1 The Cash Statement Dr. Clive Vlieland-Boddy FCA FCCA MBA

2 History & Background Introduced in the 70’s as the source and uses or application of funds.Introduced in the 70’s as the source and uses or application of funds. Became increasing popular.Became increasing popular. Now required under most GAAP’s and IFRS.Now required under most GAAP’s and IFRS.

3 Benefits and reasons for the cash statement. The solvency and liquidity of the enterprise. The solvency and liquidity of the enterprise. Assists with enhanced comparability Assists with enhanced comparability Avoids Fraud. Avoids Fraud. Shows the ability to generate cash or not. Shows the ability to generate cash or not. Highlights investment profile. Highlights investment profile. Highlights the financing profile. Highlights the financing profile. Is not affected by accounting policies. Is not affected by accounting policies. Is relatively easy to prepare. Is relatively easy to prepare. Is easily audited. Is easily audited. Is easily understood. Is easily understood. Is difficult to manipulate. Is difficult to manipulate.

4 The Cash Statement Essentially it is a comparison between two balance sheets.Essentially it is a comparison between two balance sheets. It shows where the cash has come from and where it has gone.It shows where the cash has come from and where it has gone. It highlights the investment profile.It highlights the investment profile.

5 Cash Vs Profit It is essential to appreciate the difference. Cash represents actual payments and receipts. I.e. a summary of bank transactions.Cash represents actual payments and receipts. I.e. a summary of bank transactions. Profits represent the difference between sales made, less the cost of of sales and overheads.Profits represent the difference between sales made, less the cost of of sales and overheads. Items like depreciation or provisions are not a movement in the bank account. Items like depreciation or provisions are not a movement in the bank account.

6 What is cash flow? Cash that is generated by a businessCash that is generated by a business –Generally customers Vs. that is demanded by the business:Vs. that is demanded by the business: –including its shareholders, –financiers –and vendors in its normal course.in its normal course.

7 Cash v. Cash Flow and Income I made money, but I feel so brokeI made money, but I feel so broke –Timing differences between net income and cash Receivables vs.. payablesReceivables vs.. payables Deferred expenses vs.. revenuesDeferred expenses vs.. revenues Capital expenditures and amortizationCapital expenditures and amortization Growth financingGrowth financing You say I lost money, ha! I have plenty of cashYou say I lost money, ha! I have plenty of cash For now! There is often a lag between accrual income and cash flowFor now! There is often a lag between accrual income and cash flow

8 Understanding Sources & Uses Revenue –A straight sale for cash is a source of cash –However when the sale becomes a receivable, we have a use of cash. We, in essence, let our customer use our cash. –The payment of a receivable by the customer is a source of cash.

9 Understanding Sources & Uses Expense Expense –A straight purchase from a vendor * is a use of cash. –However when that purchase is on account (they will bill and we will pay later) this becomes a source of cash. –When we later pay the bill, it is a use of cash.

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11 The Two Ways to Calculate Direct Method - Shows all major classes of gross cash receipts and payments. This is cumbersome and not often used.Direct Method - Shows all major classes of gross cash receipts and payments. This is cumbersome and not often used. Indirect Method - Here the net profit is the starting and is then adjusted for non cash items such as depreciation. Then the balance sheet items are compared between the relevant dates.Indirect Method - Here the net profit is the starting and is then adjusted for non cash items such as depreciation. Then the balance sheet items are compared between the relevant dates.

12 The direct method

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14 The indirect method

15 The principal Headings:

16 Cash comes from: Operations or Operating ActivitiesOperations or Operating Activities –Profits from trading activities plus non cash items –Net Changes in Working Capital Investing ActivitiesInvesting Activities –Buying Plant & Equipment –Investing in R & D –Buying Businesses (Investments) Financing ActivitiesFinancing Activities –Investors (sale of stock) = Equity –Banks (Loans) = Debt

17 Balance Sheets Comparison If Non current assets have increased over a period then that must mean that funds have been expended in acquiring more fixed assets. This is a use of funds.If Non current assets have increased over a period then that must mean that funds have been expended in acquiring more fixed assets. This is a use of funds. If the money that a company has tied up in say inventories is reduced then that is a source of funds. I.e. money has been released.If the money that a company has tied up in say inventories is reduced then that is a source of funds. I.e. money has been released. If the company manages to get its suppliers to allow more credit then again that is a source of funds.i.e. essentially a loans from suppliers.If the company manages to get its suppliers to allow more credit then again that is a source of funds.i.e. essentially a loans from suppliers.

18 What do these mean…. An increase in Assets means a Use of Funds.An increase in Assets means a Use of Funds. A decrease is a source of funds. A decrease is a source of funds. Caution. Depreciation is not a movement of funds….. ( You do not write out a cheque for depreciation…)Caution. Depreciation is not a movement of funds….. ( You do not write out a cheque for depreciation…)

19 So what does this mean? An increase in liabilities represents the fact that you have really borrowed money. I.e. a source of funds.An increase in liabilities represents the fact that you have really borrowed money. I.e. a source of funds. So an increase in accounts Payable represents a source of funds.So an increase in accounts Payable represents a source of funds. Like wise an increase in say retained earnings, share capital or loans is also a source of funds.Like wise an increase in say retained earnings, share capital or loans is also a source of funds. A reduction in liabilities represents a use or application of funds. I.e. by repaying loans you have to consume cash.A reduction in liabilities represents a use or application of funds. I.e. by repaying loans you have to consume cash.

20 Cash Statement Funds Generated From Operations Profit For YearProfit For Year Add Non Cash Items – DepreciationAdd Non Cash Items – Depreciation Net Change in CANet Change in CA Net Change in CLNet Change in CL Total Generated from Operations Net Into Investing Activities (Net NCA) Net From Financing Activities (Net NCL & Shares) Net Change in Cash Flow

21 The Matrix Download the matrix at the matrix at

22 The structure of the cash flow statement. Financing Activities Investing Activities Operating Activities Net Cash flow Operations Net Cash flow Investments Net Cash flow Financing Ending Cash Balance

23 Lets work through BBQ Ex:19

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25 The Adjustments ** This represents the subtraction of Bank Balance so as to show it separately. * Non Current Assets has a difference between Balance Sheet Dates of 80. However this is after depreciation of 45. We therefore add back the depreciation. Show it as an addition to funds generated from operations as well as adding it to the investing activities.

26 Other Adjusting Items  Provisions, as they are non-cash transactions.  Dividends Proposed but not paid. Note that this year’s dividend is normally paid in the following year.  Tax on current profits, as this will be paid in the following year.  Interest that has yet to be paid.

27 Stanley Tools Again...

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29 Coffee Break As a shareholder what do you see as the benefits of the Cash Statement and how does it help you assess management’s success?

30 Finally… These statements will be revisited in Working Capital Management.These statements will be revisited in Working Capital Management.

31 Bye for now! I’m ready for some leisure time. Please ensure you Prepare for next session