Unit 3
Derived Cash Flow Statements
Derived Cash Flow Statement
Typical accounting systems work on an “accruals” rather than a “cash” basis
For example, reven...
Derived Cash Flow Statement
Typical accounting systems work on an “accruals” rather than a “cash” basis
For example, reven...
Derived Cash Flow Statement
Start End of year
Fixed assets 1,000 1,500
Debtors (receivables) 500 425
Stocks (inventories) ...
Derived Cash Flow Statement
Start End of year
Fixed assets 1,000 1,500
Debtors (receivables) 500 425
Stocks (inventories) ...
Derived Cash Flow Statement
Start End of year
Fixed assets 1,000 1,500
Debtors (receivables) 500 425
Stocks (inventories) ...
Derived Cash Flow Statement
Start End of year
Cash 25 75
Fixed assets (1,000) (1,500)
Debtors (receivables) ( 500) (425)
S...
Derived Cash Flow Statement
Start End of year
Cash 25 75
Fixed assets (1,000) (1,500)
Debtors (receivables) ( 500) (425)
S...
Derived Cash Flow
We will need some extra information (this is all on the sheet posted to the TGF)
1 Summarised profit and...
Derived Cash Flow
Opening cash balance 25
Closing cash balance 75
Cash inflow for the year 50
Lets start with the easy
bit...
Operating profit
By convention we start with the operating profit.
This is £5,250.
But we know that some of the items were...
Operating profit
By convention we start with the operating profit.
This is £5,250.
But we know that some of the items were...
Derived Cash Flow
Opening cash balance 25
Closing cash balance 75
Cash inflow for the year 50
Adjusted operating profit 5,...
Working capital movements
Next we calculate the cash flow effects of the movements in working capital.
The working capital...
Working capital movements
Start End
Debtors (receivables) 500 425
Some of the debtors have been written off. So we know th...
Working capital movements
Start End
Debtors (receivables) 500 425
Some of the debtors have been written off. So we know th...
Working capital movements
Start End
Debtors (receivables) 500 425
Some of the debtors have been written off. So we know th...
Working capital movements
Start End
Stocks (inventories) 300 325
Other current assets 100 125
Creditors (payables)<12m (35...
Working capital movements
Start End
Stocks (inventories) 300 325
Other current assets 100 125
Creditors (payables)<12m (35...
Working capital movements
Start End
Stocks (inventories) 300 325
Other current assets 100 125
Creditors (payables)<12m (35...
Working capital movement
Start End of year Movement
Debtors (receivables) 500 425 50-100 = -25
Stocks (inventories) 300 32...
Derived Cash Flow
Opening cash balance 25
Closing cash balance 75
Cash inflow for the year 50
Adjusted operating profit 5,...
Fixed Assets movement
Let us now look at other movements on the balance sheet.
Start End of year
Fixed assets 1,000 1,500
...
Fixed Assets movement
Let us now look at other movements on the balance sheet.
Start End of year
Fixed assets 1,000 1,500
...
Fixed Assets movement
Let us now look at other movements on the balance sheet.
Start End of year
Fixed assets 1,000 1,500
...
Derived cash flow, so far
Opening cash balance 25
Closing cash balance 75
Cash inflow for the year 50
Adjusted operating p...
Borrowings and share capital
The next item on the balance sheet to explain is the movement in borrowings.
Start End
Borrow...
Borrowings and share capital
The next item on the balance sheet to explain is the movement in borrowings.
Start End
Borrow...
Derived cash flow, so far
Opening cash balance 25
Closing cash balance 75
Cash inflow for the year 50
Adjusted operating p...
Retained profits
Next is the movement in retained profits.
Start End
Retained profits 325 500
The £175 is the retained pro...
Retained profits
Next is the movement in retained profits.
Retained profits 325 500
The £175 is the retained profit on the...
Derived cash flow complete
Opening cash balance 25
Closing cash balance 75
Cash inflow for the year 50
Adjusted operating ...
I will put an excel spreadsheet
with this example on the TGF
Next Time
We shall look at Portfolio Theory and CAPM from uni...
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Derived Cash Flow

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Unit 3: Derived Cash Flow. I have uploaded the full question and an excel soluton to the tutor group forum.

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Derived Cash Flow

  1. 1. Unit 3 Derived Cash Flow Statements
  2. 2. Derived Cash Flow Statement Typical accounting systems work on an “accruals” rather than a “cash” basis For example, revenue is logged when the work is done (products delivered etc) NOT when the cash is received
  3. 3. Derived Cash Flow Statement Typical accounting systems work on an “accruals” rather than a “cash” basis For example, revenue is logged when the work is done (products delivered etc) NOT when the cash is received So accounting systems do not cope well with producing cash flow statements A derived cash flow statement is one arrived at using the company’s profit and loss account and its opening and closing balance sheets.
