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Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Contents
Introduction The cash flow statement Usefulness of cash flow information Cash flow cycles Format and structure of the cash flow statement Cash flow from operating activities Cash flows from investing and financing activities Direct and indirect method for operating cash flows Constructing a cash flow statement Disposal of fixed assets Presentational differences
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Cash flows are factual details of incoming and 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
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Relates to nearness to cash of the structure of assets Determined by capacity to convert current assets into cash Relates to future availability of cash in order to settle financial liabilities on due date Determined by timing and uncertainty of expected future cash payments and cash receipts
Solvency
-
Liquidity and solvency ratios are determined on static financial position data, while cash flows reflect changes in financial position
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
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
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Related questions
1. 2.
3.
4.
5.
From which sources did the company raise cash last year? How was this cash used? Were the normal operating activities capable of satisfying its need for cash during the year? If not, is the shortage of cash compensated by new borrowings, issuing new share capital or by selling fixed assets? Is a surplus of cash used for repayment of debt, for investments or for distribution of dividends? Why has the balance of cash available decreased, knowing that the company s operations have been profitable?
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
OPERATING ACTIVITIES
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Productive
Procurement
Work in Progress
Sales
Current payables
Inventory
Current receivables
Payments
Receipts
External financing
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
(xxxxxxxxxxxxxx)
xxxxxxxxxxxxxx
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Gain on asset disposal (xxxxx) Net change in non-cash working capital (xxxxx) Cash flow proxy xxxxxxxxxxxx
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Payments for newly acquired equipment Receipts from the disposal of a building Payments for new investments
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
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
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
2.
3.
Determine the net change in cash Compare beginning and ending balance Identify all transactions of the period leading to a change in cash Direct: analyze movements in the accounts of cash (equivalents) transaction by transaction Indirect: explain net change of cash by analyzing all other accounts, knowing that each transaction with an impact on cash also affects a non-cash account Use the information (of step 1 and 2) to construct a cash flow statement according to the formal rules
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Applying step 2
Information for operating cash flow is primarily 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 Check if balances have been impacted by accrualbased adjustments or other non-cash activities
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
240 85 9 17 18
240 85 9 17 18
Financing Equity Share capital Reserves X2 profit Liabilities Trade payables LT debt
600 90
__
__ __
50 3 110 266
50 3 110 266
59 105 854
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Sale at 135
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
+ -
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Presentational choices
Interest paid can be classified under either operating or financing activities Interest and dividends received can be included in either operating or investing cash flows Starting from net profit or operating profit under the indirect method (with implications for the adjustments to be made)
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
2,550
(270) (900)
1,380
(550) (350)
20 200 200
(480)
Source: IAS 7
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Source: IAS 7
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Source: IAS 7
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Source: IAS 7
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
cont.)
20X2
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts