Financial Reporting
SESSION 8
Cash flow statement
1
Objectives
• Discuss the information content of the cash flow statement
• Understand the classification of cash flows between operating, investing
and financing activities
• Explore the links between the balance sheet, the income statement and
the cash flow statement
• Learn to calculate cash flow from operations using the direct and
indirect method
• Introduce the concept of ‘cash and cash equivalents’
2
Statement of Cash Flows
• Reports operating cash flow as well as other cash flow information
• Provides important information to investors and creditors
• In particular, information about differences in the timing of revenue
and expense recognition under GAAP/IFRS and the associated
cash inflows and outflows
3
Why do we need cash flow statement?
• Net income reported on the Income Statement provides an important
measure of performance
• But, in the absence of cash flow, income does not pay the bills
• Interest and dividend payments, required principal reductions on debt,
capital expenditure for plant and equipment and expansion cannot be
made without cash
• Cash provided by operating activities, also known as operating cash
flow, is a primary source of cash to meet these needs
4
Why do we need cash flow statement?
• In the absence of operating cash flow, cash from other sources can be
used to cover cash requirements
• For example, cash can be obtained from nonrecurring asset sales,
liquidation of marketable securities, new debt or equity financing
• These non-operating sources of cash flow can be relied upon only in
the short run
• In the long run, operating cash flow is the only reliable source of cash
available to meet recurring needs
5
Why do we need cash flow statement?
• Hence, users of financial information need cash flow statement :
– To assess extent to which reported profits have been realised in
the form of cash (quality of earnings)
– To forecast the ability of the entity to generate future cash flows
(inputs for valuation models used in accounting & finance)
– To see if the entity can meet its obligations (liabilities), pay
dividends, and finance new projects with internal sources of money
– To assess the entity’s need for external financing
– To understand the cash aspects of the operating, investing and
financing activities of the business
6
Cash flow statement
• The cash flow statement is a relatively new statement as compared
to B/S and I/S:
– First required by US standard setters (SFAS 95) in 1987
– Required by international standards (IAS 7) since 1992
– The U.K. requires the statement since 1991 (FRS1)
– Germany introduced the cash flow statement in 1999
– In some countries (e.g. Spain) it is still not required for all companies
– Some small and non-listed companies are also not required to prepare the
cash flow statement
7
Cash flow statement
• The cash flow separates changes in cash into three categories:
• Cash flow from operating activities
• Cash flow from investing activities
• Cash flow from financing activities
• The statement sums the actual change in cash during the year
• The actual change refers to the difference between the ending
and beginning cash balances on the balance sheet
8
Structure of the cash flow statement
Net cash from operating activities (CFO)
A
Net cash from investing activities (CFI)
B
Net cash from financing activities (CFF)
C
Net increase/decrease in cash flows
D=A+B+C
Cash and cash equivalents at the beginning of the year
E
Cash and cash equivalents at the end of the year
F=D+E
9
Cash flow from Cash flow from
investing
operating
activities
activities
M&S - Cash flow statement for 2020
end
Cash flow Cash and cash
equivalents
from
at
financing
beginning /
activities
Cash flow from operating activities
Operating activities: cash derived from the main or core revenueproducing activities of the enterprise
Cash inflows (receipts)
–
–
–
–
Sale of goods and rendering of services to customers
Royalties, fees, commissions
Other revenue
Interests and dividend received (optional)
Cash outflows (payments)
–
–
–
–
Purchase of goods and services
Salaries, employee benefits and social expenses
Taxes
Interests on borrowings (optional)
11
Cash flow from investing activities
Investing activities: cash resulting from buying and selling long-term
assets
Cash inflows (receipts)
– Proceeds from sale of non-current assets (intangible, tangible,
investments)
– Repayment of loans made to others
– Interests and dividend received (optional)
Cash outflows (payments)
– Purchase of non-current assets (intangible, tangible, investments)
– Loans made to others
12
Cash flow from financing activities
Financing activities: obtaining and repaying funds from/to shareholders
and long-term debtholders
Cash inflows (receipts)
– Proceeds from issuing shares
– Proceeds from issuing debt
Cash outflows (payments)
–
–
–
–
–
Repayment of debt
Capital repayment in finance leases
Share repurchases
Interests on borrowings (optional)
Dividends paid
13
Preparing Cash flow statement
14
Ollie’s Fish and Chips shop
• Ollie contributes £10,000 in cash
Assets
=
Liabilities
+
Owner’s Equity
Cash
Share capital
+10,000
+10,000
Ollie’s Fish and Chips shop
• The company borrows £3,000 from the bank
Assets
=
Liabilities
Cash
Loans payable
+3,000
+3,000
+
Owner’s Equity
Ollie’s Fish and Chips shop
• The company purchases equipment for £5,000 in cash
Assets
=
Cash
Equipment
-5,000
+5,000
Liab. + O. Equity
Ollie’s Fish and Chips shop
• The company performs service for £12,000. The customer
pays £8,000 in cash and promises to pay the balance at a
later date
Assets
=
Liab. + O. Equity
Cash
Acc. Receivable
Retained earnings
+8,000
+4,000
+12,000
Ollie’s Fish and Chips shop
• The company pays £9,000 for expenses (wages, interest, and
maintenance)
Assets
=
Liabilities
+
Owner’s Equity
Cash
Retained earnings
-9,000
-9,000
Ollie’s Fish and Chips shop
• The pays a dividend of £1,000
Assets
=
Liabilities
+
Owner’s Equity
Cash
Retained earnings
-1,000
-1,000
Recording transactions in a worksheet
Assets =
Cash
+10,000
+3,000
-5,000
+8,000
-9,000
-1,000
6,000
Liabilities +
Acc.
