Unit 3

Purposes of cash flow statements

Purposes of cash flow statements

prediction of future cash flow, evaluation of managment decisions, relationship of bet income to cash flow, shows how the company is able to pay for its operations and future growth

Operating cash flow

Creating of revenue, expenses, gains and losses

Investing cash flow

Any inflows or outflows from a company’s long-term investments

Financing

Cash obtained and spent to equity investors and creditors

Operating cash flow calculation

• Net profit is the starting profit

• Non-cash transactions are reversed

• Cash transactions which relate to operations, but are not included in net profit are added/deducted

Rule of investing cash flow

Company should re-invest at a minimum the amount of depreciation per year, so the total assets don’t get smaller

Free cash flow

Operating cash flow that can be freed up for new investment initiatives

Free cash flow formula

Operating cash flow - (cash needed for planned investing activities + scheduled debt repayments + normal dividends payments)

IAS 37

Provisions

Provisions

A present obligation that is a result of a past event, with the timing or amount of the future outflow is uncertain (>50)

Legal obligation

derives from a contract or legislation or operation of law

Constructive obligation

Derives from a company’s past actions whereby it has indicated to third parties that it will accept certain responsibilities

Expected value approach in regard to measurement of provisions

used when the measurement involves a population of items, weighting all possible outcomes by their associated probabilities

IAS 38.

Iintangible assets

Requirement for recognition of Intangible assets

Identifiability, Control by the enterprise, Existence of future economic benefits

Measurement of the initial value of intangible assets, when they were acquired

Acquisition cost, including all necessary costs to make the asset ready for its intended use

Measurement of the initial value of intangible assets, when they were internally generated

Measure through the sum of expenditure from the date when it first meets recognition criteria

Factors that signify the development phase (which must be recognised)

• Technical feasibility

• Intention and ability to use or sell it

• Probable future economic benefits

• Availability of resources

  • Reliable estimation of the expenses

Why can’t internally generated brands be recognized as an asset

Since the expenses are not distinguishable from costs of developing the business in general

Can patents be recognised as an asset

Yes, but issues with identification of the related costs

Goodwill (kinda IFRS 3)

Difference between the acquisition cost and the net (fair) value of the assets acquired

Cash generating unit

Smallest identifiable group of assets that generates cash flow that are independent of other groups of assets

What does the cash generating unit represent

the earning power of company purchased

Goodwill and reduction in value

Impairment only approachH

How is impairment of goodwill is carried out

1. Recoverable amount of the CGU including is compared to its net carrying value including good will

2. Impairment is first allocated to the goodwill and then to the other assets compared to their carrying amount in the CGU

Processing of VAT

It’s netted in the system with each purpose and net amount is paid periodically to the tax authorities

Which financial statements does VAT affect

Only cash flow, it is not a part of revenue or expenses, so the profit remains unaffectedI

IAS 12

Income taxes

Placement of Income taxes on the P&L

Separate line

Other taxes and ancillary tax-related changes position

Component of the expenses in the profit before tax (ex: payroll related taxes)

Corporate income tax payable formula

taxable profit * tax rate

Deferred taxes

Taxes that will be received or paid in future accounting periods

What do the deferred taxes arise from

Some expenses are tax-deductible, some income is not taxable

Pipeline form accounting profit before tax to taxable profit

• • Disallowed expenses

• • Special allowance

• • Non-taxable income

  • = Taxable profit

Effective tax rate formula

income tax figure from P&L / pre-tax accounting profit

Group effective tax rate

Tax expense / Profit before tax

What is a major source of the difference between the effective and the statutory tax rate

Permanent differences (ex: meals and entertainment)