Cash Flow StatementsCash flow statement may provide considerable information about what is really happening ina business beyond that contained in either the income statement or the balance sheet.Analysing this statement should not present an intimidating task; instead it will quicklybecome obvious that the benefits of understanding the sources and uses of a company’s cashfar outweigh the costs of undertaking some very straightforward analyses.Who cares about a Cash Flow Statement? • Managementmay want to know if the cash generated by the company will be sufficient to fund their expansion strategy • Shareholders may want to know if the firm is generating enough cash to pay dividends •Suppliers want to know if their customers will be able to pay if offered credit Investors want to evaluate future growth potential •Employeesare interested in the overall viability of their employer as indicated by its ability to fund its operationsReasons why companies prepare a cash flow statements To show the future cash inflows and outflows To help predict future cash flows To assist with financial planning To assist in assessing the liquidity of the business To show that profits does not always equal cash To comply with legal requirementsAims: Students will be able to prepare a Cashflow statement Reconcile operating profit to net cash flow from operating activities Reconcile movement in cash to movement in net debt Explain why profit does not always equal cash
Rules for reconciling operating profit to net Cashflow from operatingactivitiesDepreciation –does not affect cash flow always ADDIncrease in Debtors Outflow=SUBTRACTDecrease in Creditors Outflow=SUBTRACTIncrease in Stocks Outflow=SUBTRACTDecrease in Debtors Inflows= ADDIncrease in Creditors Inflows=ADDDecrease in Stocks Inflows= ADDCash flow Statement explain the difference between cash balances at the beginning of theyear and cash balances at the end of the yearFinancial Reporting Standard 1 outlines how cash flow statements must be presented, and thelayout of the statement and the two reconciliation notes with it must be done in accordancewith the FRS1. 1. Reconciliation of Operating Profit to Net Cash Flow from Operating ActivitiesCash flow is derived from the operating activities of the business/firm and Operating profit isadjusted for changes in; Stock, Debtors, Creditors, Non-Cash Items.Non-Cash items do not cause on inflow/outflow of cash but do affect net profit.Examples include depreciation, profit/loss on disposal of assets, changes in provision for baddebts, writing off of patents.
Reconciliation of Operating Profit to Net Cash Flow from Operating Activities €€Operating ProfitAdd DepreciationLess Profit on disposal of Fixed Assets(Add loss on disposal)Add decrease in Stock(Less increase in Stock)Add decrease in Debtors(Less increase in Debtors)Less decrease in Creditors(Add increase in Creditors)Add Increase in Bad Debt Provision(Less decrease in BDP)Add Patents written offNet Cash Flow from Operating Activitiesxxxxxx
Cash Flow StatementIt is very important that students learn the layout and know the headings and theinflows/outflows that appear under each heading. In exams marks may be awarded for theheadings only if they are laid out in the prescribed format as belowCashflow forecast of XYZ Ltd for the y/e 31/12/20XX €€Operating Activities Net Cashflow from operating activitiesReturn on Investment & Servicing of Finance Interest Received Interest paid Preference dividend paid Dividends ReceivedTaxation Taxation PaidCapital Expenditure & Financial Investment Payment to acquire fixed assets Receipts from sale of fixed assets Payments to acquire investments Receipts from sale of investmentsEquity dividend paid Ordinary dividends paid= Net cash inflow before liquid resources and financingManagement of Liquid Resources Purchase of Govt securities Sale of Govt securities Payment into Current Asset investments/short-term deposits Withdrawal fromCurrent Asset investments/short-term depositsFinancing Receipts from the issue of shares Receipts from share premium Repayment of Debentures/loans Receipts from issue of Debentures/loans= Increase /Decrease in Cash
Reconciliation of movement in Cash to movement in Net Debt €€Increase/Decrease in cashCash used to increase liquid resources (withdrawals from liquid resources)Cash used to repay debentures (Receipt from issue of new debentures/loans)Change in Net debtNet debt at 1/1/20XXNet debt at 31/12/20XXThe Net debt is calculated by:Total Borrowings(Debentures + Overdraft + other loans)minusCash+LiquidResources(Current asset investments)Note that if the net debt turns out to be a positive calculation then it is referred to as NetFundsAbridged Profit and Loss AccountIn some Leaving Certificate examination questions students may be asked to prepare anabridged profit & loss account. The layout of this account is exactly the same as the profit &loss account. The approach to this question is to work backwards from the profit & lossbalance given in the question. Put in the figures for dividends, taxation, interest, work back tothe operating profit and then continue as normal with the reconciliation of the operating to netCashflow from operating activitiesAbridged Profit & Loss for the year ended 31/12/20XXOperating ProfitInterest for the yearProfit before taxationTaxation for the yearProfit after taxationDividends- Interim -ProposedRetained profits for the yearRetained profits on 1/1/2009Retained profits on 31/12/2009
Profit does not equal cashbecause:Items affect cash but not profit Amounts paid for fixed assets or amounts received from sale of fixed assets Amounts paid into or withdrawn from the business by its ownersItems affect profit but not cash Non-cash expenses/gains such as depreciation. profit on disposal of fixed asset, decrease in bad debt provision Credit Sales and Credit PurchasesKey Points to remember when doing Cash flow Questions Follow the three steps i.e. Prepare a reconciliation of operating profit to net cash flow from operating activities, the cash flow statement and a reconciliation of movement in cash to movement in net debt. The layout and wording must followed exactly Proof your answer by looking at the change in cash