1. Chapter 4 Cash flows
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Accounting and Finance in NZ by Clark, Maguire and Davies
Slides prepared by Laura Hopkins

2. Learning objectives Completion of this topic should enable you to
describe what is meant by cash flow
outline the structure of the cash flow statement
classify the categories of cash inflows and cash outflows that comprise the cash flow statement
illustrate how both the direct and indirect cash flow approaches are used to derive net cash flows from operating activities
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Accounting and Finance in NZ by Clark, Maguire and Davies
Slides prepared by Laura Hopkins

3. Learning objectives cont.
Completion of this topic should enable you to
prepare a cash flow statement
explain the links between the cash flow statement and the balance sheet
explain the links between the cash flow statement and the income statement
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Accounting and Finance in NZ by Clark, Maguire and Davies
Slides prepared by Laura Hopkins

4. What the cash flow statement tells us
Change in cash between start and end of the period
Amount of cash generated and from where
What the cash was used for
Cash consists of
cash on hand
deposits that are payable on demand
cash equivalents
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Accounting and Finance in NZ by Clark, Maguire and Davies
Slides prepared by Laura Hopkins

5. Cash inflows and outflows
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Accounting and Finance in NZ by Clark, Maguire and Davies
Slides prepared by Laura Hopkins

6. What information the cash flow statement provides
Information on how much cash
was generated from the entity trading
came from sources external to the entity
was needed to fund new working capital
was spent on new assets
came from new borrowing
was used to repay debt
Information used for the statement is factual and verifiable
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Accounting and Finance in NZ by Clark, Maguire and Davies
Slides prepared by Laura Hopkins

7. The structure of the cash flow statement
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Accounting and Finance in NZ by Clark, Maguire and Davies
Slides prepared by Laura Hopkins

8. The structure of the cash flow statement cont.
Users need detailed information to evaluate
the ability of the entity to generate cash from its activities
the changes in the net assets of the entity
the entity’s financial structure
liquidity
solvency
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Accounting and Finance in NZ by Clark, Maguire and Davies
Slides prepared by Laura Hopkins

9. The presentation of the cash flow statement
A more informative presentation describes
 operating activities
cash flow from the revenue-producing activities
 investing activities
cash flows from acquisition/disposal of long-term assets and other investments
 financing activities
cash flows from changes in the debt and equity structure
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Accounting and Finance in NZ by Clark, Maguire and Davies
Slides prepared by Laura Hopkins

10. The presentation of the cash flow statement cont.
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Accounting and Finance in NZ by Clark, Maguire and Davies
Slides prepared by Laura Hopkins

11. Operating activities
A key indicator of entity’s ability to generate enough cash to maintain operating capacity without borrowing
Should result in a net cash inflow
Cash flow results from income statement items
will only include cash items
accrual-based will not affect cash flow
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Accounting and Finance in NZ by Clark, Maguire and Davies
Slides prepared by Laura Hopkins

12. Operating activities cont.
Cash flows include
cash received from
customers for sale of goods and services
royalties, fees and commissions
cash paid
to suppliers for purchased goods and services
to employees
for other operating activities
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Accounting and Finance in NZ by Clark, Maguire and Davies
Slides prepared by Laura Hopkins

13. Investing activities
Expenditure to acquire resources to be used to generate future income and cash flows
Includes acquiring and disposing of non-current assets
Generally results in a net cash outflow
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Accounting and Finance in NZ by Clark, Maguire and Davies
Slides prepared by Laura Hopkins

14. Investing activities cont.
Cash flows include
cash received from
sale of property, plant, equipment, intangibles, long-term assets
sale of shares and other investments
repayment of loans
cash paid to acquire
property, plant, equipment, intangibles, long-term assets
shares and other investments
to make loans
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Accounting and Finance in NZ by Clark, Maguire and Davies
Slides prepared by Laura Hopkins

