Neilson Corp. reported $145,000 of net income for 2011. In preparing

Neilson Corp. reported $145,000 of net income for 2011. In preparing the statement of cash flows, the accountant noted several items that might affect cash flows from operating activities.

1. During 2011, Neilson reported a sale of equipment for $7,000. The equipment had a carrying amount of $23,500.

2. During 2011, Neilson sold 100 Lontel Corporation common shares at $200 per share. The acquisition cost of these shares was $145 per share. This investment was shown on Neilson’s December 31, 2010 balance sheet as an investment at fair value with gains and losses in net income.

3. During 2011, Neilson made a correction of an error for ending inventory of December 31, 2010. The debit to opening retained earnings was $14,600.

4. During 2011, Neilson revised its estimate for bad debts. Before 2011, Neilson’s bad debt expense was 1% of its net sales. In 2011, this percentage was increased to 2%. Net sales for 2011 were $500,000, and net accounts receivable decreased by $15,000 during 2011.

5. During 2011, Neilson issued 500 common shares for a patent. The shares’ market value on the transaction date was $23 per share.

6. Depreciation expense for 2011 was $38,000.

7. Neilson Corp. holds 40% of Nirbana Corporation’s common shares as a long-term investment and exercises significant influence. Nirbana reported $27,000 of net income for 2011.

8. Nirbana Corporation paid a total of $2,800 of cash dividends to all shareholders in 2011.

9. During 2011, Neilson declared a 10% stock dividend, distributing 1,000 common shares. The market price at the date of issuance was $20 per share.

10. Neilson Corp. paid $10,000 in dividends: $2,500 of this amount was paid on term preferred shares classified as a long-term liability.

Instructions

(a) Prepare a schedule that shows the net cash flow from operating activities using the indirect method. Assume that no items other than the ones listed affected the calculation of 2011 cash flow from operating activities. Also assume that Neilson Corp. follows ASPE.

(b) Assume now that Neilson Corp. follows IFRS. What possible amounts might be reported?

(a)

Cash flows from operating activities
Net income			$145,000
Adjustments to reconcile net income to
to net cash provided by operating activities:
Depreciation expense	$38,000
Loss on sale of equipment	16,500
Gain on sale of investment at fair value
with gains and losses in net income	(5,500)
Decrease in accounts receivable	15,000
Income from investment accounted
using the equity method	(10,800)
Dividends received from investment
accounted using the equity method	1,120		54,320
Net cash provided by operating activities			$199,320

Other comments:

No. 1 the proceeds from the sale of the equipment will be shown as cash received from investing activities, but the loss or $16,500 ($23,500 – $7,000) must be an added back to income.

No. 2 is shown as a cash inflow from investing activities of $20,000 (purchase of 100 Lontel Corporation shares at $200 per share) and the gain of $5,500 is deducted from net income in the operating section.

No. 3 does not affect the statement of cash flows as it does not involve nor does it affect cash.

No. 4 is a non-cash expense (Bad Debt Expense) in the income statement. Bad debt expense is not handled separately when using the indirect method. It is part of the change in net accounts receivable.

No. 5 is a significant non-cash investing and financing activity.

No. 6 depreciation is added to income when using the indirect method.

No. 7 and 8 the equity pick-up is deducted and the dividends received are added to net income. Another alternative is to net the Company’s pro-rata share of the dividend against the income from equity method amount reported in the cash flows from operating activities.

No. 9 is not shown on a statement of cash flows.

No. 10 dividends of $2,500 on term preferred shares properly represent cash outflows in the operating activities, included in the calculation of net income, while the remaining dividends of $7,500 would be show as outflows in the financing activities section of the statement of cash flows.

(b)  If Neilson Corp. were following IFRS, there would be choices available on the treatment of dividends and interest paid or received. Under IFRS, interest paid and received and dividends received can be recognized as operating flows on the basis they are included in determining net income. Alternatively, interest paid could be a financing outflow while interest and dividends received could be considered investment flows. A choice is also permitted for dividends paid: a financing flow as a return to equity holders, or an operating flow as a measure of the ability of operations to cover returns to shareholders. However management views these specific flows, once the choice is made; it is applied consistently from period to period.