Equipment
receivable
Loans
payable
Owner’s Equity
Share
capital
+10,000
Retained
earnings
+3,000
+5,000
+4,000
4,000
Use the column to prepare
cash flow statement –
statement of changes in the
cash balance.
5,000
3,000
10,000
Use closing balance
row to prepare
balance sheet
+12,000
-9,000
-1,000
+2,000
Balance Sheet at the end of period
Assets
Amount
Cash
Receivables
Equipment
6,000
4,000
5,000
Total Assets
15,000
Liabilities and
Equity
Amount
Loans payable
Share capital
Retained earnings
3,000
10,000
2,000
Total L+E
15,000
Recording transactions in a worksheet
Assets =
Cash
+10,000
+3,000
-5,000
+8,000
-9,000
-1,000
6,000
Liabilities +
Acc.
Equipment
receivable
Loans
payable
Owner’s Equity
Share
capital
+10,000
Retained
earnings
+3,000
+5,000
+4,000
4,000
Use the column to
prepare cash flow
statement – statement of
changes in the cash
balance.
5,000
3,000
Use closing balance
row to prepare
balance sheet
10,000
+12,000
-9,000
-1,000
+2,000
Use the column to
prepare the I/S –
statement of flows
(changes) in equity
Income Statement at the end of period
Amount
Revenues
Expenses
Net income
12,000
9,000
3,000
Recording transactions in a worksheet
Assets =
Cash
+10,000
+3,000
-5,000
+8,000
-9,000
-1,000
6,000
Liabilities +
Acc.
Equipment
receivable
Loans
payable
Owner’s Equity
Share
capital
+10,000
Retained
earnings
+3,000
+5,000
+4,000
4,000
Use the column to
prepare cash flow
statement – statement of
changes in the cash
balance.
5,000
3,000
Use closing balance
row to prepare
balance sheet
10,000
+12,000
-9,000
-1,000
+2,000
Use to prepare the
I/S – statement of
flows (changes) in
equity
Cash flow statement
Operating activities:
Sale of service
Payment for expenses
8,000
-9,000
Cash flow from operating activities
-1,000
Investing activities:
Purchase of equipment
-5,000
Cash flow from investing activities
-5,000
Financing activities:
Owner contributions
Borrowings
Payment of dividends
Cash flow from financing activities
Increase in cash balance
Cash at the beginning of the period
Cash at the end of the period
10,000
3,000
-1,000
12,000
6,000
0
6,000
26
Cash flow from operating activities
• Two methods to calculate cash flows from operating activities:
- Direct method
- Indirect method
• The figure for ‘cash flow from operating activities’ is the same under
direct or indirect method
27
Direct versus indirect cash flow format
• Affects only the operating section of the cash flow statement
• In our example above:
• Direct Cash flow statement
Sale of service
(-) Payment for expenses
8,000
-9,000
Cash flow from operating activities
-1,000
• Indirect Cash flow statement
Net income
(-) Increase in accounts receivable
Cash from operating activities
3,000
-4,000
-1,000
28
Cash flow from operating activities
29
Cash flow from operating activities
• In general, differences between net income and CFO (cash flow from
operations) are captured in operating current assets and operating
current liabilities accounts
• So, to arrive at CFO, certain adjustments need to be made to the
Income Statement items
30
Direct (semi direct) method
How are operating cash receipts and payments obtained?