  4. 4. Derived Cash Flow Statement Start End of year Fixed assets 1,000 1,500 Debtors (receivables) 500 425 Stocks (inventories) 300 325 Cash 25 75 Other current assets 100 125 Creditors (payables)<12m (350) (400) Borrowings (750) (1,000) Net assets 825 1,050 Share capital 500 550 Retained profits 325 500 825 1,050
  5. 5. Derived Cash Flow Statement Start End of year Fixed assets 1,000 1,500 Debtors (receivables) 500 425 Stocks (inventories) 300 325 Cash 25 75 Other current assets 100 125 Creditors (payables)<12m (350) (400) Borrowings (750) (1,000) Net assets 825 1,050 Share capital 500 550 Retained profits 325 500 825 1,050 The cash flow statement maps the opening cash figure to the closing one.
  6. 6. Derived Cash Flow Statement Start End of year Fixed assets 1,000 1,500 Debtors (receivables) 500 425 Stocks (inventories) 300 325 Cash 25 75 Other current assets 100 125 Creditors (payables)<12m (350) (400) Borrowings (750) (1,000) Net assets 825 1,050 Share capital 500 550 Retained profits 325 500 825 1,050 The cash flow statement maps the opening cash figure to the closing one. As the balance sheet has to balance we can show the movement of cash by explaining the movements of everything else and picking out those caused by cash.
  7. 7. Derived Cash Flow Statement Start End of year Cash 25 75 Fixed assets (1,000) (1,500) Debtors (receivables) ( 500) (425) Stocks (inventories) (300) (325) Other current assets (100) (125) Creditors (payables)<12m 350 400 Borrowings 750 1,000 Share capital 500 550 Retained profits 325 500 25 75
  8. 8. Derived Cash Flow Statement Start End of year Cash 25 75 Fixed assets (1,000) (1,500) Debtors (receivables) ( 500) (425) Stocks (inventories) (300) (325) Other current assets (100) (125) Creditors (payables)<12m 350 400 Borrowings 750 1,000 Share capital 500 550 Retained profits 325 500 25 75 Explain this movement By explaining each of these movements
  9. 9. Derived Cash Flow We will need some extra information (this is all on the sheet posted to the TGF) 1 Summarised profit and loss account Sales 10,000 Cost of sales 3,500 Operating costs 1,250 Operating profit 5,250 Interest 2,000 Tax 1,500 Net profit (earnings) 1,750 Dividends 1,575 Retained profits 175 2 Fixed assets were purchased for an unknown amount. A depreciation charge of £250 is included in the above p&l 3 There was a bad debt write down of £100 in the above figures 4 New loans were taken out amounting to £250 and new shares were issued for £50.
  10. 10. Derived Cash Flow Opening cash balance 25 Closing cash balance 75 Cash inflow for the year 50 Lets start with the easy bit - what is the cash flow? The rest of the statement has to explain this figure.
  11. 11. Operating profit By convention we start with the operating profit. This is £5,250. But we know that some of the items were not related to cash:
  12. 12. Operating profit By convention we start with the operating profit. This is £5,250. But we know that some of the items were not related to cash: Specifically: Depreciation £250 and bad debt write off £100 So we adjust the operating profit by adding back these deductions Adjusted operating profit 5,250 + 250 + 100 = £5,600
  13. 13. Derived Cash Flow Opening cash balance 25 Closing cash balance 75 Cash inflow for the year 50 Adjusted operating profit 5,600
  14. 14. Working capital movements Next we calculate the cash flow effects of the movements in working capital. The working capital items are: Start End Debtors (receivables) 500 425 Stocks (inventories) 300 325 Other current assets 100 125 Creditors (payables)<12m (350) (400)
  15. 15. Working capital movements Start End Debtors (receivables) 500 425 Some of the debtors have been written off. So we know that part of the movement is “non-cash”.
  16. 16. Working capital movements Start End Debtors (receivables) 500 425 Some of the debtors have been written off. So we know that part of the movement is “non-cash”. So, let us adjust the starting debtors by the write down. Start End Debtors (receivables) 500 – 100 = 400 425 So, has there been a positive or adverse cash flow relating to debtors?
  17. 17. Working capital movements Start End Debtors (receivables) 500 425 Some of the debtors have been written off. So we know that part of the movement is “non-cash”. So, let us adjust the starting debtors by the write down. Start End Debtors (receivables) 500 – 100 = 400 425 So, has there been a positive or adverse cash flow relating to debtors? As debtors have increased, this is adverse: our customers are paying more slowly. So we put (25) on the cash flow.
