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Chapter 23: Q4ISTQ (page 1399)

For purposes of the statement of cash flows, under IFRS interest paid is treated as:

  1. an operating activity in all cases.
  2. an investing or operating activity, depending on use of the borrowed funds.
  3. either a financing or investing activity.
  4. either an operating or financing activity, but treated consistently from period to period.

Short Answer

Expert verified

The correct option is 鈥渄鈥�.

Step by step solution

01

Meaning of IFRS

A set of internationally standardized accounting and financial reporting guidelines known as IFRS are used to prepare and display financial statements. Ensures that accounting procedures are uniform, producing comparable financial records among different reporting entities worldwide.

02

Explaining the correct option

Interest and dividends are either financing or operational cash operations. A financial institution will frequently incorporate interest payments, instalments, and profit payments in operating cash flows.

03

Explaining the incorrect option

Option a) Many businesses report cash flows incorporating paid interest and collected. Others classify interest paid as financing cash flow and interest received as cash flow for investing.

Option b) It cannot be reported under investing activities, as it is not related to the sale or purchase of fixed assets or investments. .

Option c) Interest paid is either reported as operating activity or the financing activity, depending upon the nature of the business.

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Most popular questions from this chapter

In 2017, Wild Corporation reported a net loss of \(70,000. Wild鈥檚 only net income adjustments were depreciation expense \)81,000, and increase in accounts receivable $8,100. Compute Wild鈥檚 net cash provided (used) by operating activities.

Accounting, Analysis, and Principles The income statement for the year ended December 31, 2017, for Laskowski Manufacturing Company contains the following condensed information.

LASKOWSKI CO.

INCOME STATEMENT


Revenues

\(6,583,000

Operating expenses (excluding depreciation) \)4,920,000

Depreciation expense 880,000

5,800,000

Income before income tax

783,000

Income tax expense

353,000

Net income

\( 430,000

Included in operating expenses is a \)24,000 loss resulting from the sale of machinery for \(270,000 cash. The company purchased machinery at the cost of \)750,000.

Laskowski reports the following balances on its comparative balance sheets on December 31.


LASKOWSKI CO.

COMPARATIVE BALANCE SHEETS (PARTIAL)

2017

2016

Cash

\(672,000

\)130,000

Accounts receivable

775,000

610,000

Inventory

834,000

867,000

Accounts payable

521,000

501,000

Income tax expense of \(353,000 represents the amount paid in 2017. Dividends declared and paid in 2017 totalled \)200,000.

Accounting

Prepare the statement of cash flows using the indirect method.

Analysis

Laskowski has an aggressive growth plan, which will require significant investments in plant and equipment over the next several years. Preliminary plans call for an investment of over $500,000 in the next year. Compute Laskowski鈥檚 free cash flow (from Chapter 5) and use it to evaluate the investment plans with the use of only internally generated funds.

Principles

How does the statement of cash flows contribute to achieving the objective of financial reporting?

Krauss Company鈥檚 income statement for the year ended December 31, 2017, contained the following condensed information.

Service revenue \(840,000

Operating expenses (excluding depreciation) \)624,000

Depreciation expense 60,000

Loss on sale of equipment 26,000 710,000

Income before income taxes 130,000

Income tax expense 40,000

Net income \( 90,000

Krauss鈥檚 balance sheet contained the following comparative data at December 31.

2017 2016

Accounts receivable \)37,000 $54,000

Accounts payable 41,000 31,000

Income taxes payable 4,000 8,500

(Accounts payable pertains to operating expenses.)

Instructions Prepare the operating activities section of the statement of cash flows using the direct method.

Question: (SCF鈥擠irect Method) Los Lobos Corp. uses the direct method to prepare its statement of cash flows. Los Lobos鈥檚 trial balances at December 31, 2017 and 2016, are as follows.

Debits
December 31

2017
2016

Cash

\(35,000

\)32,000

Accounts receivables

33,000

30,000

Inventory

31,000

47,000

Property, plant and equipment

100,000

95,000

Unamortized bond discount

4,500

5,000

Cost of goods sold

250,000

380,000

Selling expenses

141,500

172,000

General and administration expenses

137,000

151,300

Interest expenses

4,300

2,600

Income tax expenses

20,400

61,200

\(756,700

\)976,100

Credits
December 31

2017
2016

Allowance for doubtful accounts

\(1,300

\)1,100

Accumulated depreciation 鈥� Plant assets

16,500

15,000

Account payable

25,000

15,500

Income tax payable

21,000

29,100

Deferred tax liability

5,300

4,600

8% callable bonds payable

45,000

20,000

Common stock

50,000

40,000

Paid-in-capital in excess of par

9,100

7,500

Retained earnings

44,700

64,600

Sales revenue

538,800

778,700

\(756,700

\)976,100

Additional information:

1. Los Lobos purchased \(5,000 in equipment during 2017.

2. Los Lobos allocated one-third of its depreciation expense to selling expenses and the remainder to general and administrative expenses.

3. Bad debt expense for 2017 was \)5,000, and write-offs of uncollectible accounts totalled $4,800.

Instructions

Determine what amounts Los Lobos should report in its statement of cash flows for the year ended December 31, 2017, for the following items.

(a) Cash collected from customer

(d) Cash paid for income tax

(b) Cash paid to suppliers

(e) Cash paid for selling expenses

(c) Cash paid for interest

Springsteen Co. had the following activity in its most recent year of operations.

  1. Pension expense exceeds amount funded.
  2. Redemption of bonds payable
  3. Sale of the building at book value
  4. Depreciation
  5. Exchange of equipment for furniture
  6. Issuance of ordinary shares
  7. Amortization of intangible assets
  8. Purchase of treasury shares
  9. Issuance of bonds for land.
  10. Payment of dividends
  11. Increase in interest receivable on notes receivable
  12. Purchase of equipment.

Instructions Classify the items as (1) operating鈥攁dd to net income, (2) operating鈥攄educt from net income, (3) investing, (4) financing, or (5) significant non-cash investing and financing activities. Use the indirect method.
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