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Explain the difference between the indirect and direct method of the statement of cash flows.

Part 2

In the second part of this assignment, you will write a Final Paper. Include a title page, introduction, and conclusion in addition to the sections below. Include all appropriate in-text citations and references to support your statements. Document any information used from sources in APA style as outlined in the Ashford Writing Center’s Citing Within Your Paper (Links to an external site.) guide.

In your Final Paper,

  • Analyze management judgments and their effect on the financial statements.
  • Explain the calculations of cash flow statements.
  • Summarize the reporting methods for comprehensive income.
  • Examine the purpose of liquidation and required disclosures.

Part A—Management Judgments

Unlike U.S. GAAP, IFRS requires that an entity disclose both (a) management judgments with the most significant effect on the financial statements and (b) information about the major sources of estimation uncertainty that may result in a material misstatement to the carrying values of the entities assets and liabilities. These disclosure requirements are included in Applying IFRS: Enhancing Communication Effectiveness (Links to an external site.). Read pages 39 through 44, and address the following:

  • Identify where judgments in the financial statements should be disclosed.
  • Identify two examples of judgments that could have a significant impact on the financial statements.
  • Identify four examples of estimation uncertainty that could result in a material adjustment in future years?
  • Describe whether the entity should disclose the estimation if it is likely that this value might change significantly within the next year. (Consider an entity that reports an asset at fair value when the fair value is based upon recently observed market prices. Cite specific references from Applying IFRS: Enhancing Communication Effectiveness (Links to an external site.) to support your answer.)
  • Cite specific judgments and estimations that have been made in the notes to the Home Depot 2017 Annual Report (Links to an external site.).

Part B—Cash Flow

  • Explain the difference between the indirect and direct method of the statement of cash flows.
  • Describe whether all three sections of the cash flow statement are different when using either method.
  • Describe which method is preferred by the FASB.
  • Describe how are the following calculated when preparing the cash flow statement using the direct method:
    • Cash collected from customers,
    • Cash paid for merchandise,
    • Cash paid to employees and cash paid for other accrued expenses, and
    • Cash paid for other operating costs including insurance and other prepaid expenses.

Part C—Comprehensive Income

Read Statement of Financial Accounting Standards No.130 (Links to an external site.) paragraphs 8 through 9 and 58 through 67, and address the following:

  • Explain what comprehensive income is.
  • Identify the four possible reporting methods for comprehensive income (in theory).
  • Explain the pros and cons of each method.
  • Identify the method you think is the best.

Part D—Liquidations

Read Accounting Standards Update: Presentation of Financial Statements (Topic 205) (Links to an external site.), pages 4 through 7, and address the following:

  • Describe liquidation accounting.
  • Identify when liquidation is imminent.
  • Explain initial and subsequent measurement.
  • Identify what disclosures are required.

The Financial Statements Final Paper

  • Must be five to seven double-spaced pages in length (not including title and references pages) and formatted according to APA style as outlined in the Ashford Writing Center’s APA Style (Links to an external site.) resource.
  • Must include a separate title page with the following:
    • Title of paper
    • Student’s name
    • Course name and number
    • Instructor’s name
    • Date submitted

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