CHAPTER 10 cash flow statements

Cash flow statementabout the cash flows associated with the company’s main operations and those associated with its investing and financing activities of the period conjunction with bo

CHAPTER 10 Cash flow statements

Contents

Cash flow statement

about the cash flows associated with the

company’s main operations and those

associated with its investing and financing activities of the period

conjunction with both the income statement (performance dimension) and the balance sheet (financial position)

Usefulness of cash flow information

is a significant performance dimension

dynamics of short-term liquidity and

long-term solvency

input for economic decision models

Cash flow versus profit

phenomena

accounting!

outgoing flows of cash, while the balance sheet and income statement emanate from

professional judgement and are not a direct

projection of objective economic data

Liquidity/solvency and cash flows

- Relates to “nearness to cash” of the structure of assets

- Determined by capacity to convert current assets into cash

static financial position data, while cash flows reflect changes in financial position

Relationship with BS and IS

Income statement

A cash flow statement reflects both “profit related” and

“non-profit related” activities (investing and financing) with

an impact on available cash over the period covered in the income statement

Related questions

year? How was this cash used?

satisfying its need for cash during the year?

borrowings, issuing new share capital or by selling fixed assets?

investments or for distribution of dividends?

knowing that the company’s operations have been profitable?

Cash conversion cycles

continuously in a series of short-term and long-term conversion cycles

cycle) relates to the main business

operations

Cash conversion cycles (cont.)

acquisition, renewal and disposal of

intangible and tangible infrastructure and the long-term sourcing of funds

subsequently consumed during several

Fig 10.1 Long-term and short-term cash

flow cycles

Inventory

Work in Progress Sales

Receipts Payments

Procurement

Current payables Inventory Current receivables

Cash and cash equivalents

Main operations

External financing Investing/ Productive

infrastructure

Format and structure of the cash

+ Beginning cash balance

Ending cash balance

Cash flows from operating

cash flow (f.i changes in the level of inventories, receivables, creditors, etc.)

Operating cash flows: Examples

services (cashing in of receivables included)

included)

Operating cash flows – Direct versus indirect method

2 methods for identifying and presenting the operating cash flow:

most important categories of gross operating cash

inflows and cash outflows

determined by adjusting the (net) profit figure for the

3 types of differences

Direct method - Example

Cash paid to suppliers and employees (27,600)

Net cash flow from operating activities 1,380

Indirect method - Example

Adjustments for:

3,740

Working capital changes:

Increase in trade and other receivables (500)

Income taxes paid

Net cash flow from operating activities

(1170) 1,380

Cash flow proxy

Cash flow proxy (bis)

Add back:

Deduct:

Cash flows from investing

activities

and disposal of long-term tangible and

intangible assets and other investments

indication of the expansion or downsizing of operating capacity

Cash flows from financing

activities

composition of contributed capital and financial debt

of the company

 Receipts from issuing new shares or bonds

 Receipts from new bank loan

 Payments for buy-back of shares

 Repayments of loans

 Payments of interest and dividend

Constructing a cash flow statement

in cash

(equivalents) transaction by transaction

other accounts, knowing that each transaction with

an impact on cash also affects a non-cash account

flow statement according to the formal rules

Applying step 2

derived from balances in the IS, while information for the two other principal categories comes from the

Balance Sheet (and details in the Notes)

 Movements in the accounts indicate a change in

financial position and further examination is needed

to determine if they had a cash impact

“accrual-based adjustments” or other “non-cash activities”

Fig 10.2 Classifying balance sheet

movements as inflows or outflows of cash

Illustration - Constructing a CFS (2)

Disposal of fixed assets - Example

Disposal of equipment:

Acquisition cost 275

- Accum depreciation - 200

Net carrying value = 115  Sale at 135

 Result (gain) on disposal = 135 - 115= 20

 Incoming cash flow = 135, composed of a decrease in net carrying value of equipment in the BS (115) and gain on disposal in the IS (20)

Disposal of fixed assets

Incoming cash flows

Cash + Other assets = Liabilities + Owners’equity

Outgoing cash flows

Cash + Other assets = Liabilities + Owners’equity

-Presentational choices

operating or financing activities

included in either operating or investing cash flows

under the indirect method (with implications for the adjustments to be made)

IAS 7 - Direct Method (Extract)

Source: IAS 7 – Cash Flow Statements, Appendices

20X2 Cash flows from operating activities

Cash receipts from customers 30,150

Cash paid to suppliers and employees (27,600)

Cash generated from operations 2,550

Net cash from operating activities 1,380

Cash flows from investing activities

Acquisition of subsidiary X, net of cash acquired (550)

Purchase of property, plant and equipment (350)

Proceeds from sale of equipment 20

Net cash used in investing activities (480)

Cash flows from financing activities

Proceeds from issue of share capital 250

Proceeds from long-term borrowings 250

Payment of finance lease liabilities (90)

Net cash used in financing activities (790)

Net increase in cash and cash equivalents 110

Cash and cash equivalents at beginning of period 120

Cash and cash equivalents at end of period 230

IAS 7 - Direct Method (Extract)

Source: IAS 7 – Cash Flow Statements, Appendices

20X2 Cash flows from operating activities

Cash receipts from customers 30,150

Cash paid to suppliers and employees (27,600)

Cash generated from operations 2,550

Net cash from operating activities 1,380

Cash flows from investing activities

Acquisition of subsidiary X, net of cash acquired (550)

Purchase of property, plant and equipment (350)

Proceeds from sale of equipment 20

Net cash used in investing activities (480)

IAS 7 - Direct Method (Extract- cont.)

Source: IAS 7 – Cash Flow Statements, Appendices

Cash flows from financing activities

Proceeds from issue of share capital 250

Proceeds from long-term borrowings 250

Payment of finance lease liabilities (90)

Net cash used in financing activities (790)

Net increase in cash and cash equivalents 110

Cash and cash equivalents at beginning of period 120

Cash and cash equivalents at end of period 230

* This could also be shown as an operating cash flow

IAS 7 - Indirect Method (Extract)

20X2

Cash flows from operating activities

Net cash from operating activities 1,380

Cash flows from investing activities

Acquisition of subsidiary X net of cash acquired (550)

Purchase of property, plant and equipment (350)

Net cash used in investing activities (480)

Cash flows from financing activities

Net cash used in financing activities (790)

* This could also be shown as an operating cash flow

Source: IAS 7 – Cash Flow Statements, Appendices

IAS 7 - Indirect Method (Extract)

20X2

Cash flows from operating activities

Decrease in trade payables (1,740)

Cash generated from operations 2,550

Source: IAS 7 – Cash Flow Statements, Appendices

IAS 7 - Indirect Method (Extract – cont.)

20X2

Cash flows from investing activities

Acquisition of subsidiary X net of cash acquired (550)

Purchase of property, plant and equipment (350)

Proceeds from sale of equipment 20

Interest received 200

Dividends received 200

Cash flows from financing activities

Proceeds from issue of share capital 250

Proceeds from long-term borrowings 250

Payment of finance lease liabilities (90)

Dividends paid* (1,200)

* This could also be shown as an operating cash flow

Source: IAS 7 – Cash Flow Statements, Appendices