• From the detailed records of the cash book of the entity
• By adjusting sales, cost of sales and other items in the I/S for
changes in B/S
Income statement
cash item
Accrual basis
+/-
Changes in a related
=
Cash flow
balance sheet item
Cash basis
31
Dukes Company
Income statement
Sales revenue
Cost of sales
Gross margin
Other operating expenses
Personnel expenses
Gross operating profit
Other operating revenues
Depreciation expense
Impairment & provision expense
Gain on sale of non-current assets
Operating profit
Financial revenues
Financial expenses
Operating profit before taxes
Income tax
Profit for the year
X2
14,100
-4,000
10,100
-620
-4,310
5,170
150
-1,400
-100
200
4,020
300
-580
3,740
-1,280
2,460
Steps:
• Identify I/S cash items
Cash sales (exlude credit sales)
• Find related B/S items
• Determine the sign (+, -) of the
change in the related B/S items
to eliminate the accrual
component in the I/S item
32
Dukes Company
Balance sheet
ASSETS
Non-current assets:
Plant, property and equipment
Less accumulated depreciation
Current Assets:
Inventory
Less provision for impairment
Accounts receivable
Cash & Bank
TOTAL ASSETS
X2
X1
14,950
-4,300
10,650
12,000
-3,700
8,300
2,000
-100
1,900
2,300
80
14,930
2,300
0
2,300
1,650
190
12,440
SH.EQUITY&LIABILITIES
Shareholders' equity:
Share capital
Reserves&Ret.profits
Net income/loss
X2
X1
3,200
3,800
2,460
9,540
3,000
3,600
2,780
9,380
4,350
870
250
5,470
3,000
60
0
3,060
TOTAL SH.EQUITY & LiABIL.
14,930
12,440
(1) Including bank overdrafts
950
200
Liabilities:
Financial liabilities (1)
Accounts payable
Non-curr. assets acc payable
33
Dukes Company
Income statement
Sales revenue
Cost of sales
Gross margin
Other operating expenses
Personnel expenses
Gross operating profit
Other operating revenues
Depreciation expense
Impairment & provision expense
Gain on sale of non-current assets
Operating profit
Financial revenues
Financial expenses
Operating profit before taxes
Income tax
Profit for the year
X2
14,100
-4,000
10,100
-620
-4,310
5,170
150
-1,400
-100
200
4,020
300
-580
3,740
-1,280
2,460
1st step
Identify I/S cash items
Because we are identifying only
operating CF
34
Dukes Company
Let’s find cash sales
Start from the income statement
Sales revenue
Cost of sales
Gross margin
Other operating expenses
Personnel expenses
Gross operating profit
Other operating revenues
Depreciation expense
Impairment & provision expense
Gain on sale of non-current assets
Operating profit
Financial revenues
Financial expenses
Operating profit before taxes
Income tax
Profit for the year
X2
14,100
-4,000
10,100
-620
-4,310
5,170
150
-1,400
-100
200
4,020
300
-580
3,740
-1,280
2,460
1st step
Identify I/S cash items
Sales revenue are:
cash sales + credit sales.
35
Dukes Company
2nd step - find related B/S item:
Balance sheet
ASSETS
Non-current assets:
Plant, property and equipment
Less accumulated depreciation
Current Assets:
Inventory
Less provision for impairment
Accounts receivable
Cash & Bank
TOTAL ASSETS
X2
X1
14,950
-4,300
10,650
12,000
-3,700
8,300
2,000
-100
1,900
2,300
80
14,930
2,300
0
2,300
1,650
190
12,440
SH.EQUITY&LIABILITIES
Shareholders' equity:
Share capital
Reserves&Ret.profits
Net income/loss
Liabilities:
Financial liabilities (1)
Accounts payable
Non-curr. assets acc payable
TOTAL SH.EQUITY & LiABIL.
(1) Including bank overdrafts
X2
X1
3,200
3,800
2,460
9,540
3,000
3,600
2,780
9,380
4,350
870
250
5,470
3,000
60
0
3,060
14,930
12,440
950
200
Credit sales = D in Accounts receivable
36
Dukes Company
3rd step - determine the sign (+,-) of the change in the related B/S items:
Balance sheet
ASSETS
Non-current assets:
Plant, property and equipment
Less accumulated depreciation
Current Assets:
Inventory
Less provision for impairment
Accounts receivable
Cash & Bank
TOTAL ASSETS
X2
X1
14,950
-4,300
10,650
12,000
-3,700
8,300
2,000
-100
1,900
2,300
80
14,930
2,300
0
2,300
1,650
190
12,440
SH.EQUITY&LIABILITIES
Shareholders' equity:
Share capital
Reserves&Ret.profits
Net income/loss
X2
X1
3,200
3,800
2,460
9,540
3,000
3,600
2,780
9,380
4,350
870
250
5,470
3,000
60
0
3,060
TOTAL SH.EQUITY & LiABIL.
