Inventory Reporting: Cash Flow & Balance Sheet (Unit 2)

Cash Flow Statement: Purpose & Structure

• Purpose: report cash inflows and outflows during a period; focus on cash movements, not non-cash items.
• Key classifications:
  • Operating Activities: day-to-day trading cash flows (inflows: cash sales, receipts from accounts receivable, GST receipts, etc.; outflows: cash purchases of inventory, payments to suppliers, GST paid, wages, etc.).
  • Investing Activities: buying/selling non-current assets (inflows: sale of vehicles, computers, etc.; outflows: purchase of shop fittings, office equipment, vehicles).
  • Financing Activities: changes in financial structure (inflows: owner contributions, loans; outflows: drawings, loan repayments).
• Purpose of cash flow statement: assess cash generation, liquidity, and ability to fund operations, debt, and asset investments.
• Important note: only cash transactions are reported; ignore credit/non-cash items.

Classification Headings in the Cash Flow Statement

• Operating Activities
  • Cash inflows: cash sales, receipts from accounts receivable, GST receipts/refunds, other revenue receipts.
  • Cash outflows: cash purchases of inventory, payments to accounts payable, GST paid, operating expenses (advertising, wages, materials, interest, etc.).
• Investing Activities
  • Inflows: sale of non-current assets (e.g., vans, vehicles, computers, furniture).
  • Outflows: purchase of non-current assets (e.g., shop fittings, office equipment, vehicles).
• Financing Activities
  • Inflows: owner contributions, loans received.
  • Outflows: drawings, loan repayments.

Net Cash Flows & Example

• Net increase in cash is the sum of net cash flows from each activity:
  $\text{Net Increase in Cash} = \text{Net Cash Flows}<em>{\text{Operating}} + \text{Net Cash Flows}</em>{\text{Investing}} + \text{Net Cash Flows}_{\text{Financing}}$
• Example: if operating = $14{,}360$, investing = $0$, financing = $-500$, then
  $\text{Net Increase in Cash} = 14{,}360 + 0 - 500 = 13{,}860$

Why Inventory Moves appear in the Cash Flow Statement

• Inventory movements that involve cash (cash purchases, cash sales) affect cash flow and are reported in Operating Activities.
• Cost of Sales (COGS) is not a cash flow by itself; it’s derived from inventory changes and is not shown as a separate cash flow entry.

Reporting for Inventory: Balance Sheet vs. Cash Flow

• Inventory is a current asset on the Balance Sheet; reported at cost and valued via inventory cards and physical count.
• For inventory on the Balance Sheet:
  • Use the Inventory card data and the Balance/Total columns.
  • Report the inventory value that matches the physical count, adjusted for any losses or write-downs.

The Balance Sheet: Purpose & Format

• Purpose: show a firm’s financial position at a point in time (assets, liabilities, owner’s equity).
• Accounting equation: $\text{Assets} = \text{Liabilities} + \text{Owner's Equity}$
• Balance Sheet is accurate as at a specific date (e.g., as at 31 October 2025).
• Title information on the Balance Sheet includes the for whom it is prepared, its type, and the date.

Balance Sheet: Asset Classification & Presentation

• Assets:
  • Current Assets: resources expected to be converted to cash or used within 12 months.
  • Non-current Assets: resources used for more than 12 months (not held for resale).
• Liabilities:
  • Current Liabilities: obligations due within 12 months.
  • Non-current Liabilities: obligations due after 12 months.
• Equality check: $\text{Total Assets} = \text{Total Liabilities} + \text{Owner’s Equity}$

Balance Sheet: Inventory Reporting

• Inventory reporting steps:
  1) Refer to the Inventory card.
  2) Refer to the BALANCE column.
  3) Refer to the 'total' sub-column (Qty × Cost Price).
  4) Use the value from the physical inventory count.

Owner’s Equity: Format on the Balance Sheet

• Typical presentation:
  • Capital - Owner’s name
  • Add: Capital Contribution
  • Add: Net Profit (or Less: Net Loss)
  • Less: Drawings
• If Net Profit is earned, reflect it from the Income Statement; if Net Loss, reflect as deduction.

Inventory Balance Calculations (Conceptual)

• Inventory balance formula (typical flow):
  $\text{Balance at start} + \text{Cash purchases} + \text{Credit purchases} - \text{Purchase returns} = \text{Goods available for sale}$
• Then adjust for
  • Cost of Sales (COGS),
  • Inventory loss, and
  • Balance as per physical count.
• Final Ending Inventory should align with the Balance Sheet (via physical count).

Quick Reference: Key Formulas & Concepts

• Assets = Liabilities + Owner’s Equity
• Net Increase in Cash = Net Cash Flows from Operating + Net Cash Flows from Investing + Net Cash Flows from Financing
• Inventory on Balance Sheet = cost-based value from inventory cards or physical count (whichever is appropriate), reported as a Current Asset.
• Cash Flow Statement excludes non-cash items (e.g., credit sales, GSTowed, etc. beyond cash receipts/payments).

Practice Contexts (Exercises 12.3 & 12.5 – Overview)

• Exercise 12.3: Wherelslt Maps (March 2030)
  • Prepare: Cash Flow Statement and Income Statement for March 2030; analyze GST settlement and buying expenses; prepare Owner’s Equity section; calculate Gross Profit Margin and Net Profit Margin; compare to industry averages (Gross Profit Margin 25%, Net Profit Margin 5%).
• Exercise 12.5: Baxter’s Books (2030)
  • Prepare: Cash Flow Statement and Income Statement for 2030; discuss why trading firms show Gross Profit in the Income Statement; prepare Owner’s Equity section; compare margins (Gross 40%, Net 12%).

Quick Margins (Industry Benchmarks)

• Gross Profit Margin = $\frac{\text{Gross Profit}}{\text{Sales}}$
• Net Profit Margin = $\frac{\text{Net Profit}}{\text{Sales}}$
• Use these to comment on performance relative to industry norms.

Learning Review (Purpose)

• Remember the three reports: Cash Flow Statement, Income Statement, Balance Sheet.
• Focus on how inventory affects cash flows (operating) and inventory value on the Balance Sheet.
• Understand classification headings and the flow of information between journals, the cash flow statement, and the balance sheet.