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Positioning of items within cash flow statement—IFRS vs. U.S. GAAP (LO 4-9)
Lend Corp. has a primary business model of borrowing funds at low interest rates and lending
them out at higher interest rates. The balances in Lend Corporation’s balance sheet accounts at
December 31, 2017 are as follows:
| Assets | Liabilities | ||
| cash | 300,000 | 40,000 | |
| land | 300,000 | 800,000 | |
| building | 800,000 | ||
| Accum depr: Building | 160,000 | Owner’s Equity | |
| A/R | 20,000 | Retained Earnings | 320,000 |
| Notes Rec | 900,000 | Contributed capital | 1,000,000 |
During 2018, Lend Corp. has the following transactions:
∙ Received $45,000 in cash interest on notes receivable.
∙ Paid $16,000 of cash interest on notes payable.
∙ Collected $10,000 cash from accounts receivable.
∙ Paid $40,000 cash to reduce accounts payable.
∙ Owes $3,000 at the end of the year to administrative employees for work performed.
∙ Building depreciation is an additional $20,000.
Required:
1. Compute Lend Corp’s 2018 net income.
2. Show Lend Corp’s 12/31/2018 balance sheet.
3. Report Lend Corp’s 12/31/2018 statement of cash flows using the indirect method under
U.S. GAAP.
4. Report Lend Corp’s 12/31/2018 statement of cash flows using the indirect method under IFRS.
Record cash flows from interest received in the cash flows from investing section. Record cash
flows from interest paid in the cash flows from financing section.
5. Compare your net cash flows from operations computed from requirement 3 vs. require- ment 4.
Which do you think better reflects Lend Corp’s fundamental operating cash flows?
Expert Answer
| 1 | Income statement | ||
| Revenue | |||
| Interest revenue | 45000 | ||
| Expense | |||
| Interest expense | 16000 | ||
| Salaries expense | 3000 | ||
| Deprciation expense building | 20000 | 39000 | |
| Net income | 6000 | ||
| 2 | Balance sheet | ||
| Assets | |||
| Cash | 299000 | ||
| Land | 300000 | ||
| Building | 800000 | ||
| Accumulated depreciation building | -180000 | ||
| Accounts receivable | 10000 | ||
| Notes receivable | 900000 | ||
| Total assets | 2129000 | ||
| Liabilities and stockholders equity | |||
| Liabilities | |||
| Salaries and wages payable | 3000 | ||
| Notes payable | 800000 | ||
| Total liabilities | 803000 | ||
| Stockholders equity | |||
| Retained earnings | 326000 | ||
| Contributed capital | 1000000 | ||
| Total stockholders equity | 1326000 | ||
| Total liabilities and stockholders equity | 2129000 | ||
| 3 | Cash flow statement | ||
| Cash flow from operating activities | |||
| Net income | 6000 | ||
| Depreciation expense | 20000 | ||
| Decrease in accounts receivable | 10000 | ||
| Decrease in accounts payable | -40000 | ||
| Increase in wages payable | 3000 | -7000 | |
| Cash flow from operating activities | -1000 | ||
| Cash flow from investing activities | 0 | ||
| Cash flow from financing activities | 0 | ||
| Net Cash and cash equivalent | -1000 | ||
| Add | Cash and cash equivalent at beginning | 300000 | |
| Cash and cash equivalent at end | 299000 | ||
| 4 | Cash flow statement | ||
| Cash flow from operating activities | |||
| Net income | 6000 | ||
| Depreciation expense | 20000 | ||
| Interst expense | 16000 | ||
| Interest revenue | -45000 | ||
| Decrease in accounts receivable | 10000 | ||
| Decrease in accounts payable | -40000 | ||
| Increase in wages payable | 3000 | -36000 | |
| Cash flow from operating activities | -30000 | ||
| Cash flow from investing activities | |||
| Interest revenue | 45000 | ||
| Cash flow from financing activities | |||
| Interest expense | -16000 | ||
| Net Cash and cash equivalent | -1000 | ||
| Add | Cash and cash equivalent at beginning | 300000 | |
| Cash and cash equivalent at end | 299000 |