14,930
12,440
(1) Including bank overdrafts
950
200
Liabilities:
Financial liabilities (1)
Accounts payable
Non-curr. assets acc payable
Cash sales = Sales revenue – D in Accounts receivable
Cash sales = 14,100 – (2,300 – 1,650) = 13,450
37
Direct method
Cash receipts from customers =
X2
Sales revenue
X2
+/-
Change in acc.receivable X2
+ opening acc.receivable
– closing acc.receivable
13,450
+ 14,100
+1,650
- 2,300
Cash received from costumers =
sales revenue – D acc receivable = 14,100 – 650 = 13,450
Note: D = closing balance of an account – opening balance of an account
38
Dukes Company
Let’s find cash purchases
Income statement
Sales revenue
Cost of sales
Gross margin
Other operating expenses
Personnel expenses
Gross operating profit
Other operating revenues
Depreciation expense
Impairment & provision expense
Gain on sale of non-current assets
Operating profit
Financial revenues
Financial expenses
Operating profit before taxes
Income tax
Profit for the year
X2
14,100
-4,000
10,100
-620
-4,310
5,170
150
-1,400
-100
200
4,020
300
-580
3,740
-1,280
2,460
1st step
Identify relevant I/S cash item:
Cost of sales (COS) are part of purchases from
suppliers.
39
Dukes Company
Income statement
Sales revenue
Cost of sales
Gross margin
Other operating expenses
Personnel expenses
Gross operating profit
Other operating revenues
Depreciation expense
Impairment & provision expense
Gain on sale of non-current assets
Operating profit
Financial revenues
Financial expenses
Operating profit before taxes
Income tax
Profit for the year
X2
14,100
-4,000
10,100
-620
-4,310
5,170
150
-1,400
-100
200
4,020
300
-580
3,740
-1,280
2,460
1st step
Identify I/S cash items:
Cost of sales (COS) are part of purchases from
suppliers.
Let’s reconstruct purchases
Remember:
Inventory(t) = Inventory(t-1) + Purchases - COS
Purchases = COS + D inventory
40
Dukes Company
Income statement
Sales revenue
Cost of sales
Gross margin
Other operating expenses
Personnel expenses
Gross operating profit
Other operating revenues
Depreciation expense
Impairment & provision expense
Gain on sale of non-current assets
Operating profit
Financial revenues
Financial expenses
Operating profit before taxes
Income tax
Profit for the year
1st step
X2
14,100
-4,000
10,100
-620
-4,310
5,170
150
-1,400
-100
200
4,020
300
-580
3,740
-1,280
2,460
Identify I/S cash items:
Cost of sales (COS) are part of purchases from
suppliers.
Let’s reconstruct purchases:
Inventory(t) = Inventory(t-1) + Purchases - COS
Purchases = COS + D inventory
We need cash purchases.
Purchases = cash purchases + credit purchases
41
Dukes Company
2nd & 3rd steps
Balance sheet
ASSETS
Non-current assets:
Plant, property and equipment
Less accumulated depreciation
Current Assets:
Inventory
Less provision for impairment
Accounts receivable
Cash & Bank
TOTAL ASSETS
X2
X1
14,950
-4,300
10,650
12,000
-3,700
8,300
2,000
-100
1,900
2,300
80
14,930
2,300
0
2,300
1,650
190
12,440
SH.EQUITY&LIABILITIES
Shareholders' equity:
Share capital
Reserves&Ret.profits
Net income/loss
Liabilities:
Financial liabilities (1)
Accounts payable
Non-curr. assets acc payable
TOTAL SH.EQUITY & LiABIL.
(1) Including bank overdrafts
X2
X1
3,200
3,800
2,460
9,540
3,000
3,600
2,780
9,380
4,350
870
250
5,470
3,000
60
0
3,060
14,930
12,440
950
200
Purchases = COS + D inventory
cash purchases
Purchases = 4,000 + (2,000 - 2,300) = 3,700
credit purchases
42
Dukes Company
Balance sheet
ASSETS
Non-current assets:
Plant, property and equipment
Less accumulated depreciation
Current Assets:
Inventory
Less provision for impairment
Accounts receivable
Cash & Bank
TOTAL ASSETS
X2
X1
14,950
-4,300
10,650
12,000
-3,700
8,300
2,000
-100
1,900
2,300
80
14,930
2,300
0
2,300
1,650
190
12,440
SH.EQUITY&LIABILITIES
Shareholders' equity:
Share capital
Reserves&Ret.profits
Net income/loss
X2
X1
3,200
3,800
2,460
9,540
3,000
3,600
2,780
9,380
4,350
870
250
5,470
3,000
60
0
3,060
TOTAL SH.EQUITY & LiABIL.
