Intermediate Accounting: Management Judgments and Cash Flows

This report delves into key aspects of intermediate accounting, beginning with an analysis of management judgments in financial reporting. It emphasizes the importance of disclosing significant accounting policies and the impact of various judgments, such as revenue recognition and the derecognition of financial assets. The report then explores the implications of estimation uncertainty in areas like lease classification, business acquisitions, and fair value measurements. The second part of the report focuses on cash flow statements, contrasting the direct and indirect methods. It highlights the differences in the operating activities section and discusses FASB's preference for the direct method. The report explains the calculation of cash flows from various operating activities, including cash collected from customers, cash paid to merchandise, cash paid to employees, and payments for accrued and other operating expenses. References to relevant accounting literature and The Home Depot's annual report are included to support the analysis.

Running head: INTERMEDIATE ACCOUNTING
Intermediate Accounting
Name of the Student
Name of the University
Author’s Note

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Table of Contents
Part A: Management Judgments................................................................................................2
Part B: Cash Flows.....................................................................................................................3
References..................................................................................................................................5

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Part A: Management Judgments
It needs to be mentioned that the business organizations use different judgments for
the purpose of financial reporting. Thus, it is required for the business organizations to
disclose the significant accounting policies along with the financial judgment used by the
managers in the financial statements of the companies. More specifically, they are needed to
disclose the judgments in the notes to the financial statements (deloitte.com, 2018).
The presence of many judgments can be seen having major impact on the financial
statements. One of them is the judgment for the recognition of revenue. It is needed for the
companies to exercise appropriate judgment that enables the companies in reaching
consistent conclusion for recognize revenue in economically similar situation. Another
significant judgment is the judgment related to the de-recognition of the financial assets or
liabilities. It is essential as the removal of recognized assets or liabilities from the balance
sheet has major impact on the financial position of the companies (ey.com, 2018).
The presence of estimation uncertainty can be seen in the classification of leases as
the companies are needed to make correct estimation for finance and operating leases. After
that, the estimation uncertainty can be seen in the fact that whether the acquisition id of the
business or a group of assets. After that, estimation uncertainty can be seen in the
determination of acquirer of the business combination. Lastly, estimation uncertainty can be
seen on the determination of the fact that whether an investee is a subsidiary or not
(deloitte.com, 2018).
It is needed for the business organizations to use the estimation of fair value method
relate to the price that the company would be received from the sales of an asset in an orderly
transaction between the market participants at the date of measurement (ir.homedepot.com,
2018). As per the 2017 Annual Report of The Home Depot, the company measures their

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assets at fair value on a recurring basis. In this process, the company also use the required
estimation in the fair value measurement process. Thus, at the time of selling the asset, it is
needed for the company to disclose the estimations due to the fact that these estimations need
to be considered at the time of the determination of the selling prices of the asset in the fair
value. It is required for the company to adopt the same process in case of the liabilities
(ir.homedepot.com, 2018).
Part B: Cash Flows
The main difference between the direct method of cash flow and indirect method of
cash flow can be seen in the first section of the statement of cash flows that is cash flow from
operating activities. Under the direct method of cash flows, certain items will be included in
the cash flow from operating activities such as cash payment to the suppliers, cash received
from the customer and others. On the other hand, under the indirect method of cash flows, it
is needed to show net income followed by the required adjustments for the conversion of the
total net income to cash amount from the operating activities. In addition, under the direct
method, it is needed to provide a reconciliation of net income to the cash (Farshadfar &
Monem 2013).
In this context, it needs to be mentioned that there is not any difference in the cash
flows that the companies report in the investing as well as financing activities. The
differences are mainly seen under the section of cash flow from operating activities
(Farshadfar & Monem 2013).
It needs to be mentioned that FASB always prefers the direct method of cash flow
statement. According to the view of the FASB, the primary objective of the cash flow
statement can be better achieved with the direct method of cash flow statement. In addition,
as per the assertion of FASB, vast use of direct method of cash flows can be seen among

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many users due to its usefulness as it enhances the cash flow prediction, assesses the
relationship between reported amount and income statement and others.
Under the direct method of cash flows statement, cash collected from customers is
calculated by adding sales with the decrease in accounts receivable; or, subtracting the
increase in the accounts receivable from the sale amount (Park and Jang 2013).
Under the direct method of cash flows, two steps need to be followed for the
calculation of the cash paid to merchandise. In the first step, cost of purchase needs to be
calculated by adding cost of goods sold with increase in inventory; or, by subtracting
decrease in inventory from cost of goods sold. After that, cash payment to suppliers is
determined by adding the cost of purchase with the decrease in accounts payable; or,
subtracting increase in accounts payable from the cost of purchase (Noreen, Brewer and
Garrison, 2014).
Under the direct method of cash flows, cash paid to employees is calculated in the
following manner:
(Opening accrued wages + wages and salaries for the period) – closing accrued wages and
salaries
Under the direct method of cash flows, the calculation of the payment for accrued
expenses is done in the following manner:
Payments = Expenses + Ending prepaid expenses - Beginning prepaid expenses + Beginning
accrued expenses - Ending accrued expenses
Lastly, under the direct method of cash flows, the calculation of other operating
expenses including insurance and other prepaid expenses is done in the following manner:
(Opening accrued insurance + insurance for the period) – prepaid expense

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References
Deloitte (2018). Www2.deloitte.com. Retrieved 12 December 2018, from
https://www2.deloitte.com/content/dam/Deloitte/ru/Documents/audit/IFRS_news/23-
05-2017.pdf
EY (2018). Ey.com. Retrieved 12 December 2018, from
https://www.ey.com/Publication/vwLUAssets/ey-apply-pd-february-2017/$FILE/ey-
apply-pd-february-2017.pdf
Farshadfar, S., & Monem, R. (2013). Further evidence on the usefulness of direct method
cash flow components for forecasting future cash flows. The international journal of
accounting, 48(1), 111-133.
Noreen, E.W., Brewer, P.C. and Garrison, R.H., 2014. Managerial accounting for managers.
New York: McGraw-Hill/Irwin.
Park, K. and Jang, S.S., 2013. Capital structure, free cash flow, diversification and firm
performance: A holistic analysis. International Journal of Hospitality
Management, 33, pp.51-63.
The Home Depot (2018). Annual Report 2017. Retrieved 12 December 2018, from
http://ir.homedepot.com/~/media/Files/H/HomeDepot-IR/2018_Proxy_Updates/
HD_AR_Soft-Copy.pdf