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Chapter 18

Statement of cash flows

PowerPoint presentation by Anne AbrahamUniversity of Wollongong

©2009 John Wiley & Sons Australia, Ltd

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PURPOSE OF THE STATEMENT OF CASH FLOWS

• Evaluate entity’s financial structure• Assess ability to generate cash• Check accuracy of past assessments of

future cash flows• Examine relationship between profitability

and net cash flow• Evaluate changes in net assets of the

entity• Compare performance with other entities• Evaluate ability to adapt to change

What advice would you give a client whose business was having problems managing

their cash flow?

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GENERAL FORMAT OF THE STATEMENT OF CASH FLOWS

• Refer AASB 107 • Required disclosures• Gross cash inflows and outflows

– Classified by activity type– Reconciled to movement in cash for the

period– Cash from operations reconciled to

operating profit

• Explanatory notes

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Cash Flows from operating activitiesCash receipts from customers $ x Cash paid to suppliers and employees (x)Cash generated from operations xInterest paid (x)Income taxes paid (x)Net cash provided by operating activities $ x

Cash Flows from Investing ActivitiesPurchase of investments (x)Purchase of property, plant and equipment (x)Proceeds from sale of equipment xInterest received xDividends received x Net cash used in investing activities x

Cash Flows from Financing Activities Proceeds from issue of share capital x Proceeds from long-term borrowings x Repayment of borrowings (x)Dividends paid (x)Net cash provided by financing activities x

Net increase (decrease) in cash held xCash and cash equivalents at beginning of period xCash and cash equivalents at end of period $ x

HAWKESBURY LTDStatement of Cash Flows

For the year ended 30 June 2011

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CONCEPT OF CASH

• AASB 107• Cash on hand

– Cash– Demand deposits

• Cash equivalents– Short-term highly liquid investments

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CLASSIFICATION OF CASH FLOW ACTIVITIES

• AASB107 requires reporting of cash inflows and cash outflows in three broad categories– Cash flows from operating activities– Cash flows from investing activities– Cash flows from financing activities

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Cash flows from operating activities

CASH INFLOWS CASH OUTFLOWS

• From sale of goods or services

• From cash advances and loans made by financial institutions relating to the entity's main revenue-producing activities

• To suppliers for goods• To employees for services• To other persons/entities

for expenses• To lenders for interest and

other borrowing costs• To government for income

tax, GST and other fees and charges

• To other persons/entities for materials and contracts

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Cash flows from investing activities

CASH INFLOWS CASH OUTFLOWS

• From sale of property, plant and equipment

• From sale of shares and debentures of other entities

• From repayment of advances and loans to other entities

• From interest received [or operating activity]

• From dividends received [or operating activity]

• To purchase property, plant and equipment

• To purchase shares and debentures of other entities

• To lend money to other entities

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Cash flows from financing activities

CASH INFLOWS CASH OUTFLOWS

• From issue of shares• From issuing debentures,

notes• From borrowing (loans,

mortgages)• From grants

• To shareholders for share buy-backs and redemption of preference shares

• To owners for dividends paid [or operating activity] or cash drawings

• To debenture holders for redemption of debt

• To lenders to repay borrowings

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PREPARING A STATEMENT OF CASH FLOWS – DIRECT METHOD

• Alternative methods to deterimine cash flows:– Analyse, summarise and classify the cash

transactions and determine the non-cash transactions affecting assets and liabilities

OR– Analyse the other financial reports (income

statement and balance sheet)

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Analysis of cash and other records

Cash flow summary for the yearCash received from accounts receivable $471 000Cash paid to accounts payable 328 000Interest received 1 050Wages & salaries paid 63 000Insurance paid 6 000Other expenses paid 12 000B. York, cash drawings 20 000New equipment purchased 40 000Proceeds from sale of equipment 3 000Investments purchased 10 000Cash at 1 July 2010 25 000Cash at 30 June 2011 21 050

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Analysis of cash and other records continued

Step 1: Ascertain net cash provided from operating activities

Step 2: Ascertain net cash provided from investing activities

Step 3: Ascertain net cash provided from financing activities

Step 4: Ascertain net cash increase (decrease) for the year

Step 5: Reconcile cash at end of year with beginning of year

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Analysis of financial statements