  18. 18. Working capital movements Start End Stocks (inventories) 300 325 Other current assets 100 125 Creditors (payables)<12m (350) (400) Let us consider the other working capital items. Stocks have increased – good or bad for cash flow? Creditors have gone up – good or bad for cash flow?
  19. 19. Working capital movements Start End Stocks (inventories) 300 325 Other current assets 100 125 Creditors (payables)<12m (350) (400) Let us consider the other working capital items. Stocks have increased – good or bad for cash flow? Creditors have gone up – good or bad for cash flow? Stocks increasing is bad for cash flow (25) Creditors increasing in good for cash flow +50 What about other current assets?
  20. 20. Working capital movements Start End Stocks (inventories) 300 325 Other current assets 100 125 Creditors (payables)<12m (350) (400) Let us consider the other working capital items. Stocks have increased – good or bad for cash flow? Creditors have gone up – good or bad for cash flow? Stocks increasing is bad for cash flow (25) Creditors increasing in good for cash flow +50 What about other current assets? Now we can conclude from debtors and stocks that an increase in working capital assets is adverse, so we treat this increase as (25)
  21. 21. Working capital movement Start End of year Movement Debtors (receivables) 500 425 50-100 = -25 Stocks (inventories) 300 325 -25 Other current assets 100 125 -25 Creditors (payables)<12m (350) (400) 50
  22. 22. Derived Cash Flow Opening cash balance 25 Closing cash balance 75 Cash inflow for the year 50 Adjusted operating profit 5,600 Movements in working capital Debtors (25) Stocks (25) Creditors 50 Other current assets (25) Cash from operations 5,575
  23. 23. Fixed Assets movement Let us now look at other movements on the balance sheet. Start End of year Fixed assets 1,000 1,500 We need to explain the £500 movement.
  24. 24. Fixed Assets movement Let us now look at other movements on the balance sheet. Start End of year Fixed assets 1,000 1,500 We need to explain the £500 movement. Opening fixed assets 1,000 Additions (cash) x Depreciation (250) Closing fixed assets 1,500
  25. 25. Fixed Assets movement Let us now look at other movements on the balance sheet. Start End of year Fixed assets 1,000 1,500 We need to explain the £500 movement. Opening fixed assets 1,000 Additions (cash) x Depreciation (250) Closing fixed assets 1,500 So the additions must be £750. This is cash spent and is called “capital expenditure” or “capex”.
  26. 26. Derived cash flow, so far Opening cash balance 25 Closing cash balance 75 Cash inflow for the year 50 Adjusted operating profit 5,600 Movements in working capital Debtors (25) Stocks (25) Other current assets (25) Creditors 50 Operating cash flow 5,575 Capital expenditure (750)
  27. 27. Borrowings and share capital The next item on the balance sheet to explain is the movement in borrowings. Start End Borrowings (750) (1,000) So the company must have borrowed £250 and nothing else happened.
  28. 28. Borrowings and share capital The next item on the balance sheet to explain is the movement in borrowings. Start End Borrowings (750) (1,000) So the company must have borrowed £250 and nothing else happened. Similarly with the share capital Share capital 500 550 Shares must have been issued to a value of £50.
  29. 29. Derived cash flow, so far Opening cash balance 25 Closing cash balance 75 Cash inflow for the year 50 Adjusted operating profit 5,600 Movements in working capital Debtors (25) Stocks (25) Other current assets (25) Creditors 50 Operating cash flow 5,575 Capital expenditure (750) New borrowings 250 Share issue 50
  30. 30. Retained profits Next is the movement in retained profits. Start End Retained profits 325 500 The £175 is the retained profit on the profit and loss account. But we have only accounted for the operating profit. We must therefore look at the items below that:
  31. 31. Retained profits Next is the movement in retained profits. Retained profits 325 500 The £175 is the retained profit on the profit and loss account. But we have only accounted for the operating profit. We must therefore look at the items below that: Interest 2,000 Tax 1,500 Dividend 1,575 If any of these were not paid then they would be included in creditors, which we have already adjusted for. So we now can simply put these figures straight into our cash flow.
  32. 32. Derived cash flow complete Opening cash balance 25 Closing cash balance 75 Cash inflow for the year 50 Adjusted operating profit 5,600 Movements in working capital Debtors (25) Stocks (25) Other current assets (25) Creditors 50 Operating cash flow 5,575 Capital expenditure (750) New borrowings 250 Share issue 50 Interest paid (2,000) Tax paid (1,500) Dividends paid (1,575) Cash flow 50
  33. 33. I will put an excel spreadsheet with this example on the TGF Next Time We shall look at Portfolio Theory and CAPM from unit 4
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