its scope while certain other types of inventories are exempted only from the measurement requirements in the Standard.

   Some of the scope is as follows:-

1. raw material (material in use)
2. work in process (work being in process)
3. finished goods (goods which are prepared for using)

The Standard does not apply to the measurement of inventories of producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, to the extent that they are measured at net realizable value in accordance with well-established industry practices. The previous version of IAS 2 was amended to replace the words 'mineral ores' with 'minerals and mineral products' to clarify that the scope exemption is not limited to the early stage of extraction of mineral ores ..

COST FLOW ASSUMPTIONS:-

1. Average-cost method
2. First in - first out method
3. Last in – last out method...


The following item should not be include in inventory cost:-
àAbnormal waste
àStorage costs
àSelling costs
àInterest costs etc …

Fair value:-
   The amount for which an asset could be saved or liability could be settled …

Write down the net realizable value (NRV):-

   It is the estimated which the company’s estimate in the ordinary working of the business. Less the cost of completion this estimated cost should be there to make sale any nrv must be an expense in the period which the written down occur. Any reversal can be recognized in the income statement of the business in the same period which the reveal occurs...

DISCLOSURE:-
  à Accounting policy for inventories. Carrying amount, generally classified as merchandise, supplies, materials, work in process and finished goods· g amount, generally classified as merchandise, supplies, materials, work in process and finished goods. The classification depends on what is appropriate for entity…

à Carrying amount of any inventories at fair value less cost to sell…

à  Amount of any reversal of a write down to NRV and the circumstances that led to such reversal…

à Amount of any write-down of inventories recognized as an expense in the period…

à Carrying amount of inventories pledged as security for liabilities...

Cost of inventories recognized as expense (cost of goods sold). IAS 2 acknowledges that some enterprises classify income statement expenses by nature ( material, labor and so on ) rather than by functions (CGS selling expense and so on ). Accordingly, as an alternative to disclosing cost of goods sold expense, IAS 2 allows an entity to disclose operating costs recognised during the period by nature of the cost (raw materials and consumables, labour costs, other operating costs) and the amount of the net change in inventories for the period)…

closing entries

Ø Closing entries:-
   

Ø Introduction

Ø Definition

Ø Revenues, Expenses,  Dividends, Income summary

Introduction:-
                    Closing entries are normally done to close the entries or temporary accounts of the journal, CLOSING ENTRY is a journal entry at the end of a period to transfer the net effect of revenue and expense items from the income statement to owners equity..
Definition:-
                         “A closing entry is made to the general ledger at the conclusion of an accounting period and is used to transfer the balance from a temporary account to a corresponding permanent account.”

 Revenues, Expenses  Etc :-                

Ø  Closing entries are based on the balances of accounts in the adjusted trial balance.
                   Temporary accounts include:
            1. Revenues
            2. Expenses
            3. Dividends
            4. Income Summary …

adjusting entries

ADJUSTING ENTRIES:-
       
         INTRODUCTION:-
                         à  An adjusting journal entry is created to adjust account balances. Adjusting entries are used for a variety of reasons, including booking depreciation or amortization, reallocating accruals and reversing accruals of prepaid income or expenses, adjusting Sales Tax Payable for interest, penalties, or discounts, and entering bank or credit card fees or interest. This is usually done by an accountant.

                            à   An adjusting entry will not affect your books or reports differently from a normal journal entry, except for being noted on the Adjusted Trial Balance report.  If you are not sure whether the entry you are about to make should be an adjusting entry, please consult your accountant…

IN OTHER WORDS à  Adjusting entries are those entries that passed to rectify an error or wrong entry already made some accounting soft wares have disabled edit function in the accounts, so the only way to undo the mistake is to pass a correction entry or adjusting entry…

TYPES OF ADJUSTING ENTRIES:-
There are total five types of adjusting entries which are as follows:-
1. Accrued revenues
2. Unearned revenues
3. Accrued expenses
4. Prepaid expenses
5. Others…
               The detail is given below…

1. Accrued revenues are those which are already earned but not yet paid or recorded . They are also called accrued assets they are normally used in adjusting entries.
2. Unearned revenues are those which are received in cash and recorded as liabilities in the accounts . They are also known as deffered revenues .
3. Accrued expenses are those which have been incurred but not yet paid or recorded . They are also known as accrued liabilities . they are also normally used in adjusting entries .
4. Prepaid expenses are those whish are paid in cash and are recorded but yet to be used .
5. Others includes  depreciation of fixed assets, allowances for bad debts, and inventory adjustments .

Problem 4.6(b):-

1.

Adjusting Entry	Debits	Credits
Unearned dues	21000
Earned dues		21000

2.

Adjusting Entry	Debits	Credits
Insurance expired	3200
Unexpired insurance		3200

3.

Adjusting Entry	Debits	Credits
Rent expense	7300
Prepaid expense		7300

4.

Adjusting Entry	Debits	Credits
Office supplies expense	1720
Office supplies		1720

5.

Adjusting Entry	Debits	Credits
Depreciation equipment	3000
Accumulated depreciation		3000

6.

Adjusting Entry	Debits	Credits
Interest expense	750
Interest payable		750

7.

Adjusting Entry	Debits	Credits
Salaries expense	10500
Prepaid salaries		10500

8.

Adjusting Entry	Debits	Credits
Tax expense	2000
Tax payable		2000

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