1. Slide 15.1 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Chapter 15 Reporting cash flows

2. Slide 15.2 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Definitions Cash comprises cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

3. Slide 15.3 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 See text book for data used in illustration Section 15.3. Direct and indirect methods

4. Slide 15.4 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Direct method Table 15.3 Direct method 25Operating cash flow (20)Wages paid (58)Cash paid to suppliers 103Cash received from customers £

5. Slide 15.5 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Indirect method Table 15.4 Indirect method 25Operating cash flow (3)(Decrease) in payables 3Decrease in receivables (15)(Increase) in inventory 40 10Add back depreciation 30Operating profit £

6. Slide 15.6 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Which to choose – direct or indirect ? Both are allowed by IAS 7. Both give the same answer for operating cash flow. Indirect method emphasises management of working capital. Direct method gives information not available elsewhere in the annual report.

7. Slide 15.7 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 £m 1Cash flows from operating activities 2Profit before taxationxx 3Adjustment for items not involving a flow of cash: 4Depreciation, amortisation, gain or loss on disposal of non-current assets etc xx 5Adjusted profitxx 6(Increase)/decrease in inventoriesxx 7(Increase)/decrease in trade receivablesxx 8(Increase)/decrease in prepayments xx 9Increase/(decrease) in cash due to (increases)/decreases in current assetsxx 10Increase/(decrease) in trade payablesxx 11Increase/(decrease) in accruals xx 12Increase/(decrease) in cash due to increases/(decreases) in liabilitiesxx 13Increase/(decrease) in cash due to working capital changesxx 14Cash generated from operationsxx Indirect method – operating cash flow Table 15.5 Format for statement of cash flows, indirect method

8. Slide 15.8 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Indirect method – operating cash flow (Continued) Table 15.5 Format for statement of cash flows, indirect method (Continued) 14Cash generated from operationsxx 15Interest paid(xx) 16Taxes paid(xx) 17Net cash inflow from operating activitiesxx

9. Slide 15.9 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Net cash used in investing activities xx23 Dividends receivedxx22 Interest received xx21 Proceeds from sale of non-current assetsxx20 Purchase of non-current assets xx19 Cash flows from investing activities18 Indirect method – cash flows from investing Table 15.5 Format for statement of cash flows, indirect method (Continued)

10. Slide 15.10 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Cash and cash equivalents at the end of the period xx31 Cash and cash equivalents at the start of the period xx30 Increase/(decrease) in cash and cash equivalents xx29 Net cash used in financing activities xx28 Dividends paid xx27 Proceeds from long-term borrowing xx26 Proceeds from issue of share capital xx25 Cash flows from financing activities24 Indirect method – cash flows from financing Table 15.5 Format for statement of cash flows, indirect method (Continued)

11. Slide 15.11 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Notes Line 1: Cash flows from operating activities Shows how cash flows are generated from the operations of the business. Line 2: Profit before taxation Starts with the operating profit before deducting interest and taxation. Line 3: Adjustment for items not involving a flow of cash Depreciation, amortisation, provisions, unrealised gains and losses.

12. Slide 15.12 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Notes (Continued) Line 4: Adding back depreciation, amortisation, gain or loss on disposal etc Add back because these items are not part of cash flow and are therefore not needed. Line 5: Adjusted profit Subtotal line. Line 6: (Increase)/decrease in inventories (stocks) Increase inventories, use up cash. Reduce inventories, release cash.

13. Slide 15.13 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Notes (Continued) Line 7: (Increase)/decrease in trade receivables (debtors) Increase debtors, reduce cash flow. Decrease debtors, increase cash flow. Line 8: (Increase)/decrease in prepayments Increase prepayments, use more cash. Decrease prepayments, reduce the need for cash. Line 9: Increase/(decrease) in cash due to (increases)/decreases in current assets Subtotal.

14. Slide 15.14 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Notes (Continued) Line 10: Increase/(decrease) in trade payables (creditors) Increase creditors, reduce the need for cash. Decrease creditors, use up cash faster. Line 11: Increase/(decrease) in accruals Increase accruals (unpaid expenses), reduce the need for cash. Reduce accruals, use up cash faster. Line 12: Increase/(decrease) in cash due to increases/(decreases) in liabilities Subtotal.

15. Slide 15.15 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Notes (Continued) Line 13: Increase/(decrease) in cash due to working capital changes Subtotal for change in current assets minus change in current liabilities. Line 14: Cash generated from operations Subtotal. Line 15: Interest paid Cash paid in the period.

16. Slide 15.16 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Notes (Continued) Line 16: Taxes paid Cash paid in the period. Line 17: Net cash inflow from operating activities Subtotal. Line 18: Cash flows from investing activities Start of second major section.

17. Slide 15.17 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Notes (Continued) Line 19: Purchase of non-current assets Cash paid for non-current (fixed) assets. Line 20: Proceeds from sale of non-current assets Cash received (this is not the same as gain or loss on disposal). Line 21: Interest received Cash received as interest on deposits or loans made.

18. Slide 15.18 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Notes (Continued) Line 22: Dividends received Cash received as dividends on shareholdings. Line 23: Net cash used in investing activities Subtotal. Line 24: Cash flows from financing activities Start of third major section.

19. Slide 15.19 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Notes (Continued) Line 25: Proceeds from issue of share capital Cash received equals increase in nominal value plus increase in share premium reserve. Line 26: Proceeds from long-term borrowings Cash received from lenders. Line 27: Dividends paid Dividends paid during the financial year (usually proposed dividend from previous year plus interim of current year).

20. Slide 15.20 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Notes (Continued) Line 28: Net cash used in financing activities Subtotal. Line 29: Increase/(decrease) in cash and cash equivalents Total of lines 17 + 23 + 28 (sum of each main section). Lines 30 and 31: Cash and cash equivalents at the start and end of the period. Taken from the balance sheet.

21. Slide 15.21 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Notes (Continued) Check on calculations: Lines 29 + 30 = Line 31.

22. Slide 15.22 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 £m 1Cash flows from operating activities 2Cash receipts from customersxx 3Cash paid to suppliers xx 4Cash paid to employeesxx 5–13(Lines not used) 14Cash generated from operationsxx 15Interest paid (xx) 16Taxes paid(xx) 17Net cash inflow from operating activities xx Direct method – operating cash flow Table 15.6 Format for statement of cash flows, direct method

23. Slide 15.23 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Direct method – operating cash flow (Continued) Line 2: Cash receipts from customer Cash received from customers (Check that cash received = Sales of the period + receivables at start – receivables at end). Line 3: Cash paid to suppliers Cash paid to suppliers. (Check that cash paid = Purchases of the period + payables at start – payables at end). Line 4: Cash paid to employees Usually there are no wages or salaries unpaid at the end of a period. Lines 14–31 Same as for indirect method

24. Slide 15.24 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Direct method Investing cash flows and Financing cash flows. Are the same as those for indirect method.

25. Slide 15.25 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Summary Cash comprises cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

26. Slide 15.26 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Summary (Continued) The indirect method and the direct method are alternative approaches to calculating the cash flow arising from operating activities.

27. Slide 15.27 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Summary (Continued) The indirect method starts with the profit from operations, eliminates non-cash expenses such as depreciation, and adds on or deducts the effects of changes in working capital to arrive at the cash flow arising from operating activities.

28. Slide 15.28 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Summary (Continued) The direct method takes each item of operating cash flow separately from the cash records to arrive at the cash flow arising from operating activities.