14,930
12,440
(1) Including bank overdrafts
950
200
Liabilities:
Financial liabilities (1)
Accounts payable
Non-curr. assets acc payable
Purchases = cash purchases + credit purchases
3,700 = cash purchases + D Accounts payable
credit purchases
cash purchases = 3,700 – (870 – 60) = 2,890
43
Direct method
Cash paid to suppliers of inventory =
Purchases – D acc payable
Cost of sales = purchases – D inventory
or
Purchases = cost of sales + D inventory
Cash paid to suppliers of inventory =
cost of sales + D inventory – D acc payable
Purchases
Cash paid to suppliers of inventory = 4,000 + (2,000 - 2,300) - (870 – 60) = 2,890
44
Dukes Company
Income statement
Sales revenue
Cost of sales
Gross margin
Other operating expenses
Personnel expenses
Gross operating profit
Other operating revenues
Depreciation expense
Impairment & provision expense
Gain on sale of non-current assets
Operating profit
Financial revenues
Financial expenses
Operating profit before taxes
Income tax
Profit for the year
First step:
X2
14,100
-4,000
10,100
-620
-4,310
5,170
150
-1,400
-100
200
4,020
300
-580
3,740
-1,280
2,460
Identify I/S cash items
45
Direct method
Cash paid to employees =
Employees’ expense – D employee payable – D accrued salaries
Cash paid to employees = 4,310
Cash paid for interest/tax =
Interest/tax expense – D interest/tax payable – D accrued interest/tax
Cash paid for interest = 580
Cash paid for tax = 1,280
Cash received from interest =
Interest revenue – D interest receivable
Cash received from interest revenue = 300
46
Direct method
Dukes company
Cash flows from operating activities
X2
Cash received from customers
Cash paid to suppliers
Cash flow from operations
Cash received from other operating revenues
Cash paid to employees
Cash paid for other operating expenses
Cash received from interest revenues
Cash paid for interest expenses
Cash paid for tax
Cash flow from operating activities
13,450
-2,890
10,560
150
-4,310
-620
300
-580
-1,280
4,220
47
Indirect method
Operating profit (Profit before interest and tax)
+/-
Adjustments for non-cash items in profit/loss
+ depreciation/amortisation expense
+ impairment & provision expenses (non-working capital)
- gain on sale of non-current assets
+ loss on sale of non-current assets
+/Adjustments for changes in b/s working capital items
- increases in working capital
+ decreases in working capital
=
Cash flows from operating activities
48
Indirect method: changes in working capital
Working Capital = Current assets (excluding cash) – Current Liabilities
• Increases in working capital use cash: negative adjustment
Year 2
Year 1
Acc receivable
1,500
1,000
Acc payable
3,000
4,500
↑ acc receivable indicates that less cash was collected from customers
↓ acc payable indicates that more cash was used to pay suppliers
• Decreases in working capital provide cash: positive adjustment
Acc receivable
Acc payable
Year 2
Year 1
500
2,000
3,900
2,600
↓ acc receivable indicates that the company collected receivables which provides additional cash
↑ acc payable indicates that suppliers are funding the business operations which requires less cash
49
Indirect method
Dukes company
Cash flows from operating activities
Profit before interest and tax
Depreciation expense
Gain on sale of non-current assets
Interests paid
Interests received
Tax paid
Cash flow from operating activities before
changes in working capital and provisions
Decrease in inventory
Increase in impairment & provisions
Increase in accounts receivable
Increase in accounts payable
Cash flow from operating activities
X2
4,020
1,400
-200
-580
+300
-1,280
3,660
300
100
-650
810
4,220
50
Indirect method: typical adjustments
If starting from ‘operating profit’ or ‘profit before interest and tax’
Profit before interest and tax
xxx
Add depreciation and amortisation expense
xxx
Add (deduct) non-working capital provision (reversal of provision)
xxx
Add (deduct) capital loss (gain)
xxx
Cash from sale of noncurrent assets is reported
under investing activities
51
Indirect method: typical adjustments
If starting from profit for the year
Profit of the year
xxx
Add depreciation and amortisation expense
xxx
Add (deduct) non-working capital provision (reversal of provision)
xxx
Add (deduct) capital loss (gain)
xxx
Add (deduct) interest expense (revenue)
xxx
Add tax expense
xxx
Tax paid is reported under
operational activities
Interest received is reported
under operational or
investing activities
Interest paid is reported
under operational or
financing activities
52
Indirect method: typical adjustments
…
Deduct (add) increase (decrease) in acc receivable
xxx
Deduct (add) increase (decrease) in inventory
