17 SoCF Flashcards
What are the headings in SCF in order
- Operating activities
Investing activities
Financing activities
Summary section
what are operating activities
and the headings that the adjustments are under
The principal revenue producing activities of the entity and other activities that are not investing or financing activities.
Start with: Net profit before tax (adjustments under)
= Operating profit before working capital changes
= Cash generated from operations
= net cash from operating activities
what are Investing activities and examples
The acquisition and disposal of long term assets and other investments not included in cash equivalents.
what are Financing activities and examples
Include external and internal finance of the B
Activities that result in changes in the size and composition of the contributed equity and borrowings of the entity
Some examples of what would be included under these headings are shown in the pro forma.
Start with: Net profit before tax (adjustments under)
= Operating profit before working capital changes
= Cash generated from operations
= net cash from operating activities
what are the Adjustments to come to Operating profit before working capital
Start with: Net profit before tax (adjustments under)
Adjustments for:
Interest expense X
Depreciation/ amortisation X
Increase/Decrease in provisions X/(X)
= Operating profit before working capital changes
and also removing anything that would be included elsewhere in the cash flow
Start with: Net profit before tax (adjustments under)
= Operating profit before working capital changes
= Cash generated from operations
= net cash from operating activities
what are the Adjustments to come to cash generated from Operations (AFTER working capital)
= Operating profit before working capital changes X
Increase in trade receivables (X)
Increase in inventories (X)
Increase in trade payables
= Cash generated from operations
Start with: Net profit before tax (adjustments under)
= Operating profit before working capital changes
= Cash generated from operations
= net cash from operating activities
what goes into calculation net cash from operating activities
= Cash generated from operations X
Interest paid (X) Income taxes paid (X)
= net cash from operating activities
Headings of SoCF:
1 Operating activities
2 Investing activities
3 Financing activities
4 summary section
what goes into calculation net cash used in investing activities
Purchases of property, plant and equipment (X)
Proceeds of sale of property, plant and equipment X
Purchase of intangibles (X)
Purchase of investments (X)
Interest received (bank)X
Government grant received X
Investment income (div) received X
Headings of SoCF:
1 Operating activities
2 Investing activities
3 Financing activities
4 summary section
what goes into calculation net cash used in financing activities
Proceeds from issue of shares X Proceeds from issue of debt X Redemption of debt (X) Payment of finance lease liabilities (X) Dividends paid* (X)
what are the advantages of cash flow statement
▪ it is difficult to manipulate statement of cash flows; they are real and possess the qualitative characteristic of objectivity (as opposed to subjective profits).
▪ statement of cash flows is an easy concept for users to understand, indeed many users misinterpret statement of cash flow items as being statement of cash flows.
▪ statement of cash flows helps to assess a company’s liquidity, solvency and financial adaptability. Healthy liquidity is vital to a company’s going concern.
▪ many business investment decisions and company valuations are based on projected statement of cashflows.
what are some points you can talk about with regards to interpretation of SoCF
Ideally the statement of cash flows should show a net increase in cash during a period, but it is obviously not as cut and dry as that within a business.
It’s not necessarily a good thing to generate a cash inflow or suffer cash outflow. Most businesses would not survive a prolonged period of net cash outflows. Whilst others who have too much tied up in liquid resources have shareholders who would benefit from a cash outflow for example investing in noncurrent assets or paying a dividend.
Cash balances can also be distorted in the short term by holding back payments to suppliers by a matter of days at the year end, delaying buying inventories or offering settlement discounts for prompt payments, pressing customers for payment- WINDOW dressing
A statement of cash flows alone cannot give enough information to enable a user to know if the entity’s funds are being managed efficiently. Reviewing the year end statement of financial position and considering the relationship between components of working capital and financing would be advisable.
In general net cash from operating activities should be higher than profit from operations due to the effect of the adjustment for depreciation. This may not be the case if the working capital is not being well managed or unusual transactions have taken place.
analysts when looking at SoPL and SoCF, how do they interpret this
The ‘quality’ of a company’s operating profit is said to be confirmed by closely correlated statement of cash flows.
Some analysts take the view that if a company shows a healthy operating profit but has low or negative operating statement of cash flows, there is a suspicion of profit manipulation or creative accounting.
Headings of SoCF:
1 Operating activities
2 Investing activities
3 Financing activities
4 summary section
what goes into summary net cash used in summary
Net cash used in financing activities (X)
Net increase in cash and cash equivalents X
Cash and cash equivalents at beginning of period X
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=Cash and cash equivalents at end of period X
