Q2IFRS Briefly describe some of the sim... [FREE SOLUTION]

Chapter 23: Q2IFRS (page 1399)

Briefly describe some of the similarities and differences between GAAP and IFRS with respect to cash flow reporting.

Short Answer

Expert verified

The statement of cash flows must include the operating, investing, and financing components according to both IFRS and U.S. GAAP.One significant distinction is that under IFRS, bank overdrafts may occasionally be included in cash and cash equivalents (which is not the case in U.S. GAAP).

Step by step solution

Meaning of GAAP

GAAP stands for "generally accepted accounting principles," a collection of accounting principles, methods, and rules that organizations use to create or make financial statements for a given period.

Describing some of the similarities and differences between GAAP and IFRS

The statement of cash flows is necessary for IFRS, just like it is for U.S. GAAP. An IFRS statement of cash flows has identical content and appearance to one that follows U.S. GAAP. Under U.S. GAAP, the disclosure requirements for the statement of cash flows are more stringent.

Additional similarities include:

Companies that prepare financial statements by IFRS must include a statement of cash flows as a component.
Both IFRS and U.S. GAAP stipulate that the statement of cash flows should include three main sections, including operating, investing, and financing, as well as changes in cash and cash equivalents.
Like U.S. GAAP, IFRS permits the preparation of the cash flow statement using either the indirect or direct method. Companies typically report net cash flows from operating activities using the indirect approach in domestic and foreign contexts.

Notable differences are

(1) According to IFRS, businesses should segregate the total amount of cash flows related to an increase in operational capacity from those needed to sustain operating capacity;

(2) The IFRS and U.S. GAAP definitions of cash equivalents are comparable. One significant distinction is that, under IFRS, in certain circumstances, bank overdrafts are regarded as a component of cash and cash equivalents (which is not the case in U.S. GAAP). Bank overdrafts are categorized as finance operations under U.S. GAAP.

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MICHAELS COMPANY COMPARATIVE BALANCE SHEETS AS OF DECEMBER 31, 2017 AND 2016
	2017	2016
Cash	\(10,000	\)4,000
Accounts receivable	20,500	12,950
Short-term investments	22,000	30,000
Inventory	42,000	35,000
Prepaid rent	3,000	12,000
Prepaid insurance	2,100	900
Supplies	1,000	750
Land	125,000	175,000
Building	350,000	350,000
Accumulated depreciation 鈥� building	(105,000)	(87,500)
Equipment	525,000	400,000
Accumulated depreciation 鈥� equipment	(130,000)	(112,000)
Patents	45,000	50,000
Total assets	\(910,600	\)871,100

Account payable	\(22,000	\)32,000
Income tax payable	5,000	4,000
Salaries and wages payable	5,000	3,000
Short-term note payable	10,000	10,000
Long-term note payable	60,000	70,000
Bond payable	400,000	400,000
Premium on bond payable	20,303	25,853
Common stock	240,000	220,000
Paid-in-capital in excess of par 鈥� common stock	25,000	17,500
Retained earnings	123,297	88,747
Total liabilities and stockholders equity	\(910,600	\)871,100

MICHAELS COMPANY INCOME STATEMENT AND DIVIDEND INFORMATION FOR THE YEAR ENDED DECEMBER 31, 2017
Sales revenue		\(1,160,000
Cost of goods sold		748,000
Gross margin		412,000
Operating expenses
Selling expenses	\)79,200
Administrative expenses	156,700
Depreciation/Amortization expenses	40,500
Total operating expenses		276,400
Income from operations		135,600
Other revenue/expenses
Gain on sale of land	8,000
Gain on sale of short-term investment	4,000
Dividend revenue	2,400
Interest expenses	(51,750)	(37,350)
Income before tax		98,250
Income tax expenses		39,400
Net income		58,850
Dividend to common stockholders		(24,300)
To Retained earnings		$34,550

PACIFIC CLOTHING STORE STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JANUARY 31, 2017
Sources of cash
From sales of merchandise	\(382,000
From sale of common stock	380,000
From sale of investment	120,000
From depreciation	80,000
From issuance of note for truck	30,000
From interest on investments	8,000
Total sources of cash	1,000,000

Uses of cash
For purchase of fixtures and equipment	330,000
For merchandise purchased for resale	253,000
For operating expenses (including depreciation)	170,000
For purchase of investment	95,000
For purchase of truck by issuance of note	30,000
For purchase of treasury stock	10,000
For interest on note	3,000
Total uses of cash	891,000
Net increase in cash	\)109,000

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Briefly describe some of the similarities and differences between GAAP and IFRS with respect to cash flow reporting.

Short Answer

Step by step solution

Meaning of GAAP

Describing some of the similarities and differences between GAAP and IFRS

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