xxx
Deduct (add) increase (decrease) in prepayments
xxx
Deduct (add) increase (decrease) in accrued revenues
xxx
Add (deduct) increase (decrease) in acc payable
xxx
Add (deduct) increase (decrease) in unearned revenues
xxx
Add (deduct) increase (decrease) in accrued expenses
xxx
Add (deduct) increase (decrease) in working capital provisions
xxx
Add (deduct) increase (decrease) in advances from customers
xxx
Cash from operations before interest and tax
xxx
Interest paid or received – optional
xxx
Tax paid or received
xxx
Cash from operations
xxx
53
Cash flow from investing and
financing activities
54
Cash flow from investing activities
Changes in non-current assets accounts
• Income statement shows gain/loss on disposal of non-current assets
• Balance sheet shows increase/decrease in non-current assets resulting from
acquisitions, disposal, revaluation, depreciation, impairment
• To obtain the cash flow movements in non-current assets we have to analyse in
detail the changes in non-current asset accounts:
NBV at end = NBV at beginning + Increases – Decreases
↔
NBV at end = NBV at beginning
+ Acquisitions + Revaluation
- NBV of disposals – Impairment loss – Depreciation expense
55
Cash flow from investing activities
• Cash inflows / Receipts from non-current assets
•
Use NBV of disposals of the following equation:
Gain/loss on disposal = Sale proceeds – NBV of disposal
•
Receipts from sale of non-current assets =
Sale proceeds – D acc receivable for non-current assets
Credit sale
• Cash outflows / Payments for non-current assets
•
Use acquisitions
•
Payments for acquisitions of non-current assets =
Acquisitions – D acc payable for non-current assets
Credit purchase
56
Cash flow from investing activities
Dukes company
I/S reveals 200 as gains on sale of non-current assets in cash
Assume the net book value (NBV) of the assets sold is 250
(NBV of the assets sold can be obtained from the analysis of the Non-current assets
account )
57
Dukes Company
Income statement
Sales revenue
Cost of sales
Gross margin
Other operating expenses
Personnel expenses
Gross operating profit
Other operating revenues
Depreciation expense
Impairment & provision expense
Gain on sale of non-current assets
Operating profit
Financial revenues
Financial expenses
Operating profit before taxes
Income tax
Profit for the year
X2
14,100
-4,000
10,100
-620
-4,310
5,170
150
-1,400
-100
200
4,020
300
-580
3,740
-1,280
2,460
58
Dukes Company
Balance sheet
ASSETS
Non-current assets:
Plant, property and equipment
Less accumulated depreciation
Current Assets:
Inventory
Less provision for impairment
Accounts receivable
Cash & Bank
TOTAL ASSETS
X2
X1
14,950
-4,300
10,650
12,000
-3,700
8,300
2,000
-100
1,900
2,300
80
14,930
2,300
0
2,300
1,650
190
12,440
SH.EQUITY&LIABILITIES
Shareholders' equity:
Share capital
Reserves&Ret.profits
Net income/loss
Liabilities:
Financial liabilities (1)
Accounts payable
Non-curr. assets acc payable
TOTAL SH.EQUITY & LiABIL.
(1) Including bank overdrafts
X2
X1
3,200
3,800
2,460
9,540
3,000
3,600
2,780
9,380
4,350
870
250
5,470
3,000
60
0
3,060
14,930
12,440
950
200
59
Cash flow from investing activities
Dukes company
I/S reveals 200 as gains on sale of non-current assets in cash
Assume the net book value (NBV) of the assets sold is 250
(NBV of the assets sold can be obtained from the analysis of the Non-current assets
account )
• Receipts from non-current assets
Gain = Sale proceeds – NBV of disposal ↔ 200 = Sale proceeds – 250
Sale proceeds = 450
Sale proceeds – D acc receivable for non-current assets
Sale proceeds = 450 (cash)
60
Cash flow from investing activities
Dukes company
I/S reveals 200 as gains on sale of non-current assets in cash
Assume the net book value (NBV) of the assets sold is 250
• Payments for non-current assets
NBV (X2) = NBV (X1) + Acquisitions + Revaluation – NBV disposal – Impairment - Depreciation
B/S
B/S
B/S
I/S
I/S
61
Dukes Company
Balance sheet
ASSETS
Non-current assets:
Plant, property and equipment
Less accumulated depreciation
Current Assets:
Inventory
Less provision for impairment
Accounts receivable
Cash & Bank
TOTAL ASSETS
X2
X1
14,950
-4,300
10,650
12,000
-3,700
8,300
2,000
-100
1,900
2,300
80
14,930
2,300
0
2,300
1,650
190
12,440
SH.EQUITY&LIABILITIES
Shareholders' equity:
Share capital
Reserves&Ret.profits
Net income/loss
Liabilities:
Financial liabilities (1)
Accounts payable
Non-curr. assets acc payable
TOTAL SH.EQUITY & LiABIL.
(1) Including bank overdrafts
NBV
X2
X1
3,200
3,800
2,460
9,540
3,000
3,600
2,780
9,380
4,350
870
250
5,470
3,000
60
0
3,060
14,930
12,440
950
200
Is there revaluation in equity?
