T4&5 - CASH FLOW STATEMENT

purpose of cash flows

provide users of financial statements with a basis to assess the ability of the enterprise to generate cash and cash equivalents and the needs of the enterprise to utilise those cash flows

users of financial statements

make economic decisions, evaluation of the ability of enterprise to generate cash and cash equivalents and the timing and certainty of their generation

statement of cash flows

historical changes in cash and cash equivalents of enterprise

definition of cash

cash on hand and demand deposits

definition of cash equivalent

short-term, highly liquid investments, readily convertible, insignificant risk of changes in value

definition of cash flows

inflows and outflows of cash and cash equivalent

benefits of cash flow information (3)

provides information that enables users to evaluate financial structure and changes in net assets

enhance comparability of reporting operating performance, eliminates effects different accounting treatments for same event

helps answer questions such where cash came from and how much cash was used

operating activity

revenue-producing activities that are not investing or financing, determine profit or less

example of operating activities

cash receipts - sale of goods and rendering of services

cash payments - suppliers and employees

investing activity

acquisition and disposal of long-term assets and investments, intended to generate future income

examples of investing activities

cash receipts and payments to PPE, intangibles and long-term equity investments

financing activity

changes in composition of equity capital and borrowings of enterprise

examples of financing activities

cash proceeds from share issue

cash payments and proceeds of borrowings

examples of operating cash flows

interest received

dividends received

interest paid

dividends paid

direct method

major classes of gross cash receipts and payments are disclosed

indirect method

profit or loss is adjusted for the effects of non-cash, accruals, items of income or expenses associated with investing or financing

cash flow from operating activities

converting profit or loss into cash basis

effects of converting profit into cash basis

non-cash items

working capital changes

examples of non-cash items

depreciation and gain or loss of PPE

working capital changes (increase in debtors)

minus $x from net profit figure to reflect cash not received

working capital changes (increase in creditors)

plus $x to net profit figure to reflect purchases not paid

working capital changes (increase in inventory)

minus $x from net profit figure to reflect cash already paid for unsold goods

interpretation of cash flow statement

operating, investing and financing activities, enable past decision to be evaluated

degree to which cash has been used efficiently

whether sufficient cash is being provided for future operations and growth

investment and finance decisions (4)

management principles, thorough investigations of all alternatives, good budgetary and evaluation procedures

investment decisions (6)

use available cash, obtain more based on risk involved, rate of return, cash flow generated, effect on profitability, in line with business objectives

why is finance needed (3)

day to day, expansion, paying taxes

short-term finance

short-term purposes, day to day

long-term finance

long-term purposes, expansion

how is cash generated

investing - assets sold, face difficulty

financing - acceptable for purchase of long-term, cannot occur for long

operating - generate cash

why is cash flow from operating activities important

represents the principal revenue producing activities of the business, core operations