Describe importance of cash flow
Business stakeholders rely that the business has sufficient cash
Businesses fail as a result of inability to find sufficient cash to settle their responsibilities
Balance sheet and income statement show movements in wealth and the net increase or decrease in wealth for the period concerned
Describe the statement of cash flows
shows cash inflows and outflows of the business over a period of time
- Cash receipts
- cash payments
- Net cash flow = Cash inflow - cash outflow
What are three components of the cash flow statement?
- Operating activites
- Investing activities
- Financing Activities
what is cash in the statement of cash flows?
Cash: Cash on hand, demand deposits
Cash Equivalents
- Highly liquid investments
- readily convertible to cash at the investor’s option
- Used by entity in its cash anagement function on a day to day basis
- Eg. bank bills, non-bank bills, money market deposits
- Bank overdraft
Describe cash flow from operating activities
Net inflow from operations eg. purchase of inventory, payment of wages
Describe cash flows from investing activities
Cash payments to acquire additional non-current assets and and other investments not
included in cash equivalents
cash receipts from the disposal of such assets through proceeds from sale
Examples of cash outflow from investing activities
- to purchase property, plant and equipment, and other long-term assets
- to purchase long or short-term marketable securities
- to make loans
Examples of cash inflow from investing activities
Inflows
from sale of property,
plant & equipment,and
other long-term assets (sale proceeds from disposal of non-current asset)
from sale of long and
short-term securities (shares or other investments)
from collection of loans
describe cash flow from financing activities
deals with financing the business. This excludes short-term credit such as trade credit
Examples of Cash outflow from financing activities
- share repurchases
- debt repayment
- payment of dividends
What are two approaches to cash flow from operating activities?
Direct method: major classes of gross cash receipts
and gross cash payments are disclosed. Encouraged
in Australia.
Indirect method: starts with net profit and then
eliminates non-cash items:
Net profit
+/- Adjustments for non-cash items
Net cash inflow (outflow) from operating activities
for non-cash transactions, most relate to?
Most relate to operating activities and are linked to the difference between cash-based and accrual-based transactions.
- Income earned differs from the cash received: receivables (credit sales)
- Expenses incurred differ from the cash paid: e.g., depreciation or impairment, doubtful debts, accruals, prepayments, payables
- Gains/losses on disposal of non-current assets, revaluations, etc.
cash flows from operating activities
(the direct method)
Reports the net of:
- receipts from customers
- payments to suppliers
- payments for expenses
cash flow from operating activites
direct method
- Cash receipts from customers
- Cash payments to suppliers
- Cash paid for expenses
Opening inventory
+ purchases
= goods available for sales
- closing inventory
= cost of goods sold
Opening accounts payable
+ purchases
= amount expected to pay for the period
– closing accounts payable
=cash paid to suppliers
cash flow from operating activites
direct method
- Cash receipts from customers
- Cash payments to suppliers
- Cash paid for expenses
- Calculation of paid paid relation to expense prepayments i.e prepaid expenses (asset accounts)
Beginning prepayments (balance sheet) + expense paid (cash paid for prepayments) in the period – expense recognised for the period (found in income statement) = ending prepayments
Closing balance of prepaid expense x
+ expense recognised for the period x
= amount expected to pay for the period x
− opening balance of prepaid expense (x)
= expenses paid x
cash flow from operating activites
direct method
- Cash receipts from customers
- Cash payments to suppliers
- Cash paid for expenses
- Calculation of paid paid relation to expense payable/ accruals
The calculation of cash paid relating to expense
payable/accruals (liabilities accounts):
Opening expense payables/accruals X
+ expense recognised for the period X
= the amount expected to pay for the period X
- closing expense payables/accruals (X)
= expenses paid X
cash flow from operating activites
direct method
- Cash receipts from customers
- Cash payments to suppliers
- Cash paid for expenses
opening accounts receivable
+ sales
= Amount expected to receive for the period
– closing accounts receivable
= cash received from customers
what are the four expenses on the income statement of the company?
depreciation, interest expense, income tax
expense, other expenses
- depreciation expense does not present an outflow
“interest expense” and “other expenses” must have been paid in cash in the period because they are the expenses of the year and there are no prepayments or accruals related to these expenses at either beginning or end of the year. So the
cash paid for theses expenses equals the amount of these expenses
convert other expenses to cash outflow
- converting tax expense (relating to expense payable)
Opening income tax payable (from balance sheet)
+ income tax expense (from income statement)
= **amount expected to pay for the period **
− closing income tax payable (from balance sheet)
= **income tax paid **
what does cash flow from operating activities look like?
Cash receipts from customers 95
Cash paid to suppliers (63)
Interest paid (3)
Income taxes paid (2010 liability) (4)
Cash paid for other expenses (17)
Net cash provided by operating activities 8
what does cash flow from investing activities look like?
Purchase of land and equipment
(20)
Proceeds from sale of land and
equipment
0
Net cash used in investing activities (20)
calculating cash flow from financing activities
how do you calculate cash payment of dividends?
Opening balance of dividend payable 15
+ dividend declared for the period 20
= amount expected to pay for the period 35
− closing balance of dividend payable (20)
= dividends paid 15
what does cash flow from financing activities look like?
Proceeds from issue of share capital 15
Proceeds of long-term borrowings 5
Repayment of long-term borrowings (0)
Dividends paid (15)
Net cash provided by financing activities 5
what limitiations do cash flow statements have?
Much of the detailed information is disclosed in
the notes, and therefore careful review of the
notesis needed.
Cash flows can be manipulated.
Cash flow information is past information and
makes no predictions of the future.