62
Dukes Company
Income statement
Sales revenue
Cost of sales
Gross margin
Other operating expenses
Personnel expenses
Gross operating profit
Other operating revenues
Depreciation expense
Impairment & provision expense
Gain on sale of non-current assets
Operating profit
Financial revenues
Financial expenses
Operating profit before taxes
Income tax
Profit for the year
X2
14,100
-4,000
10,100
-620
-4,310
5,170
150
-1,400
-100
200
4,020
300
-580
3,740
-1,280
2,460
Is the impairment related to the non-current
assets?
Need to check the B/S!
63
Dukes Company
Balance sheet
ASSETS
Non-current assets:
Plant, property and equipment
Less accumulated depreciation
Current Assets:
Inventory
Less provision for impairment
Accounts receivable
Cash & Bank
TOTAL ASSETS
X2
X1
14,950
-4,300
10,650
12,000
-3,700
8,300
2,000
-100
1,900
2,300
80
14,930
2,300
0
2,300
1,650
190
12,440
SH.EQUITY&LIABILITIES
Shareholders' equity:
Share capital
Reserves&Ret.profits
Net income/loss
Liabilities:
Financial liabilities (1)
Accounts payable
Non-curr. assets acc payable
TOTAL SH.EQUITY & LiABIL.
(1) Including bank overdrafts
X2
X1
3,200
3,800
2,460
9,540
3,000
3,600
2,780
9,380
4,350
870
250
5,470
3,000
60
0
3,060
14,930
12,440
950
200
II
Impairment is related
to inventory!
64
Cash flow from investing activities
Dukes company
• Payments for non-current assets
NBV (X2) = NBV (X1) + Acquisitions + Revaluation – NBV disposal – Impairment - Depreciation
10,650 = 8,300 + Acquisitions – 250 – 1,400 ↔ Acquisitions = 4,000
Acquisition paid in cash = Acquisitions – D acc payable for non-current assets
Credit purchase
65
Dukes Company
Balance sheet
ASSETS
Non-current assets:
Plant, property and equipment
Less accumulated depreciation
Current Assets:
Inventory
Less provision for impairment
Accounts receivable
Cash & Bank
TOTAL ASSETS
X2
X1
14,950
-4,300
10,650
12,000
-3,700
8,300
2,000
-100
1,900
2,300
80
14,930
2,300
0
2,300
1,650
190
12,440
SH.EQUITY&LIABILITIES
Shareholders' equity:
Share capital
Reserves&Ret.profits
Net income/loss
Liabilities:
Financial liabilities (1)
Accounts payable
Non-curr. assets acc payable
TOTAL SH.EQUITY & LiABIL.
(1) Including bank overdrafts
X2
X1
3,200
3,800
2,460
9,540
3,000
3,600
2,780
9,380
4,350
870
250
5,470
3,000
60
0
3,060
14,930
12,440
950
200
66
Cash flow from investing activities
Dukes company
• Payments for non-current assets
NBV (X2) = NBV (X1) + Acquisitions + Revaluation – NBV disposal – Impairment - Depreciation
10,650 = 8,300 + Acquisitions – 250 – 1,400 ↔ Acquisitions = 4,000
Acquisition paid in cash = Acquisitions – D acc payable for non-current assets
Acquisitions paid in cash = 4,000 – 250 = 3,750
Credit purchase
67
Cash flow from investing activities
Dukes company
I/S reveals 200 as gains on sale of non-current assets in cash
Assume the net book value (NBV) of the assets sold is 250
• Receipts from non-current assets
Gain = Sale proceeds – NBV ↔ 200 = Sale proceeds – 250
Sale proceeds = 450 (cash)
• Payments for non-current assets
NBV (X2) = NBV (X1) + Acquisitions + Revaluation – NBV disposal – Impairment - Depreciation
10,650 = 8,300 + Acquisitions – 250 – 1,400 ↔ Acquisitions = 4,000
Acquisition paid in cash = Acquisitions – D acc payable non-current
Acquisitions paid in cash = 4,000 – 250 = 3,750
68
Cash flow from investing activities
Dukes company
Cash flows from investing activities
X2
Cash paid in purchase of non-current assets
- 3,750
Proceeds from sale of non-current assets
Cash flow from investing activities
450
-3,300
69
Cash flow from financing activities
Changes in shareholders’ equity
• Increases / decreases with cash impact (capital issues, share repurchases, dividend
payment)
Changes in long-term liabilities
• Proceeds from issuing debentures, loans, bonds and other financial instruments
• Repayments of debentures, loans, bonds and other financial instruments
• Repayment of capital in a finance lease
70
Cash flow from financing activities
Dukes company
Assume dividend payment of 2,580
Assume share issue fully paid in cash
Look at the Movements in shareholders’ equity
ASSETS
Non-current assets:
Plant, property and equipment
Less accumulated depreciation
Current Assets:
Inventory
Less provision for impairment
Accounts receivable
Cash & Bank
TOTAL ASSETS
X2
X1
14,950
-4,300
10,650
12,000
-3,700
8,300
2,000
-100
1,900
2,300
80
14,930
2,300
0
2,300
1,650
190
12,440
SH.EQUITY&LIABILITIES
Shareholders' equity:
Share capital
Reserves&Ret.profits
Net income/loss
Liabilities:
Financial liabilities (1)
Accounts payable
Non-curr. assets acc payable
TOTAL SH.EQUITY & LiABIL.
