Week 8 - The statement of cash flows Pt2 Flashcards
What are financing activities in the context of cash flow?
Financing activities are transactions that result in changes in the size and composition of a company’s equity and borrowings. These activities are related to how the company is financed and how it manages its capital structure.
What are the main cash flows from financing activities (CFF)?
Proceeds from issue of shares → cash inflow
Share buybacks (repurchase of shares) → cash outflow
Proceeds from borrowings (e.g., bank loans, bonds) → cash inflow
Repayment of borrowings (loan repayments, debt repayment) → cash outflow
Interest paid (if not included in CFO) → cash outflow
Dividends paid → cash outflow
Why is it important to separately disclose CFF?
The separate disclosure of CFF is crucial because it helps users of the financial statements understand:
How a company is financed
The company’s capital structure changes
The claims on future cash flows by creditors and shareholders, such as dividends and interest payments
How does interest paid affect financing activities?
Interest paid may be included in CFO if it’s related to operating activities (e.g., operating loans).
If it’s not included in CFO, it’s classified as part of CFF because it reflects payments to creditors related to financing.
What does Cash Flow from Financing Activities reveal?
CFF helps in understanding:
How the company is raising capital (e.g., issuing shares, borrowing)
How it is returning capital to shareholders or creditors (e.g., share buybacks, loan repayments, dividends)
The company’s ability to meet future financial obligations (interest and debt payments)
What’s the connection between CFF and predicting future cash flows?
CFF provides insight into how the company plans to meet its future financial obligations (interest and debt repayments), as well as how it is managing its equity base and debt financing, which are critical for assessing future solvency and liquidity.
What are the cash flows from financing activities (CFF) for GRFL Trading based on the provided information?
The components of CFF for GRFL Trading include:
Loan borrowed (increase in cash due to the new loan)
Dividend paid (cash outflow to owners)
Interest paid (cash outflow due to interest payments)
How do you treat proceeds from the issue of shares in GRFL Trading?
There is no change in share capital over the two years, so no new shares were issued, and thus there is no cash inflow from share issuance.
What about share buybacks for GRFL Trading?
Since there is no change in share capital, no shares were repurchased, and therefore there is no cash outflow from share buybacks.
How is the proceeds from borrowings accounted for?
The loan borrowed results in an increase in cash. The cash inflow is the amount of the new loan that was borrowed by GRFL Trading.
How do you treat interest paid in CFF for GRFL Trading?
The interest paid of €20,000 is a cash outflow under CFF. This reconciles with the interest expense of €25,000 in the Income Statement (I/S) and the interest payable of €5,000 in the Balance Sheet (B/S).
How are dividends paid accounted for in CFF for GRFL Trading?
The dividends paid of €110,000 are a cash outflow under CFF, as they represent payments made to the company’s shareholders.
How is the total cash flow from financing activities (CFF) calculated for GRFL Trading?
The total CFF is the sum of the following:
Loan borrowed (cash inflow from new loan)
Dividend paid (cash outflow to owners)
Interest paid (cash outflow for interest payments)
So the CFF will be
CFF = Loan borrowed - dividend paid - interest paid
Are the following CFO (Cash Flow from Operating Activities)
Dividends received
Dividends paid
Interest paid
Acquisition of plant and equipment
Proceeds from sale of plant & equipment
Repayment of borrowings
Payments to suppliers
Payments to employees
Receipts from the issue of shares
dividends received
interest paid (If interest is paid on operating loans or debt related to operating activities)
payments to suppliers
payments to employees
Are the following CFI (Cash Flow from Investing Activities)
Dividends received
Dividends paid
Interest paid
Acquisition of plant and equipment
Proceeds from sale of plant & equipment
Repayment of borrowings
Payments to suppliers
Payments to employees
Receipts from the issue of shares
acquisition of plant and equipment
proceeds from sale of plant & equipment
Are the following CFF (Cash Flow from Financing Activities)
Dividends received
Dividends paid
Interest paid
Acquisition of plant and equipment
Proceeds from sale of plant & equipment
Repayment of borrowings
Payments to suppliers
Payments to employees
Receipts from the issue of shares
dividends paid
interest paid (If interest is related to borrowings that finance capital (loans or debt for financing)
repayment of borrowings
receipts from the issue of shares
How do you derive Cash Flow Information from the other financial statements?
You can derive the Statement of Cash Flows (SCF) from the Balance Sheets and the Income Statement (I/S). Here’s a summary of the process:
Start with the Income Statement (I/S):
The net profit or profit before tax (from the I/S) is the starting point for Cash Flow from Operations (CFO) in the Statement of Cash Flows.
