Semester 2 Week 9 PP (Cashflows) Flashcards
What are the three parts of the statement of cashflows?
Cashflows from operating activities:
The cashflows from the day to day trading activities of the business. For example if the business was a greengrocer the cash in and out from selling fruit and vegetables, if it was a sheet metal manufacturer the cash in and out from manufacturing sheet metal etc.
What two methods can you use for operating activities in cashflows?
There are two allowable ways to lay this out:
The direct method
The indirect method
Both are used in real life, both are examinable. You need to know how to do both.
The indirect and direct methods only differ as far as the “net cash from operations line” from this point onwards they are exactly the same.
Remember the indirect and direct methods give the same answer they are different ways to calculate it. You should get the overall same figure.
What does the direct method for operating activities contain?
Direct: This is calculated by:
Cash received from customers
Less
Cash paid to suppliers and employees
Cash received from customers: Calculated by
Opening receivables
+
Revenue
-
Closing receivables
Cash paid to suppliers and employees:
A bit more complex this
Opening payables
+
Purchases
+
CASH expenses
-
Closing payables
Do purchases normally appear in the financial statements?
No – normally cost of sales
So will need to rearrange
COS = OI + Purchases – CI
Purchases = COS + CI - OI
Remember we’re also dealing with cash expenses so will have to eliminate non cash items such as:
Depreciation
Gain/loss on sale
Amortisation
Etc.
What is the cash received from customers?
Stevens Limited
Statement of financial position (extract) as at 31/3/X4
20X4 20X3
Inventories 400,000 300,000
Trade payables 320,000 290,000
The Operating activities as the direct method/
First calculate purchases
COS = OI + Purchases – CI
£1,200,000 = £300,000 +purchases - £400,000
Purchases = £1,300,000
Admin and distribution expenses are £300,000 but this includes £100,000 of depreciation and £20,000 loss on sale.
These are not cash items therefore cash expenses are £800,000 - £100,000 - £20,000 = £680,000
Cash paid to suppliers and employees:
Opening payables 290,000
+
Purchases 1,300,000
+
Cash expenses 680,000
_
Closing payables 320,000
Cash paid to suppliers and employees 1,950,000
Cash received from customers 2,250,000
Cash paid to suppliers and employees (1,950,000)
Net cash from operations 300,000
What do you do for the indirect method?
The indirect method starts with the profit then adjusts for any non-cash items.
Then working capital movements.
Net profit £300,000
Admin and distribution costs includes depreciation of £100,000 and a loss on sale of £20,000
so it would then be:
Net profit 300,000
Plus depreciation 100,000
Plus gain on sale 20,000
Before working capital changes 420,000
Working capital changes:
We have to consider what impact working capital changes have on cash.
Let’s consider inventories first.
If inventories have gone up (as in this case) this means they have bought more – so cash has gone down.
If inventories have gone down then they must have sold more so cash has gone up.
Now receivables – if receivables have gone up (as in this case) they have received less cash – more money is tied up in receivables.
But if receivables have gone down it must mean they have received payments from customers – so cash has gone up.
Now payables.
If payables have gone down, it must mean the company has been paying off amounts owed so a decrease in cash.
Whereas if payables have gone up (as in this case) then it means that the company has not been paying off amounts due – so cash has gone up.
Therefore:
Increases in current assets = decrease cash
Decreases in current assets = increase cash
Increases in current liabilities = increase cash
Decreases in current liabilities = decrease in cash
Stevens Limited
Statement of financial position (extract) as at 31/3/X4
20X4 20X3
Inventories 400,000 300,000
Trade payables 320,000 290,000
The operating activities as the indirect method.
How do you calculate the tax paid?
We calculate tax paid by taking the opening tax payable + tax charge – closing tax payable.
What is the tax paid?
Tax paid = 270,000 + 300,000 – 320,000
= £250,000
How do you calculate the interest paid?
This is calculated in a similar way to tax = opening interest payable + finance cost – closing interest payable
Interest paid = 180,000 + 700,000 – 120,000
= £760,000
How are interest and tax laid out?
Interest and taxation appears underneath net cash from operating activities, as per the image.
What is the investing activities section?
This covers the long term investments of the company – the most common examples are:
Purchases and sales of PPE
Purchases and sales of intangible non-current assets
Loans given
The most common approach we will use here is what we call the missing figure approach
We start with the opening figure
Adjust for what we know about
This gives us an expected value
We compare this to the actual closing value
The difference or missing figure is our cashflow
What would be the investing activities here?
Now the sales:
Sale proceeds ? (missing figure)
NBV 40,000
Loss on sale (10,000)
So sale proceeds must be £30,000
Nevada Limited Statement of cashflows (extract) for the year ended 31 March 20X8
Investing activities
Purchase of PPE (410,000)
Proceeds from sale of PPE 30,000
Net cash used in investing activities (380,000)
What is the financing activities section?
The final heading is financing activities. This is the cash used and generated from how the company is financed, including:
Dividends paid
Loans received and paid off
Proceeds of share issues
What would be the financing activities?
The loan has increased (2,000,000 – 1,300,000 = 700,000) meaning they must have borrowed more money – therefore a cash inflow.
The bonds, however, have gone down (1,200,000 – 700,000 = 500,000) meaning that they must have paid off some of the bonds, therefore a cash outflow.
What would be the net cashflow movement?
Our net cash movement should be the difference between the opening and closing cash on the statement of financial position.
