This is Cash flow statement

2. Table of Contents
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Table of Contents.........................................................................................................................................2
1.0MEANING OF CASH FLOW AND CASH FLOW STATEMENT.......................................................................3
2.0FORMS OF CASH......................................................................................................................................3
3.0OBJECTIVES OF CASH FLOW STATEMENT................................................................................................3
4.0PURPOSES OF CASH FLOW STATEMENT..................................................................................................3
5.0IMPORTANCE OF CASH FLOW STATEMENT.............................................................................................4
6.0COMPONENT OF CASH FLOW STATEMENT.............................................................................................4
6.1CASH FLOW FROM OPERATING ACTIVITIES.........................................................................................4
6.2CASH FLOW FROM INVESTING ACTIVITIES ..........................................................................................4
6.0CASH FLOW FROM FINANCING ACTIVITIES..........................................................................................5
7.0PREPARATION OF CASH FLOW STATEMENT............................................................................................5
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3. CASH FLOW STATEMENT
1.0 MEANING OF CASH FLOW AND CASH FLOW STATEMENT
A Cash Flow statement is a simple report that explains the various sources of cash and how the
business puts this cash into use.
Cash flow statement is a primary final financial statement that reports the movement of cash and
cash equivalents that is inflows and outflows of the company accounts during a particular
financial year.
2.0 FORMS OF CASH
Cash comprises of cash in hand and demand deposits with banks.
Cash Equivalents are short-term, highly liquid investments that are readily convertible into
known amount of cash and which are subject to an insignificant risk of change in value. An
investment normally qualifies as cash equivalent only when it has a short maturity
i. Treasury bills,
ii. Commercial paper,
iii. Money market funds and
iv. Investments in preference shares and redeemable within three months can also be taken as
cash equivalents if there is no risk of the failure of the company.
3.0 OBJECTIVES OF CASH FLOW STATEMENT
The objectives of cash flow statement are:
i. To ascertain the sources from activities (i.e., operating/investing/financing activities) from
which cash and cash equivalents were generated by an enterprise.
ii. To ascertain the uses by activities (i.e., operating/investing/financing activities) for which
cash and cash equivalents were used by an enterprise.
iii. To ascertain the net change in cash or cash equivalents indicating the difference between
sources and uses from or by the three activities between the dates of two Balance Sheets.
4.0 PURPOSES OF CASH FLOW STATEMENT
i. Forecast future cash flows
ii. Evaluate management decisions
iii. Determine the ability to pay dividends to stockholders’ and payments to creditors
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4. iv. Show the relationship of net income to the business’s cash flows
5.0 IMPORTANCE OF CASH FLOW STATEMENT
i. To identify the sources from where cash inflows have arisen within a particular period
and also shows the various activities where in the cash was utilized.
ii. It is significant to management for proper cash planning and maintaining a proper
matching between cash inflows and outflows.
iii. Shows efficiency of a firm in generating cash inflows from its regular operations.
iv. Reports the amount of cash used during the period in various long-term investing
activities, such as purchase of fixed assets.
v. Reports the amount of cash received during the period through various financing
activities, such as issue of shares, debentures and raising long-term loan.
6.0 COMPONENT OF CASH FLOW STATEMENT
It should prepared in accordance to the Revised Accounting Standard (IAS 7) on cash flow
statement. The standard requires that cash flow be classified and shown in the cash flow
statement under three heads, namely:
i. Cash Flow from Operating Activities
ii. Cash Flow from Investing Activities
iii. Cash Flow from Financing Activities.
6.1 CASH FLOW FROM OPERATING ACTIVITIES
Operating activities are accounting items which indicates the money a company brings in from
ongoing, regular business activities, such as manufacturing and selling goods or providing a
service. Cash flow from operating activities does not include long-term capital or investment
costs. It does include earnings before interest and taxes plus depreciation minus taxes.
These are both normal and core daily activities within a business that generate cash inflows and
outflows which includes:
i) Cash received from customers
ii) Cash paid to suppliers of goods and services
iii) Cash paid to employees
6.2 CASH FLOW FROM INVESTING ACTIVITIES
Investing activities are items on the cash flow statement that reports the aggregate change in a
company's cash position resulting from any gains (or losses) from investments in the financial
markets and operating subsidiaries, and changes resulting from amounts spent on investments in
capital assets such as plant and equipment.
These involves activities like the acquisition and disposal of non-current assets such as; property,
plant and equipment, intangible assets, and long-term investments.
