Adjusting and Non-Adjusting Events: Cash Flow Analysis

Adjusting Events

The following events require adjustments in financial statements:

• Settlement of a court case
• Asset impairments (asset not well accounted for)
• Determination of costs of assets purchased or sold before the reporting period
• Determination of profit or bonus payment
• Fraud or errors

Non-Adjusting Events

The following events do not require adjustments in financial statements:

• Major business combinations or disposal of a subsidiary (sell of a subsidiary)
• Plan to discontinue operations
• Purchases of assets or expropriation by government
• Destruction of a plant (by a fire, earthquake…)
• Restructuring
• Ordinary shares transactions
• Changes in asset prices or foreign exchange rates after reporting period
• Changes in tax rates or tax law
• New commitments or liabilities

Lecture 11/12

Operating Activities

Cash flows from customers: Sales + Beginning receivables - Ending receivables

• Bad debt expense (where bad debts are written off directly against customer accounts)
• Transfer from provision for doubtful debts (where debts that have previously been considered)
• Any discounts that might have been given to customers for early payments

Cash payment made to suppliers: Opening accounts payable - Closing accounts payable + Cost of sales + Closing inventory

• Opening inventory - Discount given by suppliers + Inventory write-offs

Cash flow received from interest revenue: Interest revenue + Opening interest receivable

• Closing interest receivable: - Increase in debentures + Decrease in debentures

Cash flow received from dividends: Dividend income + Opening dividends receivable - Closing dividends receivable

Cash payment of interest: Interest expense + opening interest payable - closing interest payable

• Increase in bonds + Decrease in bonds

Cash payment of income taxes: Income tax expense + opening income tax payable - closing income tax payable

+ opening deferred tax liability - Closing deferred tax liability + Closing deferred tax asset - Opening deferred tax asset

Investing Activities

Cash payment of non-current assets: Closing balance of non-current assets - Opening balance of non-current assets

+ Original cost of assets sold - Assets acquired through non-cash transactions - Revaluation increases + Accumulated Depreciation

Financing Activities

Payment of cash dividends: Dividends paid + dividends proposed + opening dividends payable - closing dividends payable

Operating Activities Items

Net income, accounts receivables, inventory, depreciation (positive), accounts payables, gain on sale of investment/ land, accrued liabilities, salaries, prepaid insurance.

Investing Activities Items

Land, plant assets, long-term investments.

Financing Activities Items

Bonds payable, capital stock, dividend payable, notes payable, issuance of common stock, dividends.