ram@2013

lesson notes on
STATEMENT OF CASH FLOW

RM Accounts Ed

1
RATIONALE….
2

 Companies generally measure their income on an

accrual basis.
 The accrual basis in advertently fails t...
USEFULNESS…
3

 Assess the ability to generate positive net cash flows
 Assess the ability to service loans and pay divi...
INDIRECT METHOD (IAS 7)
4

Seeks to adjust the accrual based
net income in order to reflect the
cash receipts for the peri...
SOCF
5

 Is based on the net difference between cash inflows

and cash outflows.
 It is broken into three (3) distinct c...
OPERATING ACTIVITIES
6

 The principle revenue producing activities (and such

that do not include financing or investing...
INVETSING ACTIVITIES
7

 The acquisition and/or disposal of long-term assets

and other investments (excluding cash).
 I...
FINANCING ACTIVITIES
8

 Those activities that result in changes in the

composition and /or size of the firm’s capital a...
SOCF can help identify if there is….
9

 Sufficient cash to meet short term demand
 Sufficient profit to finance its ope...
ram@2013

lesson notes on
PREPARING THE CASH FLOW
STATEMENT

RM Accounts Ed

10
Step one: cash flow from operating activity
11

Identify the profit before interest
and tax (pbit).
Adjust it for non-cash...
CASH FLOW FROM OPERATING ACTIVITIES
12

 Operating Income
 Add/deduct non-cash items
 e.g. Depreciation, loss/gain on d...
Step two: cash flow from investing activity
13

 Net the short-term servicing of finance.
 Remove the corporation taxes ...
CASH FLOW FROM INVESTING ACTIVITIES
14

 Net the servicing of finance
 Add interest received
 Less interest paid
 Extr...
Step three: cash flow from financing activity
15

 Net the changes made to the share capital

via cash;
 Net the changes...
CASH FLOW FROM FINANCING ACTIVITIES
16

 Net the changes in share capital
 Add issue of shares for cash
 Deduct shares ...
Step four: change in cash flow
17

 Total the sub-categories






Cash flow from operating activities
Cash flow from...
Step five: reconciliation (proof)
18

 Demonstrate that the net change in cash is that

reflected on the balance sheet (B...
Upcoming SlideShare
Loading in …5
×

The Cash Flow Statement (notes)

2,033 views

Published on

0 Comments
4 Likes
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total views
2,033
On SlideShare
0
From Embeds
0
Number of Embeds
172
Actions
Shares
0
Downloads
83
Comments
0
Likes
4
Embeds 0
No embeds

No notes for slide

The Cash Flow Statement (notes)

  1. 1. ram@2013 lesson notes on STATEMENT OF CASH FLOW RM Accounts Ed 1
  2. 2. RATIONALE…. 2  Companies generally measure their income on an accrual basis.  The accrual basis in advertently fails to establish the company’s ability to generate cash.  The SOCF seeks to give a clearer picture /better understanding of the movement of cash (cash equivalents) within the company. RM Accounts Ed ram@2013
  3. 3. USEFULNESS… 3  Assess the ability to generate positive net cash flows  Assess the ability to service loans and pay dividends  Explain changes in the cash position (open  Examine cash investing and financing activities RM Accounts Ed ram@2013 ) - end balances
  4. 4. INDIRECT METHOD (IAS 7) 4 Seeks to adjust the accrual based net income in order to reflect the cash receipts for the period. RM Accounts Ed ram@2013
  5. 5. SOCF 5  Is based on the net difference between cash inflows and cash outflows.  It is broken into three (3) distinct components  OPERATING ACTIVITIES  FINANCING ACTIVITIES  INVESTING ACTIVITIES RM Accounts Ed ram@2013
  6. 6. OPERATING ACTIVITIES 6  The principle revenue producing activities (and such that do not include financing or investing).  Those activities that have an effect on the income statement.  They are examined through changes to the firm’s current assets and current liabilities; as well as reversal of non-cash actions on the income. RM Accounts Ed ram@2013
  7. 7. INVETSING ACTIVITIES 7  The acquisition and/or disposal of long-term assets and other investments (excluding cash).  It involves the purchase of fixed assets for cash; as well as the disposal of fixed assets for cash.  It includes (cash) loans made; or the payment of interest and/or principle; as well as interest received on the loans or other investments. RM Accounts Ed ram@2013
  8. 8. FINANCING ACTIVITIES 8  Those activities that result in changes in the composition and /or size of the firm’s capital and borrowings.  The activities that include resources borrowed and the repayment of resources borrowed. RM Accounts Ed ram@2013
  9. 9. SOCF can help identify if there is…. 9  Sufficient cash to meet short term demand  Sufficient profit to finance its operations  Future opportunities for more cash flows  Liquidity to pay current debts  Necessity to offer additional shares or new capital The Statement of Cash Flow is a legal requirement for public companies. RM Accounts Ed ram@2013
  10. 10. ram@2013 lesson notes on PREPARING THE CASH FLOW STATEMENT RM Accounts Ed 10
  11. 11. Step one: cash flow from operating activity 11 Identify the profit before interest and tax (pbit). Adjust it for non-cash activity and changes in working capital. RM Accounts Ed ram@2013
  12. 12. CASH FLOW FROM OPERATING ACTIVITIES 12  Operating Income  Add/deduct non-cash items  e.g. Depreciation, loss/gain on disposals  Adjust for changes in current assets  Add if the current assets decrease  Deduct if the current assets increase  Adjust for changes in current liabilities  Add if the current liabilities increase  Deduct if the current liabilities decrease RM Accounts Ed ram@2013
  13. 13. Step two: cash flow from investing activity 13  Net the short-term servicing of finance.  Remove the corporation taxes actually paid; and then…  Adjust for investing activity in the non- current assets. RM Accounts Ed ram@2013
  14. 14. CASH FLOW FROM INVESTING ACTIVITIES 14  Net the servicing of finance  Add interest received  Less interest paid  Extract the corporation tax paid  Less taxation  Net the investment in non-current assets  Add receipts of cash on disposal of assets  Deduct payments of cash on acquisition of assets RM Accounts Ed ram@2013
  15. 15. Step three: cash flow from financing activity 15  Net the changes made to the share capital via cash;  Net the changes made to the long-term debt obligations via cash. RM Accounts Ed ram@2013
  16. 16. CASH FLOW FROM FINANCING ACTIVITIES 16  Net the changes in share capital  Add issue of shares for cash  Deduct shares redeemed for cash  Deduct dividends paid on (own) shares  Net the changes in long-term debt obligations  Add issues of long-term debt instruments  Deduct payments on long-term debt instruments RM Accounts Ed ram@2013
  17. 17. Step four: change in cash flow 17  Total the sub-categories     Cash flow from operating activities Cash flow from investing activities Cash flow from financing activities Net change in the cash flow RM Accounts Ed ram@2013 ±w ±x ±y ±z
  18. 18. Step five: reconciliation (proof) 18  Demonstrate that the net change in cash is that reflected on the balance sheet (BS).    Cash amount disclosed at beginning (BS) Net change in cash flow (see SOCF) Cash amount disclosed at ending (BS) RM Accounts Ed ram@2013 p ±z r

×