1. What to do before you even start Calculate the change in cash flow before preparing cash flow statement; Knowing the answer beforehand will give you the hint; 2008 - cash $2 and an overdrawn bank account at $14; 2009 – cash is $17 and you repaid your “bank overdraft”; $17+$14-$2=$29; increase in cash

2. Cash flow Operating activity Step 1: calculate how much you received from customers; Sales – Increase in Trade Debtors (Accounts Receivable); 591- (123-115)=583; As you have “other operating income” of $21 add that to $583; Now your total amount received from customers is $604;

3. Cash paid to suppliers and employees Step 2: take “cost of sales” which is $307 and deduct decrease in “Inventory” and add decrease in “Trade creditors”; Now calculate your operating activity; Take “other expense” and deduct depreciation; Add increase in “prepaid expenses”; Deduct increase in “Accruals”;

4. Cash paid to suppliers and employees Now let’s do the calculations with real numbers; $307-$3+$5+$12+$10-$4=$327; $3=$44-$41; decrease in inventory $5=$44-$39; decrease in AP $12=$91-$79; other exp – depr. $10=$16-$6; increase in prep.exp $4=$15-$11; increase in accruals

5. Operating activity We really paid interest as we have no interest payable in “current liabilities”; We paid taxes, but not the one that is shown in “Income Statement” as in “current liabilities” this amount is an unpaid one; So, we take last year’s tax because particularly that one was paid;

6. Operating activity Interest paid - $23; Tax paid - $32;

7. Cash flows from operating activities Cash receipts from customers (583+21) 604 Cash paid to suppliers and employees (309+18) (327) Cash generated from operations 277 Interest paid (23) Tax paid (32) Net cash from operating activities 222

8. Now move to the second part Cash flows from investing activities Interest received 2 Payments to acquire tangible non-current assets (40+55) (95) Net cash used in investing activities (93)

9. We are in the last part Cash flows from financing activities Dividends paid (40) Issue of share capital 90 Repayment of long-term borrowing (150) Net cash used in financing activities (100) Net increase in cash and cash equivalents 29 Cash and cash equivalents at the beginning of the financial year (12) Cash and cash equivalents at the end of the financial year 17

10. Let’s calculate investing activity 1 January ($)31 December ($) Land and buildings – cost or valuation 150,000200,000 Plant and Machinery: Cost80,000100,000 Accumulated depreciation(20,000)(30,000) Net60,00070,000 Fixtures and fittings: Cost20,00025,000 Accumulated Depreciation(10,000)(12,000) Net10,00013,000

11. You are told that: Land and buildings were revalued upwards by $20,000; Fixtures and fittings which had cost $5,000 and which had been depreciated by $3,000 were sold for $1,000; Calculate the depreciation for the year; Prepare “investing activity” of cash flow statement;

12. Learn the format! Land and buildingsCostAccumulated Depreciation Book value (net) Balance at the start of the year 150,000======150,000 Less any disposals================== 150,000======150,000 Plus new acquisitions X=30,000======30,000 Plus any revaluation20,000======20,000 less depreciation for the year ====== Equals closing balance 200,000======200,000

13. Learn the format! Plant and machinery CostAccumulated Depreciation Book value (net) Balance at the start of the year 80,000(20,000)60,000 Less any disposals================== 80,000(20,000)60,000 Plus new acquisitions X=20,000======20,000 Plus any revaluation====== ===== less depreciation for the year ======X=(10,000)(10,000) Equals closing balance 100,00030,00070,000

14. Learn the format! TransactionCostAccumulated Depreciation Book value (net) Balance at the start of the year 20,000(10,000)10,000 Less any disposals(5,000)3,000(2,000) 15,0007,0008,000 Plus new acquisitions X=10,000======10,000 Plus any revaluation====== less depreciation for the year ======X=(5,000)(5,000) Equals closing balance 25,000(12,000)13,000

15. What is what Cost - $5,000 Depreciation - $3,000 Book value - $2,000 We sold it for $1,000; Our loss on disposal is $1,000; ($2,000-$1,000); That $1,000 will be in the Income Statement as a loss;

16. Let’s prepare the extract of the investing activity now Cash flows from investing activities: Purchase of land and buildings – (30,000); Purchase of plant and machinery – (20,000); Purchase of fixtures and fittings – (10,000); Proceeds from sale of fixtures and fittings – 1,000; Net cash used in investing activities (59,000)

17. ©2008 Pearson Prentice Hall. All rights reserved. 12-17 Learning Objective 4 Prepare a cash flow statement by the direct method

18. ©2008 Pearson Prentice Hall. All rights reserved. 12-18 Direct Method Collections from customers Sales Cost of goods sold Payments to suppliers Salaries expense Payments to employees Interest expense Interest payments Income StatementCash Flow Statement Income tax expense Income tax paid

19. ©2008 Pearson Prentice Hall. All rights reserved. 12-19 Direct Method Formulas RECEIPTS Income Statement Balance Sheet Change From customers Sales +Decrease in accounts receivable -Increase in accounts receivable Of interestInterest revenue +Decrease in interest receivable -Increase in interest receivable

20. ©2008 Pearson Prentice Hall. All rights reserved. 12-20 Direct Method Formulas PAYMENTS Income Statement Balance Sheet Change To suppliersCost of goods sold +Increase in inventory -Decrease in inventory AND +Decrease in accounts Payable -Increase in accounts payable

21. ©2008 Pearson Prentice Hall. All rights reserved. 12-21 Direct Method Formulas PAYMENTS Income Statement Balance Sheet Change For expenses Operating expenses +Increase in prepaid -Decrease in prepaids OR +Decrease in accrued liabilities -Increase in accrued liabilities

22. ©2008 Pearson Prentice Hall. All rights reserved. 12-22 Direct Method Formulas PAYMENTS Income Statement Balance Sheet Change To employees Salaries expense +Decrease in salaries payable -Increase in salaries payable For interestInterest expense +Decrease in interest payable -Increase in interest payable

23. ©2008 Pearson Prentice Hall. All rights reserved. 12-23 Direct Method Formulas PAYMENTS Income Statement Balance Sheet Change For income taxes Income tax expense +Decrease in income tax payable -Increase in income tax payable

24. ©2008 Pearson Prentice Hall. All rights reserved. 12-24 E12-27 Credit sales$60,000 Ending accounts receivable 32,000 Beginning accounts receivable 22,000 Increase in accounts receivable 10,000 Collections from customers If more customers buy on account, how would that affect cash flow? Add or subtract?

25. ©2008 Pearson Prentice Hall. All rights reserved. 12-25 E12-27 Cost of goods sold$111,000 Ending inventory 21,000 Beginning inventory 24,000 Decrease in inventory (3,000) Ending accounts payable 8,000 Beginning accounts payable 14,000 Decrease in accounts payable 6,000 Payments to suppliers$114,000

26. ©2008 Pearson Prentice Hall. All rights reserved. 12-26 Direct Method Noncash expenses not listed – Depreciation, depletion and amortization Gains and losses not included – Gain or loss does not equal cash received – Cash proceeds included as an investing inflow Investing and financing activities reported as explained previously