Step 1: Cash flows from operating activities• Direct method:

– Major classes of operating expenses andrevenues are reported as gross outflows and inflows from operations

– Adjust sales, COS and other operating items for non-cash items (accruals) and non-operating items

– Required by AASB 107

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Analysis of financial statements continued

• Indirect method:– Accrual basis operating profit is reconciled

to net cash flow from operating activities by:• adding back deferrals• deducting accruals

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Analysis of financial statements continued

• Cash receipts from customers

+ Decrease in accounts receivable or

– Increase in accounts receivableAccrual-basis sales

+ Beginning accounts receivable– Ending accounts receivableAccrual-basis sales

OR

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Analysis of financial statements continued

– Example

Accrual basis sales $480 000Add: Beginning accounts receivable 43 000Total cash collectable from customers 523 000Less: Ending accounts receivable 52 000Cash receipts from customers $471 000

Accounts ReceivableOpening balance 43 000Sales 480 000

523 000

Cash 471 000Closing balance 52 000

523 000

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Analysis of financial statements continued

• Payments to suppliers for purchases

Accrual basis cost of sales $336 000 Less: Beginning inventory (52 000)Add: Ending inventory 50 000Accrual-basis purchases for the year 334 000 Add: Beginning accounts payable 32 000 Less: Ending accounts payable (38 000)Payments to suppliers for purchases $328 000

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Analysis of financial statements continued

Inventory

Opening balance 52 000Purchases 334 000

386 000

Cost of goods sold 336 000Closing balance 50 000

386 000

Accounts Payable

Opening balance 32 000 Purchases 334 000

366 000

Cash payments 328 000Closing balance 38 000

366 000

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Analysis of financial statements continued

Step 2: Cash flows from investing activities• Acquisition and disposal of non-current

Assets– Amounts paid– Proceeds received– Eliminate effect of non-cash transactions

• Depreciation• Gains/losses on disposal

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Analysis of financial statements continued

Step 3: Cash flows from financing activities• Analyse changes in:

– Non-current liabilities– Equity

• Determine cash transactions– Inflows– Outflows

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Analysis of financial statements continued

Step 4– Ascertain net cash and cash equivalent

increase (decrease)

Step 5– Reconcile cash and cash equivalents at

end with that at beginning

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York Enterprises – statement of cash flows

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NOTES TO THE STATEMENT continued

Note 1– To disclose items included in the cash and

cash equivalents balance at the end of the period and reconcile this with cash assets in the balance sheet

Note 2– To reconcile net cash used in operating

activities with profit (loss) in the income statement

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NOTES TO THE STATEMENT continued

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NOTES TO THE STATEMENT continued

Note 3– To discuss non-cash financing and

investing activities

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ADVANCED ISSUES

• Impact of GST– UIG Interpretation 1031– GST outlays and collections regarded as

affecting operating activities– Calculation of accrual-basis sales and

services revenue becomes more complicated

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ADVANCED ISSUEScontinued

• Cash receipts from customers+ Beginning accounts receivable– Ending accounts receivable– Additions to GST Collections

account during the period+ Any GST refunds from the ATO

Accrual-basis sales and services

revenue

Accounts Receivable adjusted for GST CollectionsBeginning balance 10 000Sales 300 000GST collections 33 000

343 000

Cash 299 350Ending balance 43 650

343 000

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ADVANCED ISSUES continued

• Trade accounts receivable– Bad debts (direct write-off)– Allowance for doubtful debts– Discount allowed

• Trade accounts payable and discount received

• Non-trade receivables and payables• Bills receivable and bills payable

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ADVANCED ISSUES continued

• Short term investments• Dividends• Income tax

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Analysing the statement of cash flows

• Used to evaluate cash position– changes to cash and cash equivalents– effect of operating activities on cash– effect of financing and investing activities– effect of non-cash transactions and events

on future cash flows– comparison to position in prior periods

What is the relationship between budgeting and managing cash flow, and strategic

planning for the business?

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LIMITATIONS OF THE STATEMENT OF CASH FLOWS

• Past cash flows reported• Non-cash transactions and events• Disclosures in notes to the statement• Liquidity/solvency• Management manipulation• Costs

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