Download cash flow statement

CHAPTER22
CASH FLOW
STATEMENTS
1THE NEED FOR A CASH FLOW
STATEMENT
• Profit represents the increase in net
assets in a business during an
accounting period.
• This increase can be in :
---Cash
---Non-current assets
---Receivables
---Inventory
• Or the liabilities of the business may have
decreased ,i.e more cash has been spent this year
in paying off suppliers than was the case last year.
• A cash flow statement is needed because of the
differences between profits and cash. It achieves
the following:
---Provides additional information on business
activities
---Helps to assess the current liquidity of the
business.
---Allows the user to see the major types of cash
flows into and out of the business
---Helps the user to estimate future cash flow
---Determines cash flows generated from trading
transactions rather than other cash flows.
2 IAS 7 CASH FLOW STATEMENTS
• IAS 7 requires enterprises to present a
cash flow statement as part of their
financial statements.
• A cash flow statement can be presented in
a number of ways:
---As a summary of the cash receipts and
payments of an enterprise (a summarized
cash book)
---From the balance sheet and income
statement, opening with a reconciliation
between reported profit and operating cash
flow.
• IAS 7 requires the cash flow statement to
be presented using standard headings ,to
ensure that cash flows are reported in a
form that:
---Highlights the significant components of
cash flow.
---Facilitates comparison of the cash folw
performance of different business.
• The standard leading shown n the
statement are:
---Operating activities
---Investing activities
---Financing activities
• Specimen format for a cash flow statement
from IAS 7
• CASH FLOW STATEMENT FOR THE
PERIOD ENDED…
•
$’000
•
•
•
•
•
•
•
•
•
•
Cash flows from operating activities
Net profit before taxation
Adjustments for:
Depreciation
Interest expense
Operating profit before working
capital changes
(Increase)/decrease in trade receivables
(Increase)/decrease in inventories
(Increase)/decrease in trade payables
$’000
X
X
X
X
(X)/X
(X)/X
X / (X)
•
•
•
•
Cash generated form operations
Interest paid
Dividends paid
Income taxed paid
X
(X)
(X)
(X)
• Net cash from operating activities
•
•
•
•
•
•
Cash flows from investing activities
Purchase of property, plant and equipment
Proceeds of sale of equipment
Interest received
Net cash used in investing activities
X/(X)
(X)
X
X
X
X/(X)
•
•
•
•
Cash flows form financing activities
Proceeds of issue of shares
Repayment of loans
Net cash used in financing activities
•
•
•
•
•
•
Net increase/(decrease) in cash and cash
equivalents
Cash and cash equivalents at the beginning
of the period
Cash and cash equivalents at the end of the
period
X
(X)
X/(X)
X/(X)
X
X
• Cash flows from operating activities :begins
with the profit before tax as shown in the income
statement. The figures below are the adjustments
necessary to convert the profit figure to the cash
flow for the period.
Depreciation
Interest
expense
Increase in
trade
receivables
Added back to profit because it
is a non-cash expense
Added back because it is not
part of cash generated from
operations (the interest actually
paid is deducted later)
Deducted because this is part of
the profit not yet realized into
cash but tied up in receivables
Decrease in
inventories
Added on because the decrease in
inventories liberates extra cash
Decrease in
trade payables
Deducted because the reduction in
payables must reduce cash
Interest paid
Dividends paid
Income taxed
paid
These are the amount actually
paid in the year
• Cash flows from investing activities :cash spent
on non-current assets, proceeds of sale of noncurrent assets and income from investments.
• Cash flows from financial activities: the
proceeds of issue of shares and long-term
borrowing made or repaid.
• Net increase in cash and cash equivalents :the
overall increase9or decrease) in cash and cash
equivalents during the year. Add the cash and cash
equivalents at the beginning of the year to give the
final balance of cash and cash equivalents at the
end of the year.
---‘cash’：cash on hand and deposits available on
demand.
---‘Cash equivalents': short-term highly liquid
investments that are readily convertible to known
amounts of cash and which are subject to an
insignificant risk of changes in value usually
excludes investments, unless they re readily
convertible and with little or no risk of change in
value).
• IAS 7 requires a note to the cash flow statement
giving details of the make-up cash and cash
equivalents:
Cash and cash equivalents
•
•
•
•
• Cash on hand and
• balance at banks
• Short-term investments
•
At end of
year
$’000
X
X
X
At
beginning
of year
$’000
X
X
X
3 PREPARATION OF A CASH FLOW
STATEMENT
• Direct method :figure for the cash
statement derived from the
accounting records or form the other
financial statements.
• Indirect method: figures derived
from the other financial accounting
statements:
---Balance sheets for the current year
end and the previous period
---Income statement for the period.