Adjustments are made for non-cash items (e.g., depreciation, amortisation) and changes in working capital (e.g., inventories, receivables, payables).
Use the Opening and Closing Balance Sheets:
The changes in working capital items (e.g., inventory, receivables, payables) are derived from the Opening and Closing Balance Sheets. The changes show how cash has been used or generated in day-to-day operations.
For Investing Activities (CFI), you look at changes in non-current assets (like the acquisition or disposal of property, plant, and equipment).
For Financing Activities (CFF), you analyze changes in debt and equity (e.g., new borrowings, repayments, share issues, or dividend payments).
What financial statements do you need to derive cash flow information?
Balance Sheets: The opening and closing balance sheets provide information about changes in assets, liabilities, and equity.
Income Statement (I/S): The profit or loss from operations (before tax) is the starting point for cash flow from operations (CFO).
Statement of Cash Flows: The information from the I/S and Balance Sheets is used to create the SCF.
What are the general steps to derive Cash Flow from Operations (CFO)?
Start with Net Profit or Profit Before Tax from the Income Statement.
Adjust for Non-Cash Items: Add back non-cash items like depreciation and amortization.
Adjust for Changes in Working Capital: Analyze the changes in current assets (like inventories and receivables) and current liabilities (like payables) from the Opening and Closing Balance Sheets.
Account for Non-Operating Profit/Loss: If any non-operating profit or loss is included (e.g., from asset sales), exclude them from the operating cash flow.
How do you derive Cash Flow from Investing Activities (CFI)?
Use the Balance Sheets to examine changes in non-current assets (e.g., property, plant, equipment).
Identify purchases (increases in assets) and sales (decreases in assets) of long-term assets.
Also, include cash inflows from the sale of investments (if applicable)
How do you derive Cash Flow from Financing Activities (CFF)?
Examine changes in equity and borrowings between the Opening and Closing Balance Sheets.
For instance:
Proceeds from borrowings: Cash inflows from new loans.
Repayments of borrowings: Cash outflows from loan repayments.
Equity transactions: Cash inflows or outflows from issuing or buying back shares.
Dividends: Cash outflows from dividend payments to shareholders.
Why is the Statement of Cash Flows important?
It reconciles the changes in cash balances between the Opening and Closing Balance Sheets.
It provides insights into the liquidity, solvency, and financial flexibility of the company.
It helps users understand how the company generates and uses cash for operations, investing, and financing activities.
Statement of cash flows worked example
T. Bone – Income Statement for the y/e 30 June 2019 £ £
Gross profit 57,351
Less: Expenses
Wages 18,930
Motor expenses 6,582
Loan interest 600
Bad debts written off 650
Increase in provision for doubtful debts 240
Loss on sale of motor van 570
Depreciation 1,090
Total expenses (28,662)
Net profit for the year 28,689
Other information:
The provision for doubtful debts was £600 for 2018 and £840 for 2019
The proceeds from selling the motor van were £2,300
Net profit for the year is given as £28,689.
Depreciation is a non-cash expense, so we add back the depreciation figure of £1,090.
Loss on sale of motor van: Since this is a non-cash item, we add back the loss on sale of £570 (since it was deducted in the income statement).
Increase in provision for doubtful debts: We have an increase in the provision for doubtful debts from £600 (2018) to £840 (2019). The increase is £240, which we add back as it was deducted in the income statement but is a non-cash expense.
Provision for doubtful debts: The change in the provision for doubtful debts was £240, so we add this £240.
Bad debts written off: This is a non-cash adjustment because it doesn’t affect cash directly, so we add back the amount of £650.
We will now use all the information provided to calculate the Cash Flow from Operations (CFO).
Cash Flow from Operating Activities (CFO) Calculation:
Start with net profit:
£28,689
Adjust for non-cash items:
Add Depreciation: £1,090
Add Loss on sale of motor van: £570
Add Increase in provision for doubtful debts: £240
Add Bad debts written off: £650
Adjust for changes in working capital:
The change in provision for doubtful debts: £240 (this is already reflected in the previous step)
No changes in other working capital items like receivables, payables, or inventories mentioned, so no further adjustment needed.
Proceeds from sale of motor van: £2,300 is a cash inflow from investing activities, so this is included in the investing section.
Loan interest: The interest paid is £600, which would be included under CFF if not part of CFO. Since interest is often included in operating activities, we could exclude it from CFF, but if required, it will be cash outflow from financing.
done?
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