Principle of Accounting Chapter 11 Statements of Cash Flows BA. in International Business Foreign Trade University
Outline The role of the statement of cash flows Classification of cash flows The concept of cash The format of the statement of cash flows Preparing a statement of cash flows Cash flows and decision making
The role of the statement ofcash flows The statement of cash flows concentrates on movements of cash in and out of the business entity. It provides information relating to areas: The net cash inflows generated by trading operations The firm’s ability to meet obligations to creditors and bankers The firm’s long-term capital and debt arrangements Cash flows resulting from investing activities.
Classification of cash flows Operating activities examine the cash flows resulting from revenues and expenses. Investing and financing activities highlight the changes in items reported in the statement of financial position.
Operating activities Cash inflows Cash sales Receipts from customers Cash outflows Payments to suppliers Payments to employees Payments for operating expenses Payments for tax Payments for interest
Investing activities Cash inflows Sale of non-current assets Sale of investments Cash outflows Purchase of non-current assets Purchase of investments
Financing activities Cash inflows Cash contribution by owner Proceeds from loan Cash outflows Cash drawings by owner Repayment of loan (principal)
Examples of cash flows by classificationActivity Examples Effect on Related B/S a/c cashOperating Collection from customers Inflow Debtors Payment to suppliers Outflow Creditors Payment of wages Outflow Wages payableInvesting Purchase of non-current assets Outflow Plant, equipment Sales of non-current assets Inflow Plant, equipmentFinancing Capital contributions of cash Inflow Capital Withdrawal of cash by owner Outflow Drawings Taking out loans Inflow Loan payable Loan repayments Outflow Loan payable
The concept of cash Cash includes all cash on hand and any other cash equivalents held by a firm. The definition of cash means cash on hand, cash at bank and cash held with non-banking financial institutions on an at-call basis. Cash equivalents extends this definition to include items such as short-term cash deposits, bills receivable and other short-term investments (bank bills, treasury bills). Short-term investments can include investments with a maturity ranging from at-call up to two or three months. Overdrafts should also be included under the definition of cash and cash equivalents.
The format of the statement ofcash flows Grech’s Sports Store: Statement of cash flows for year ended 31.12.05 Cash flows from operating activities Receipts from customers 100,000 Payments to suppliers and employees (73,000) Net cash provided by operating activities 27,000 Cash flows from investing activities Proceeds from sale of shop fittings 1000 Payments for shop fittings (5,000) Net cash used in investing activities (4,000)
The format of the statement ofcash flows (cont’d) Cash flows from financing activities Loan from bank 10,000 Repayments of loan (5,000) A. Grech – cash withdrawals (29,500) Net cash used in financing activities (24,500) Net increase (decrease) in cash held (1,500) Cash held at the beginning of the year 2,000 Cash held at the end of the year 500
Preparing a statement of cash flows A statement of cash flows can be prepared from either the two cash journals or a statement of receipts and payments. Both journals and the statement of receipts and payments provide a summary of all cash flow transactions for the period. Cash flows are classified under the heading operating, investing and financing.
Cash flows and decision making The statement of cash flows provides management with information that demonstrates the effects of its decision-making on the cash resources of the firm. A statement of cash flows can be compared with previous result, therefore statement of cash flows for consecutive periods are often prepared. This allows for easy comparison and highlights changes in various activities and identifies trends.
Practice questionsExercise 11.1Exercise 11.2Exercise 11.3