Statement of Cash Flows Flashcards
Profit and cash flow
What are the formulas for them?
Cash flow = Cash in – Cash out
Profit = Income – Expenses
Income = Value of goods and services sold during a period
Expenses = value of goods and services consumed in generating income
Profit is not a measure of cash flow and…
Cash flow is not a measure of profit
Cash flow ≠ Profit
Some transactions involve cash only (no impact on profit)
E.g. a company issues 10,000 £1
ordinary shares for £3.50 each
What is the double entry?
E.g. a company issues 10,000 £1 ordinary shares for £3.50 each
What is the double entry?
Dr Bank 35,000
Cr Ordinary share capital 10,000
Cr Share premium reserve 25,000
Cash flow ≠ Profit
Some transactions involve profit only (no impact on cash flow)
Eg Depreciation for the year has been calculated at £16,000.
What is the double entry?
Eg Depreciation for the year has been calculated at £16,000.
What is the double entry?
Dr Depreciation (PoL) 16,000
Cr Accumulated depreciation (SoFP) 16,000
Cash flow ≠ Profit
Some transactions involve profit and cash but at different times
Eg a year end accrual for audit fees of £40,000.
What is the double entry at the year end?
What is the double entry when the fee is paid ?
What is the double entry at the year end?
Affects profit this period
Dr Audit (PoL – admin expense) 40,000 Cr Accruals 40,000
What is the double entry when the fee is paid
Affects cash next period
Dr Accruals 40,000
Cr Bank 40,000
Cash flow ≠ Profit
Five transactions are listed below. For each, state the initial effect on profit and on cash flow (i.e. increase/decrease/no effect)
- Purchase of new land for cash
- Sale (£300) of inventory (cost £200) for cash
- Obtain a bank loan
- Buy purchases on credit
- Write off an irrecoverable debt
- Purchase of new land for cash
Profit = No effect
Cash Flow = Decrease
- Sale (£300) of inventory (cost £200) for cash
Profit = Increase by £100
Cash Flow = Increase by £300
- Obtain a bank loan
Profit = No effect
Cash Flow = Increase
- Buy purchases on credit
Profit = No effect
Cash Flow = No effect
- Write off an irrecoverable debt
Profit = Decrease
Cash Flow = No effect
The importance of cash (4)
Cash flow is vital for the survival of a company
- Allows growth as opportunities can be taken
- Good relationship with suppliers and customers
You can be highly profitable but still go bust
- Overtrading – business runs out of cash due to rapid growth and poor cash management
Cash more easily understood
Cash less easily manipulated
Statement of cash flows – regulatory requirements
- IAS1 requires a statement of cash flows to be included in a set of financial statements for a company
- IAS7 sets out the _____________ requirements
- The cash flow statement analyses
changes in ‘cash and cash equivalents’ during a period. - _________ and _________ methods can be used – __________ most common and used for ACC1010
- IAS1 requires a statement of cash flows to be included in a set of financial statements for a company
- IAS7 sets out the presentation requirements
- The cash flow statement analyses
changes in ‘cash and cash equivalents’ during a period. - Direct and Indirect methods can be used – Indirect most common and used for ACC1010
Statement of cash flows – value to users
- Statement of cash flows are needed to provide information about __________, ______________ and ___________ _______________.
- They are prepared from the statement of ____________ ___________ and the statement of __________ __ ______.
- Therefore ____ ____ information
- Highlights how the business has _________ _____ and _____ ____ ______ over the year
- To make more useful, breaks down cashflows arising from ____________ activities, _____________ activities and _____________ activities
- Statement of cash flows are needed to provide information about liquidity, viability and financial adaptability.
- They are prepared from the statement of financial position and the statement of profit or loss.
- Therefore not new information
- Highlights how the business has raised cash and paid out cash over the year
- To make more useful, breaks down cashflows arising from operating activities, investing activities and financing activities
Cash flows from interest and dividends
Per IAS7 cash flows from interest and dividends paid and received must be:
- disclosed ___________ in a statement of cash flows
- treated as either _________, ________ or __________ activities
- classified in a __________ manner from one year to the next
In this module always treat as follows:
- __________ _______ and __________ ______ on _______________ _____________ ________ as an operating activity
- ______________ _________ and _________ ____________ as an investing activity
- _____________ _______ __ _________ _________ and _____________ ____________ ________ as a financing activity
- Per IAS7 cash flows from interest and dividends paid and received must be
- disclosed separately in a statement of cash flows - treated as either operating, investing or financing activities - classified in a consistent manner from one year to the next
- In this module always treat as follows
- Interest paid and dividends paid on redeemable preference shares as an operating activity - Interest received and dividends received as an investing activity - Dividends paid on ordinary shares and irredeemable preference shares as a financing activity
Cash flows from operating activities, investing activities and financing activities
Operating activities
- Shows users how much cash has been
- Generated from normal trading activities - Paid in tax and interest
- Useful to users
- Shows ability to generate sufficient cash to meet normal demands
Investing activities
- Shows users how much cash has been
- invested in resources - received from past investments
- Useful to users
- To predict future income and cash flow generation
Financing activities
- Shows users how much cash has been
- Used to repay debt - Received from new finance
- Useful to users
- To predict claims on future cash flow e.g. interest, dividends
Where do the figures come from?
SOFP and PoL
BUT
Need actual cash flow so some adjustments may be needed
Cash inflow from operations is…
Derived from a reconciliation
WHY do we adjust for changes in working capital? (4)
- Accounts are prepared under the accruals basis following the matching principle
- Therefore statement of profit or loss shows revenue earned in a period, not the cash received from sales.
- Similarly, it shows the expenditure incurred in generating the revenue, not the cash actually paid
- The statement of cash flows ignores accruals and simply looks at cash in versus cash out
HOW do we adjust for changes in working capital?
Increases in inventory or receivables: (3)
Increases in payables: (2)
Increases in inventory or receivables:
- Increase in inventory means more cash has been spent on buying inventory therefore the company has less cash
- Increase in receivables means more of the revenue in the PoL has not been collected therefore the company has less cash
- an increase in inventory or receivables must be subtracted from operating profit (cash OUTflow)
Increases in payables:
- Increase in payables means more of the purchases in the PoL have not been paid therefore the company has more cash
- an increase in payables is added to operating profit (cash INflow)
HOW do we adjust for changes in working capital?
Increase during the year?
Decrease during the year?
Inventory
Receivables
Payables
Inventory
Increase during the year = Cash Outflow
Decrease during the year = Cash Inflow
Receivables
Increase during the year = Cash Outflow
Decrease during the year = Cash Inflow
Payables
Increase during the year = Cash Inflow
Decrease during the year = Cash Outflow