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5. Examples of such cash flows include:
i) Proceeds on sale of non-current assets
ii) Cash used on acquisition of non-current assets
iii) Investment income received (not accrued)
6.0 CASH FLOW FROM FINANCING ACTIVITIES.
A category in a company’s cash flow statement that accounts for external activities that allow a
firm to raise capital and repay investors, such as issuing cash dividends, adding or changing loans
or issuing more stock. Cash flow from financing activities shows investors the company’s
financial strength. A company that frequently turns to new debt or equity for cash, for example,
could have problems if the capital markets become less liquid.
FORMULA: Cash received from issuing stock or debt - cash paid as dividends and Re-
acquisition of debt/stock.
7.0 PREPARATION OF CASH FLOW STATEMENT
The concept of preparing cash flow statement may easily be understood as a summary of the
cashbook set out using standard formats hence cash statement is simply a summary of the
compressed cashbook for certain financial year.
Suppose a cashbook was provided as follows
Cashbook (Cash and Bank
Sh Sh
Balance b/d
a
Receipts from debtors
b
Receipts from cash sales c
Proceeds on disposal of fixed assets f
Loans obtained h
Payments to suppliers
d
Payment for expenses
e
Purchase of fixed assets
g
Loans repaid
I
Balance c/d
j
XX XX
The cash flow statement would be drawn up as follows:
Cash flow statement for the year ended (date)
Operating Activities Sh Sh
Receipts from debtors
Receipts from cash sales
Payments to suppliers
Payments for expenses
Net cash in flow from operating activities
b
c
(d)
(e)
XX
Investing Activities
Proceeds on disposal of fixed assets f
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6. Purchase of fixed assets
Net cash flow from investing activities
(g)
XX
Financing Activities
Loans obtained
Loans repaid
Net cash flow from financing activities
Net cash flow
Add cash b/d
h
(i)
XX
XX
a _
Cash c/f j _
Note : It can be seen from the above illustration that the cash flow statement is just a rearrangement of
cashbook entries. However, the classifications are rigid; each item can only belong in one category. This
classification must be fully understood. The items falling into each category are governed by paragraphs 10 –
17 of IAS7.
However the first category that is operating activities cash flows can be arrived at by two methods;
i. The direct method – whereby major classes of gross cash receipts and gross cash payments are
disclosed; or
ii. The indirect method – whereby the net profit or loss is adjusted for the effects of transactions of a
non-cash nature and accruals/prepayments
Format for cash flow statement (using direct cash flow method)
Operating activities Sh Sh
Cash receipts from customers X
Cash paid to suppliers and employees (X)
Cash generated from operations X
Interest paid/received (X)
Income taxes paid (X)
Net cash flow from operating activities X
Investing activities
Purchase of property plant and equipment (X)
Proceeds on disposal of equipment X_
Net cash flow from investing activities X
Financing activities
Proceeds from issuance of share capital X
Redemption and purchase of share capital (X)
Proceeds from long- term borrowings X
Repayments on long-term borrowings (X)
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7. Payments on finance lease obligations (X)
Dividends paid (X)
Net cash flow from financing activities X_
Net change in cash and cash equivalents X
Cash and cash equivalents b/f X_
Cash and cash equivalents c/f XX
Format for cash flow statements (using indirect cash flow method)
Sh Sh
Net profit before tax X
Adjustment for items not involving movement of cash
Depreciation X
Profit and losses on fixed asset disposals X_
X
Adjustment for working capital items
(Increase)/Decrease in stocks X
(Increase)/Decrease in debtors X
(Decrease)/Increase in creditors X.
