Cash flow statement
1.
Usefulness of the statement of Cash Flows
Provide information to help:
1.1.
Entity’s ability to generate future cash flow.
1.2. Entity’s to pay dividends and meet obligations.
1.3. Reasons for the difference between net income and net
cash provided (used ) by operating
activities.
1.4. Cash investing and financing transactions during the period.
2. Definition:
Report the movement of cash over the period and effects of these movements on cash position
of a business.
Why is cash so import
ant?
People will only accept cash in settlement of their claims.
Cash is important in economic downturn.
Events
Effect on profit
Effect on cash
Repayment of borrowings
no
decrease
Make a profitable sale on
credit
increase
no
Buying a current asset on
credit
no
no
Receiving cash from trade
receivables
no
increase
Depreciating a non
current
assets
decrease
no
Buying some inventories for
cash
no
decrease
Make a share issue for cash
no
increase
Preparing the
statement of cash flow
3 sources of information:
1.
Comparative statement of financial position
2.
Current income statement
3.
Additional information
2 ways of making cash flow statement:
1.
Direct method: The cash flow direct method determines changes in cash
receipts and
payments which are reported in the cash flow from the operations section.
2.
Indirect method: takes the net income generated in a period and adds or subtracts changes
in the asset and liability to determine the implied cash flow.
Format of the statement of cash flows:
1.
Operating activities
Cash inflows and outflows related to normal day
to
day activities.
Depreciation added to net profit.
Changes in current assets (inventories, trade receivables and prepaid expenses)
Changes in current liability (
trade payable, accruals, income tax)
Loss/gain on sale of non
current asset.
2.
Investing activities
3.
Financing activities
Depreciation
Depreciation is an expense, but not a cash flow====depreciation added to net profit.
Current asset
When trade
receivables, prepaid expenses and inventories increase, it is negative for the cash
position of a company, deduction from net profit.
Current liabilities
When trade payables, accrued expenses and income tax payables increase, it is positive for the
cash position of a company