• The alternative reconciliations are as follows
Direct method
$’000
Indirect method
$’000
Cash received from
Profit/(loss) before tax X/ (X)
customers
X
Cash payments to suppliers Depreciation charges X
(X)
Cash paid to and on
behalf of employees (X)
Other cash payments (X)
(Increase)/decrease (X)/X
in inventories
(Increase)/decrease (X)/X
in receivables
(Increase)/decrease (X)/X
in payables
Net cash inflow/(outflow)
from operating activities X/ (X)
Net cash inflow/(outflow)
from operating activities X/ (X)
• Indirect method
---You are usually presented with two balance
sheets: for the end of the prior period and for the
end of the current period. All the differences
between the opening and closing balances are
various types of cash flow, or are otherwise
needed to produce the cash flow statement.
---To calculate the operating cash flow:
(1) Find the profit figure:
and
tax
◇Take it from operating cash flow, or
◇Calculate the increase in retain profit
add back the period’s dividends and
charge to arrive at profit before tax.
(2)Adjust the profit figure for:
◇ Non –cash expenses like depreciation, and
◇ Movements in working capital items such as inventory,
receivables and payables.
(3)where there are sales of non- current assets you will need to
find figures for additions or disposals, and depreciation on
disposals.
◇ Set up three T accounts for non-current asset
cost, aggregate depreciation and disposal
◇ Enter the opening and closing balances from
the balance sheets.
◇ Do the double entry in the ledger accounts and the cash
flow statements for all additional information given to you
in the question
◇ The balancing figures will give you the figures you need
• (4) set up a format as follows, leaving
plenty of space between the headings,
then go through the given balance
sheets from the top entering the
differences in the correct positions in
the format.
Cash flows from operating
activities
to give
Net cash from operating
activities
X
Cash flows from investing
activities
to give
Net cash used in investing X
activities
Cash flows from financing
activities
to give
Net cash used in financing X
activities
Net increase in cash and cash equivalents
X
Cash and cash equivalents balance at beginning of year
(from prior period balance sheet)
X
Cash and cash equivalents balance at end of year
(agree to closing balance sheet)
X
• Direct method
---Gross cash flows can be derived:
(1) from the accounting record: total the cash
receipts and payments directly, or
(2) for net cash flow from operating
activities, from the opening and closing
balance sheets and income statements for
the year by constructing summary control
accounts for:
◇ Sales (to derive cash received from
customers)
◇ Purchases (to derive cash payments to
suppliers)
◇ Wages( to derive cash paid to and on
behalf of employees)
•
•
•
•
•
•
•
•
•
•
•
(W1) Receivables ledger control
$
$
Balance b/d
X Cash receipts (balancing X
figure)
Sales revenue
X Balance c/d
X
X
X
(W2)Payables ledger control (excluding
non-current asset purchases)
$
$
Cash paid (bal fig) X Balance b/d
X
Balance c/d
X Purchases
-Cost of sales
X
-Administration
X
X
X
•
•
•
•
•
•
•
•
•
•
•
(W3)Wages control
$
$
Net wages paid X
Balance b/d
X
(bal fig)
X
Cost of sales
X
Balance c/d
Administration
X
X
X
Alternatively, the figure for net cash flows from operating
activities could be derived from the reconciliation shown
above.
A further working for non- current assets may be required.
(W4) Non-current assets (NBV)
$
$
Balance b/d
X
Depreciation charge
X
Addition (bal fig)
X
Balance c/d
X
X
X
Whether you use the direct or the indirect method,
here are the steps you should take in the exam.
Step 1
Allocate one or two pages to the cash flow
statements so that easily identifiable cash flows
can be inserted. Allocated a father page to
workings.
Step 2
Go through the balance sheets and take the
balance sheet movements to the cash flow
statement or to workings as appropriate, Tick off
the information in the balance sheets once it has
been used.
Step 3
Go through the additional information provided
and deal with as per Step2
Step 4
The amounts transferred to working can now be
reconciled so that the remaining cash flows can be
inserted on the statements.
Step 5
Complete the cash flow statement.
4 INTERPRETATION USING THE CASH
FLOW STATEMENT
• The cash flow statement reveals:
---Whether the overall activities reveal a positive
cash flow
---Whether the operating activities yield a positive
cash flow
---The manner in which capital expenditure has
been financed (for example, whether it has come
from internally-generated resources, borrowings,
issue of shares or from cash balance)
• Cash flow statements allow users to evaluate:
---How the enterprise generates and uses cash and
cash equivalents.
---Changes in net assets, financial structure
(including liquidity and solvency) and the ability of
the enterprise to adapt to changing circumstances.
---The ability of the enterprise to generate cash
---Between different enterprises, because the
effects of using different accounting treatments
are eliminated
---Forecasts of future cash flows
---The accuracy of past assessments of future cash
flows.