Cash generated from operations X
Tax paid (X)
Net cash inflow from operating activities X
Investing Activities
Purchase of property plant and equipment (X)
Proceeds on disposal of equipment X_
Net cash flow from investing activities X
Financing Activities
Proceeds from issuance of share capital X
Redemptions and purchase of share capital (X)
Proceeds from long-term borrowings X
Repayments on long-term borrowings (X)
Payments on finance lease obligations (X)
Dividends paid (X)
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8. Net cash flow from financing activities X_
Net change in cash and cash equivalents X
Cash and cash equivalents b/f X_
Cash and cash equivalents c/f XX
A Good Example
The balance sheet of Eco Link Ltd for the years ended 31 December, 2012 and 31 December 2013 were
summarised and shown below:
2013 2012
Fixed assets (at written down values) £ £
Premises 10,000 10,000
Fixtures 17,000 11,000
Vehicles 12,500 8,000
Current assets
Stock 17,000 14,000
Debtors 8,000 6,000
Bank and cash 23,000 29,500
87,500 78,500
Ordinary shares of £1 per share 60,000 50,000
Reserves
Profit and Loss 5,000 4,000
Creditors due in less than one year
Trade creditors 4,000 2,500
Taxation 1,500 1,000
Proposed dividends 2,000 1,000
Creditors due in more than one year
10% debentures 15,000 20,000
87,500 78,500
Note: The 10% debentures were redeemed and cancelled on 31 December 2013
The profit and Loss account for the year ended 31 December 2013 was summarised thus:
£ £
Turnover 36,250
Cost of sales (21,750)
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9. Gross profit 14,500
Profit on disposal of vehicles 700
15,200
Less:
Wages and salaries 1,600
Other (cash) expenses 3,600
Depreciation 3,500
Debenture interest 2,000
10,700
Profit before tax 4,500
Less: Tax 1,500
Profit after tax 3,000
Less: Proposed dividends (2,000)
Retained profit: for year 1,000
: Brought forward 4,000
: Carried forward 5,000
Separate bank and cash accounts for the year ended 31 December 2013 were summarised as shown below:
Bank
£
Cas
h
£
Bank
£
Cas
h
£
Opening balance b/d
Receipts from debtors
Receipts from fixed asset disposals –
vehicles
Ordinary share issue
Transfer from cash
25,300
30,500
1,200
10,000
4,650
_
4,200
3,750
500
-
-
_
Payment to trade creditors
Wages, salaries
Other expenses
Debenture interest
Fixed assets
fixtures
vehicles
Tax paid
Dividends paid
10% debentures: redeemed
Transfer to bank
Closing balances c/d
23,250
700
2,400
2,000
7,000
8,000
1,000
1,000
5,000
21,300
-
900
1,200
-
-
4,650
1,700
71,650 8,450 71,650 8,450
Opening balances b/d 21,300 1700
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10. Solution (refer only to cash book for 1st
solution)
Eco- Link Limited
Cash flow statement for the year ended 31 December 2013 (Direct Method)
Operating activities £ £
Cash receipts from customers (30500 + 3750) 34,250
Cash paid to suppliers and employees (23250 + 700 + 900) (24,850)
Other cash payments (2400 + 1200) (3,600)
Cash generated from operations 5,800
Tax paid (1,000)
Debenture interest paid (2,000)
Net cash inflow from operating activities 2,800
Investing activities
Payments to acquire fixtures (7,000)
Payments to acquire vehicles (8,000)
Proceeds on disposal of vehicles 1,700
Net cash outflow from investing activities (13,300)
Financing Activities
Ordinary share issue 10,000
Redemption of debentures (5,000)
Dividends paid (1,000)
4,000
Net change in cash and cash equivalents (6,500)
Cash and cash equivalents b/f (25,300 + 4,200) 29,500_
Cash and cash equivalents c/f (21,300 + 1,700) 23,000
Note:
1) When all cash movements have been brought in, the opening cash is added thereon to generate the
closing cash
2) Under the direct method, the cash flow statement has been drawn up from the cash book only.
3) The term “cash and cash equivalents” refers to:
• Cash in hand
• Cash at bank
• Short-term investments
For the solution using the indirect method, no reference to the cash book is made. Information provided to
enable preparation of the cash flow statement under this method consists:
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11. 1) Beginning of the year balance sheet
2) End of year balance sheet
3) A profit and loss account for the year
4) Additional information
Thus accounts need reconstruction to obtain required values for the cash flow statement to be drawn up.
Eco Link Limited
Cash flow statement for the year ended 31 December 2013 (Indirect method)
Operating activities £ £
Net profit before tax 4,500
Adjustment for items not involving movement of funds
Depreciation 3,500
Profit on disposal of vehicles (700)
7,300
Adjustment for working capital items
Increase in stock (3,000)
Increase in debtors (2,000)
Increase in creditors (trade) 1,500
Cash generated from operations 3,800
Taxation paid (1,000)
Net cash inflow from operating activities 2,800
Investing activities
Payments to acquire fixtures (7,000)
Payments to acquire vehicles (8,000)
Proceeds on disposal of vehicles 1,700
Net cash outflow from investing activities (13,300)
Financing activities
Ordinary share issue 10,000
Redemption of debentures (5,000)
Dividends paid (1,000)
4,000
Net change in cash and cash equivalents (6,500)
Cash and cash equivalents b/f (25,300 + 4,200) 29,500 _
Cash and cash equivalents c/f (21,300 + 1,700)
23,000 _
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