15. Financing activities
Shows change in debt and equity structure of the entity
Provides information on source of funding and claims on future cash flow by the providers of the funds
Net cash flow can be inflow or outflow
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Accounting and Finance in NZ by Clark, Maguire and Davies
Slides prepared by Laura Hopkins

16. Financing activities cont.
Cash flows include
cash received from
issue of shares or capital invested
long term loan or mortgage
cash paid
to repay borrowings
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Accounting and Finance in NZ by Clark, Maguire and Davies
Slides prepared by Laura Hopkins

17. Specific considerations
Interest and dividends
Income taxation
Goods and Services Tax (GST)
Non-cash transactions and events
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Accounting and Finance in NZ by Clark, Maguire and Davies
Slides prepared by Laura Hopkins

18. Preparation of the cash flow statement
Information required for preparing the statement will come from
the balance sheet
to determine changes in the assets and liabilities during the reporting period
the statement of changes in equity
to determine changes during the reporting period
the income statement for the period
to determine the funds generated from operating activities
other additional information
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Accounting and Finance in NZ by Clark, Maguire and Davies
Slides prepared by Laura Hopkins

19. Preparation of the operating activities section
Cash flows from operating activities
use direct method
adjust income statement items from accrual to cash
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Accounting and Finance in NZ by Clark, Maguire and Davies
Slides prepared by Laura Hopkins

20. Preparation of the operating activities section cont.
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Accounting and Finance in NZ by Clark, Maguire and Davies
Slides prepared by Laura Hopkins

21. Preparation of the investing activities section
Cash flows from investing activities
determine change in the item between successive balance dates
ascertain reason for the change and the effect on cash
adjust for the non-cash element of the change
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Accounting and Finance in NZ by Clark, Maguire and Davies
Slides prepared by Laura Hopkins

22. Preparation of the operating activities section
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Accounting and Finance in NZ by Clark, Maguire and Davies
Slides prepared by Laura Hopkins

23. Preparation of the financing activities section
Cash flows from financing activities
determine the change in the item between successive balance dates
determine reason for the change and the effect on cash
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Accounting and Finance in NZ by Clark, Maguire and Davies
Slides prepared by Laura Hopkins

24. Preparation of the financing activities section cont.
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Accounting and Finance in NZ by Clark, Maguire and Davies
Slides prepared by Laura Hopkins

25. Reconciling net profit to cash from operating activities
calculated on income statement
calculated under accrual accounting
Cash flow from operating activities
calculated using income statement
calculated under cash accounting
These two amounts will be different.
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Accounting and Finance in NZ by Clark, Maguire and Davies
Slides prepared by Laura Hopkins

26. Reconciliation method
Net profit after tax
adjusted for
investing items included in profit calculation
finance items included in profit calculation
non-cash items
changes in current assets
changes in current liabilities
confirms the cash flow from operating activities figure
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Accounting and Finance in NZ by Clark, Maguire and Davies
Slides prepared by Laura Hopkins

27. Reconciliation method cont.
Items that arise from investing and financing activities
gain or loss on disposal of a non-current asset
Non-cash revenues and expenses
depreciation, bad and doubtful debts
Changes in current assets and current liabilities
increase in current assets is a drain on cash so reduce net profit to adjust to the net cash flow
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Accounting and Finance in NZ by Clark, Maguire and Davies
Slides prepared by Laura Hopkins

28. Reconciliation of net profit to cash from operating activities
Net profit after tax
Add/subtract items classified as investing/financing
Add/subtract non-cash items
Add/subtract movements in working capital
= net cash flow from operating activities
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Accounting and Finance in NZ by Clark, Maguire and Davies
Slides prepared by Laura Hopkins

29. Linking cash flows to the main financial statements
Operating cash flows based on information from the income statement and balance sheet
Investing cash flows derived from information from the balance sheet and income statement
Financing cash flows derived from the balance sheet for debt information and statement of movements in equity for equity information
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Accounting and Finance in NZ by Clark, Maguire and Davies
Slides prepared by Laura Hopkins