VCE Accounting

1. 12.1
THE ROLE OF THE CASH
FLOW STATEMENT

2. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 So far we have learned that there are two financial reports that need to be
prepared:
 Balance Sheet: shows the firm’s financial position at the current point in
time
 Income Statement: shows the firm’s financial performance during the
current period
Balance Sheet
Income Statement
12.1 THE ROLE OF THE
CASH FLOW STATEMENT

3. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 The Accounting System…
Balance
Sheet
Income
Statement
Trial
Balance
4. Prepare a
Trial Balance
5. Prepare Financial
Reports
3. Enter transactions in
General Ledger
General
Ledger
Ledger
Ledger
Ledger
Ledger
1. Transactions
occur
Transaction #1
Transaction #2
Transaction #3
Transaction #4
Transaction #5
Transaction #6
Transaction #7
Transaction #8
Special
Journals
2. Special
Journals
Cash
Receipts
Journal
Cash
Payments
Journal
Sales
Journal
Purchase
Journal
12.1 THE ROLE OF THE
CASH FLOW STATEMENT

4. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 The Balance Sheet reports on the firm’s financial position by showing…
Assets
Liabilities
Owner’s Equity
Balance Sheet as at 30 June 2015
Current Assets $ $ Current Liabilities $ $
Cash at bank 3000 GST liability 1000
Debtors 5000 Creditors 4000
Stock 20000 28000 Loan 5000 10000
Non-Current Liabilities
Non-Current Assets Loan 5000
Office equipment 4000 Owner’s Equity
Vehicles 18000 22000 Capital 34000
plus Net Profit 2500
36500
less Drawings 1500 35000
TOTAL ASSETS 50000 TOTAL EQUITIES 50000
12.1 THE ROLE OF THE
CASH FLOW STATEMENT

5. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 The Income Statement reports on the firm’s financial performance by
showing…
Revenues
Expenses
Profit
Income Statement for the month ended 30 June 2015
$ $
Revenue
Cash sales 15000
Credit sales 7000 22000
less Cost of Goods Sold
Cost of sales 13000
Cartage inwards 1000 14000
Gross Profit 8000
less Stock loss 500
Adjusted Gross Profit 7500
less Other Expenses
Rent 2000
Wages 3000 5000
Net Profit 2500
12.1 THE ROLE OF THE
CASH FLOW STATEMENT

6. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 But the Balance Sheet and the Income Statement don’t satisfy all of our needs
for information about the firm’s cash balance…
Balance Sheet as at 30 June 2015
Current Assets $ $ Current Liabilities $ $
Cash at bank 3000 GST liability 1000
Debtors 5000 Creditors 4000
Stock 20000 28000 Loan 5000 10000
Non-Current Liabilities
Non-Current Assets Loan 5000
Office equipment 4000 Owner’s Equity
Vehicles 18000 22000 Capital 34000
plus Net Profit 2500
36500
less Drawings 1500 35000
TOTAL ASSETS 50000 TOTAL EQUITIES 50000
Questions:
• What was the
cash balance a
year ago?
• How much cash
came into the
firm?
• Where did the
money come
from?
• How much cash
left the firm?
• What was the
money spent
on?
Balance Sheet as at 30 June 2015
Current Assets $ $ Current Liabilities $ $
Cash at bank 3000 GST liability 1000
Debtors 5000 Creditors 4000
Stock 20000 28000 Loan 5000 10000
Non-Current Liabilities
Non-Current Assets Loan 5000
Office equipment 4000 Owner’s Equity
Vehicles 18000 22000 Capital 34000
plus Net Profit 2500
36500
less Drawings 1500 35000
TOTAL ASSETS 50000 TOTAL EQUITIES 50000
?
12.1 THE ROLE OF THE
CASH FLOW STATEMENT

7. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 But the Balance Sheet and the Income Statement don’t satisfy all of our needs
for information about the firm’s cash balance…
Income Statement for the month ended 30 June 2015
$ $
Revenue
Cash sales 15000
Credit sales 7000 22000
less Cost of Goods Sold
Cost of sales 13000
Cartage inwards 1000 14000
Gross Profit 8000
less Stock loss 500
Adjusted Gross Profit 7500
less Other Expenses
Rent 2000
Wages 3000 5000
Net Profit 2500
Income Statement for the month ended 30 June 2015
$ $
Revenue
Credit sales 7000
Cartage inwards 1000
Rent 2000
Wages 3000
Questions:
• How many of the
credit sales were
collected?
• Were these
expenses paid in
cash or put on
credit?
• How much GST
was collected
and paid?
?
12.1 THE ROLE OF THE
CASH FLOW STATEMENT

8. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 In a business, cash is king – a firm could make a profit but go bankrupt if cash
is not available to:
 Pay bills such as rent and wages
 Buy stock to re-sell
 Repay creditors for stock purchased on credit
 Repay loans to the bank
 Purchase non-current assets to use to generate revenue
 There is another report that needs to be prepared:
 Cash Flow Statement: shows the cash inflows and cash outflows of the
business during the current period
Cash Flow Statement
12.1 THE ROLE OF THE
CASH FLOW STATEMENT

9. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 The role of the Cash Flow Statement is to…
Provide information about cash that is
not available in other reports
• Balance Sheet
• Income Statement
Provide detailed and exact
information about:
• Cash inflows – the money coming
into the firm
• Cash outflows – the money leaving
the firm
Business
Cash
inflows
Cash
outflows
12.1 THE ROLE OF THE
CASH FLOW STATEMENT

10. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 The Accounting System…
Trial
Balance
4. Prepare a
Trial Balance
3. Enter transactions in
General Ledger
General
Ledger
Ledger
Ledger
Ledger
Ledger
1. Transactions
occur
Transaction #1
Transaction #2
Transaction #3
Transaction #4
Transaction #5
Transaction #6
Transaction #7
Transaction #8
Special
Journals
2. Special
Journals
Cash
Receipts
Journal
Cash
Payments
Journal
Sales
Journal
Purchase
Journal
Balance
Sheet
Income
Statement
5. Prepare Financial
Reports
Cash Flow
Statement
12.1 THE ROLE OF THE
CASH FLOW STATEMENT

11. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
TASK
In-class Homework
SQ1 X