1. Cash Flow Statements
Week 3

2. Purpose of cash flow statement
IAS 7 requires enterprises to present a cash flow statement as part of their financial statements.
Helps users
Assess company’s ability to generate cash & cash equivalents
Compare performance of companies for cash flows not affected by accounting policies
Extrapolation of historic cash flows to future periods

3. What is cash? CASH: Cash at hand Demand deposits CASH EQUIVALENTS:
Bank deposits with some notice for withdrawals
Money market investments with minimally uncertain outcomes

4. Reconciliation
Recommended that there should be a reconciliation between cash at start and at end of period EG
Increase in cash
Cash at start of period 104
Cash at end of period 196

5. Objective of IAS 7
Objective of IAS 7 is to provide information on changes by cash and cash equivalents and to classify cash flow under three standard headings:
Operating activities
Investing activities
Financing activities

6. Items under standard headings
Operating Activities
Operating profit with adjustments for depreciation (non-cash item)
Profit and or losses on sale of non-current assets
Interest paid
Working capital changes i.e. increases or decreases in inventories, receivables and payables.
Also includes outflows as interest paid, dividends paid and tax paid.
Investing Activities
Purchase of non-current assets and proceeds on sale of such assets.
Financing Activities
Proceeds on the issue of shares and loan notes and the redemption of certain classes of shares and loan notes.

7. Bank Overdrafts - treatments
Negative element of cash flow
Financing Activity
Increase = source of finance
Decrease = repayment of borrowing

8. Cash flows from operating activities
Examples:
Cash receipts from sales
Cash receipts from royalties and fees
Cash payments to suppliers
Cash payments to and on behalf of employees – salaries, PAYE tax, NICs etc
Cash payments of tax on profits

9. Direct or Indirect
The direct method shows each major class of gross cash receipts and gross cash payments.
Cash receipts from customers xx,xxx
Cash paid to suppliers xx,xxx
Cash paid to employees xx,xxx
Cash paid for other op exps xx,xxx
Interest paid xx,xxx
Income taxes paid xx,xxx  
Net cash from operating activities xx,xxx
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10. Direct or Indirect
The indirect method adjusts accrual basis net profit or loss for the effects of non-cash transactions.

11. Indirect method basic rules
Profit before tax
Add depreciation/amortisation
Add Loss on sale of asset
Subtract profit on sale of asset
Add decrease in inventory
Subtract increase in inventory
Add decrease in receivables & prepayments
Subtract increase in receivables & prepayments
Add increase in payables & accruals
Subtract decrease in payables & accruals

12. Cash flows from Investing activities
Types of investing activity
Cash payments (outflows)
Cash to acquire property, plant & equipment
Cash to acquire intangible assets
Cash paid for long term investment in another entity
Cash receipts (inflows)
Cash receipts from sale of property, plant & equipment
Cash receipts from sale of intangibles

13. Cash flows from Financing activities
Cash payments
Payments to redeem/buy back shares
Payments to repay loans or redeem debt
Cash payments to lessors under finance lease agreement where payment reduces obligation
Cash receipts
Proceeds from issue of shares
Proceeds from loan or issue of debt

14. Advantages of cash flow accounting – 1
Business survival depends on ability to generate cash
Cash flow accounting directs attention to this
Cash flow is more comprehensive than profit which depends on accounting conventions
Creditors are interested in entity’s ability to repay them
Cash flow reporting provides better means of comparing results of different companies than traditional profit reporting

15. Advantages of cash flow accounting – 2
Satisfies needs of all users better
Management – relevant costs for decision making
Shareholders & auditors – stewardship accounting
Creditors & employees
Easier to prepare (& more meaningful) than profit forecasts
Can be audited more easily
Forecasts easier to monitor by variance analysis
Disadvantage – should cash equivalents be in there?