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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.

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

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  • 1. Unit 3
    Derived Cash Flow Statements
  • 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. 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. 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 8251,050
    Share capital 500 550
    Retained profits 325 500
    825 1,050
  • 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 8251,050
    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. 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 8251,050
    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. 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. 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. Derived Cash Flow
    We will need some extra information (this is all on the sheet posted to the TGF)
    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
    Fixed assets were purchased for an unknown amount. A depreciation charge of £250 is included in the above p&l
    There was a bad debt write down of £100 in the above figures
    New loans were taken out amounting to £250 and new shares were issued for £50.
  • 10. Derived Cash Flow
    Lets start with the easy bit - what is the cash flow? The rest of the statement has to explain this figure.
    Opening cash balance 25
    Closing cash balance 75
    Cash inflow for the year 50
  • 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. 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. Derived Cash Flow
    Opening cash balance 25
    Closing cash balance 75
    Cash inflow for the year 50
    Adjusted operating profit 5,600
  • 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. I will put an excel spreadsheet with this example on the TGFNext Time
    We shall look at Portfolio Theory and CAPM from unit 4