(1) Including bank overdrafts
X2
X1
3,200
3,800
2,460
9,540
3,000
3,600
2,780
9,380
4,350
870
250
5,470
3,000
60
0
3,060
14,930
12,440
950
200
71
Cash flow from financing activities
Dukes company
Assume dividend payment of 2,580
Assume share issue fully paid in cash
Movements in shareholders’ equity
Share capital
opening
balance
3,000
+ increases
- decreases
closing
balance
= 3,200
+ 2,780
- 2,580
= 3,800
(profit retention)
(dividend)
2,460
- 2,780
+ 200
(issue)
Reserves/
3,600
Retained profit
Net income
2,780
= 2,460
(profit of the year) (profit retention)
72
Cash flow from financing activities
Dukes company
Assume repayment of loan of 400, issuance of debt amounting to 1,000.
Financial liabilities include overdrafts of 950 (X2) and 200 (X1).
Look at the movements in financial liabilities
ASSETS
Non-current assets:
Plant, property and equipment
Less accumulated depreciation
Current Assets:
Inventory
Less provision for impairment
Accounts receivable
Cash & Bank
TOTAL ASSETS
X2
X1
14,950
-4,300
10,650
12,000
-3,700
8,300
2,000
-100
1,900
2,300
80
14,930
2,300
0
2,300
1,650
190
12,440
SH.EQUITY&LIABILITIES
Shareholders' equity:
Share capital
Reserves&Ret.profits
Net income/loss
Liabilities:
Financial liabilities (1)
Accounts payable
Non-curr. assets acc payable
TOTAL SH.EQUITY & LiABIL.
(1) Including bank overdrafts
X2
X1
3,200
3,800
2,460
9,540
3,000
3,600
2,780
9,380
4,350
870
250
5,470
3,000
60
0
3,060
14,930
12,440
950
200
73
Cash flow from financing activities
Dukes company
Assume repayment of loan of 400, issuance of debt amounting to 1,000.
Financial liabilities include overdrafts of 950 (X2) and 200 (X1).
Movements in financial liabilities
Financing
activities
Financing
activities /
Cash
equivalents
Financial liability
Overdraft
opening
balance
2,800
200
+ increases
- decreases
+ 1,000
- 400
(issue)
(repayment)
+ 750
closing
balance
= 3,400
= 950
(overdraft)
Total
3,000
4,350
74
Cash flow from financing activities
Dukes company
Cash flows from financing activities
X2
Dividends paid
Proceeds from issuance of share capital
Proceeds from issuance of financial liabilities
Repayment of financial liabilities
-2,580
200
1,750
-400
Cash flow from financing activities
-1,030
75
Cash and cash equivalents
Cash comprises cash on hand and demand deposits.
Cash equivalents are short-term, highly liquid investments that are readily
convertible to known amounts of cash (typically in less than three months) and
which are subject to an insignificant risk of changes in value
Dukes company
Cash flows from operating activities
Cash flow from investing activities
Cash flow from financing activities
Net increase/decrease in cash and cash
equivalents
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
X2
4,220
-3,300
-1,030
-110
190
80
76
Bank overdrafts
• Bank overdrafts are generally considered to be part of financing activities
• Bank overdrafts can be included as component of ‘cash and cash
equivalents’ in certain circumstances
– Overdrafts are sometimes used as an integral part of the entity cash
management practices. In that case the bank balance often fluctuates
from being positive to overdrawn
77
Bank overdrafts
In that case, the cash flow statement of Dukes company would be as follows:
Cash flows from operating activities
Cash flow from investing activities
Cash flow from financing activities
Net increase/decrease in cash and cash
equivalents
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
X2
4,220
-3,300
-1,780
excluding overdraft
-860
-10 190 cash – 200 overdraft
-870 80 cash – 950 overdraft
78
Summary
In this session we:
• Discussed the information provided by the cash flow statement
• Learned to classify cash flows into operating, investing and financing
activities
• Learned to link information from the balance sheet, the income statement
and the cash flow statement
• Applied the direct and indirect method to obtain cash flows from operations
• Understood the concept of ‘cash and cash equivalents’.
79