The Cash Flow Statement

Cash flow

The actual flow of cash into or out of a business.

Where a business ends a period with more cash

than at the beginning of the period, that would

be a positive cash flow, and if less, a negative

cash flow.

Cash

For the purpose of these notes, cash means

actual cash on hand including coins, notes and

cheques received but not banked, plus balances

held at commercial banks in current, call or

deposit accounts.

Cash basis of accounting

A means of accounting for business

transactions whereby only the cash aspect of

the transaction is recorded. For example, if a

sale is made, no record is made in the books of

account until the cash is received for that sale.

This is not an acceptable method of accounting

except for very small businesses.

Accrual basis of accounting

All business transactions that affect the

accounting system are recorded as soon as such

transactions are legally enforceable regardless

of when the cash will be received or paid.

Direct method

Affects only the ‘cash flows from operations’

section of the cash flow statement. Shows the

actual cash received from customers less cash

paid to suppliers and employees

Indirect method

Usually shown only as a note to the cash flow

statement, to reconcile the cash flows from

operations to the net income after tax.

non-cash items

depreciation and profits or losses on the sale of fixed assets.

examples of non-trading items

Taxation paid, interest paid and dividends paid

How to get total cash flows from operating activities.

The total of cash from trading activities less cash outflows from non-trading items

The section of the cash flow statement is divided into two parts

▪Cash generated from trading operations, which comprises cash received

from customers less cash paid to suppliers and employees.

▪ Cash inflows and outflows from operating activities that are not part of

trading operations, e.g. taxation paid, interest paid

cost of sales

opening inventory + purchases –closing inventory.

purchases

cost of sales – opening inventory + closing inventory.

payments to suppliers and employees

purchases + operating expenses + opening accounts payable – closing accounts payable

Statement of Cash Flows

FRS 18 / IAS 7 Compliant Format

3 headings under Statement of Cash Flows Format

1. Cash flows from operating activities

2. Cash flows from investing activities

3. Cash flows from financing activities

3 recordings at bottom of Statement of Cash Flows Format

1. Net increase (decrease) in cash and cash equivalents

2. Cash and cash equivalents at the beginning of the period

3. Cash and cash equivalents at the end of the period:

What falls under the heading Cash flows from operating activities

1. Cash receipts from customers: X

2. Cash paid to suppliers and employees: (X)

3. Cash from operating activities before income taxes: X

4. Normal tax paid: (X)

5. Net cash inflow (outflow) from operating activities: X

What falls under the heading Cash flows from investing activities

1. Purchase of additional non-current assets: (X)

2. Acquisition of investments: (X)

3. Proceeds from the sale of non-current assets: X

4. Proceeds from the sale of investments: X

5. Interest received: X

6. Dividends received: X

7. Net cash inflow (outflow) from investing activities: X

What falls under the heading Cash flows from financing activities

1. Proceeds from the issue of share capital / additional capital: X

2. Shares redeemed: (X)

3. Long term borrowings raised: X

4. Long term borrowings repaid: (X)

5. Interest paid: (X)

6. Dividends paid: (X)

7. Net cash inflow (outflow) from financing activities: X

Factor Operating Expenses

Distribution + Admin + Other

Adjust for Payables

Add Opening Payables: Less Closing Payables:

Remove Non-Cash Items

Less Depreciation

Less Loss on sale / Add Profit on sale