Statement of cash flows Flashcards
What are the objectives o the statement of cash flows?
- to ensure that all entities provide information about the historical changes in cash and cash equivalents by means of a statement of cash flows
- to classify cash flows during the period between those arising from operating, investing and financing activities
Definition of cash
- cash on hand ( including overdrafts) and on demand deposits
Definition of cash equivalents
- short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value
Reconciliation from profit before tax to cash generated from operations
Profit before tax x
Adjustments for:
Finance costs x
Investment income (x)
Depreciation x
Profit/loss on sale of non-current assets (x)/x
Provisions increase/decrease x/(x)
Government grant amortisation (x)
Increase/decrease in prepayments (x)/x
Increase/decrease in accruals x/(X)
Operating profit before working capital changes x
Increase/decrease in inventories (x)/x
Increase/decrease in trade receivables (x)/x
Increase/decrease in trade payables x/(X)
Cash generated from operations x
Cash flow from operating activities
Cash generated from operations x
Interest paid (x)
Tax paid (x)
Cash flow from investing activities
Purchases of property, plant and equipment (x)
Proceeds of sale of property, plant and equipment x
Proceeds from government grants x
Interest received x
Dividends received x
Cash flows from financing activities
Proceeds from issue of shares x
Proceeds from long-term borrowings x
Payment of lease liabilities (x)
Dividends paid (x)
T-account for tax
Debit: Tax paid (balance)
c/d current tax
c/d deferred tax
Credit: b/d current tax
b/d deferred tax
SPL: tax expense
OCI: tax on revaluation
What include investing cash flows?
- cash paid for property, plant and equipment and other non-current assts
- cash received on the sale of property, plant and equipment and other non-current assets
- cash paid for investments in or loans to other entities
- dividends received on investments
T-account for Property, plant and equipment
Debit:
Balance b/d
Revaluation
New right-of-use assets
Assets purchased (balance)
Credit:
Depreciation
Disposal (at carrying amount)
Balance c/d
What include financing activities cash flow?
- receipts from issuing shares or other equity instruments
- receipts form issuing debentures, loans, notes and bonds and from other long-term and short-term borrowings ( other than overdrafts, which are normally included in cash and cash equivalents)
- repayments of amounts borrowed
- the capital element of lease rental payments
T-account of lease liability
Debit
Lease payment (balance)
c/d current liability
c/d non-current liability
Credit
b/d current liability
b/d non-current liability
new lease values (debit to asset)
T-account of retained earnings
Debit
Dividend paid (balance)
c/d
Credit
b/d
Profit for the year
What are the advantages of the statement of cash flows?
- making judgements on the amount, timing and degree of certainty of future cash flows
- it gives an indication of the relationship between profitability and cash-generating ability, and thus of quality of the profit earned
- to assess and compare the present value of future cash flow of entities
- with a statement of financial position provides information on liquidity, viability and adaptability
- cash flows cannot be manipulated easily
Limitations of the statement of cash flows
- based on historical information
- scope of manipulation, e.g. paying suppliers later
- necessary for survival in the short-term, but in order to survive in the long-term a business must be profitable
