Accounting
Lecture 15-Financial
Reports (Part 4) Cash Flow Statement
Accounting
This lecture will cover the following issues:
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The need to report for cash
Cash…..what is it?
What is the Cash Flow Statement is used for
Purpose of the Cash Flow Statement
Classification of cash flows
The most important cash flow
Format of the Cash Flow Statement
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categories of adjusting entry
The need to report for cash
Owners must have accurate information and revenues and expenses
(and therefore profit) if they are to improve the financial performance
of their firm.
Cash and profit are different measures of performance, and there are
many possible reasons why a business that is generating a profit can
experience a cash shortage.
For example, selling goods to customers on credit
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Cash…..what is it?
 Cash refers to money that the business has on
hand or in the bank (notes, coins, deposits in bank
accounts)
 Any cash equivalents (investments easily
converted to cash e.g. investment in marketable
securities)
Definition
A statement of cash flows shows all
inflows (cash receipts) and outflows
(cash payments) of cash during the
reporting period and the cash balance at
the end (a surplus or a deficit).
Purpose
The purpose is to show the business entity’s ability to pay
its debts (i.e. its liquidity) and to finance future growth.
• The objective of every business is profit. To determine whether
a business earned a profit or incurred a loss, we look to the
income statement.
• While profit is the objective, cash flow is vital to business
success. Indeed, an expression often used is “cash is king”. Cash
is the “lifeblood” of business and its efficient management is
vital to the continued success of a business. The Cash Flow
Statement reports the source of cash and how it was spent over
a time period. It measures cash surplus/deficit during the
period, which is different from accrual profit/loss. It also
complements the two-accrual based financial statements
showing financial performance and financial position.
What is a Cash Flow
Statement used for?
It is used for:
• evaluating an entity’s ability to generate
cash
• evaluating management decisions
• predicting ability to meet obligations and
pay dividends
• explaining the difference between accrual
accounting profit or loss for the period
and changes in cash resources
• comparing the operating performance of
different entities.
Unlike Accrual Accounting, the Cash
Flow Report measures cash when it is
received.
• Cash surplus/deficit will be different to profit
and loss reported in accrual accounting.
• Cash Flow is important because it determines
how the business pays it’s bills, and whether
or not it requires credit or a loan to do so.
• A healthy cash flow means the business can
service it’s own debts without having to
borrow money.
Cash Flow
• Must involve a movement of cash –
buying/selling on credit would NOT be
reported
• Must involve an external party –
transfers of cash from one account to
another; depreciation; bad debt
expense would NOT be reported as
they do not result directly in cash flows
Summary of Financial Reports:
The financial reports companies (and many other businesses) prepare
include:
 Balance Sheet – shows the financial position of the business
at a particular date. Contains A, L and OE items
 Income (Profit and Loss) Statement – shows the financial
performance (net profit/loss) of the business for a particular
period of time. Contains R and E items.
 Statement of Cash Flows/Cash Flow Statement – shows the
cash inflows and outflows of the business for a particular
period. Contains operating, investing and financing items
Classification
Three types of classification known
as “activities” in this statement:
1.Operating
2.Investing
3.Financing
Operating (O)
Normal regular cash inflows and outflows
associated with running the business.
Cash in from:
• Selling goods, providing services
• Interest received on investments
• Dividends received on investment
(profits earned from investment in
shares of another company)
Operating (O)
Cash out from:
•Paying for goods and services
•Paying employees (staff)
•Paying taxes
•Paying interest to lenders (banks)
Operating items affect profit/loss
amounts (R – E) and usually come from
the Income Statement.
Operating Activities
Cash inflows from
Selling goods and services
Fees and commissions
Interest received
Dividends received
and Outflows from
payments for goods and services
payments to employees
government charges and taxation
interest paid to creditors
Operating Activities
Operating activities
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Regular cash inflows/outflows associated with running the business, including:
cash collected from selling goods and services
cash received for royalties, fees, commissions
interest received
dividends received
payments for goods and services
payments to employees
payments to government for income and other taxes
interest paid to lenders.
A large positive operating cash flow is good. This is because it means that the business
is collecting more cash than it is paying out from its trading activities.
Investing (I)
Acquisition (buying) or the disposal (selling)
of non-current assets.
Cash in (proceeds) from:
• Disposal (selling) NCAs
• Selling investments in other
businesses (SHARES IN OTHER
COMPANY)
• Collecting loan repayments*
Investing (I)
Cash out from:
• Buying Non Current Assets (NCAs)
• Investing in other businesses
(BUYING SHARES IN OTHER
COMPANY)
• Lending money
Investing items affect NCAs and usually
come from the Balance Sheet.
Investing Activities
• Cash inflows from
– Disposal of assets and investments
– Receiving repayment on loans given to others
Cash outflows from
- Purchasing assets and investments
- Lending money to others
Financing (F)
Cash flows that related to changes in noncurrent liability and equity (i.e. obtain the
cash from investors & lenders and paying
them back)
Cash in (proceeds) from:
• Issuing (selling) shares for our company (OE)
• Borrowing from banks/others (loans)
Financing (F)
Cash out from:
• Repaying long term loans
• Payment of dividends (from retained
profits) to our shareholders (OE )
Financing items affect debt (L) and
equity (OE) and usually come from the
Balance Sheet.
Financing Activities
• Cash inflows from
– Issuing shares in the business
– Borrowings
Cash outflows from
- Repayment of loans
- Payment of dividends
Financing Activities
Financing activities
Financing cash inflows/outflows are related specifically to the
financing of the business, including cash from investors/banks to
establish or support the business, including:
• cash received from issuing shares
• cash borrowed from banks or others
• repayment of long term loans
• payment of dividends
Format of the Cash Flow Statement
• The Direct Method lists all cash flows
occurring during the period, classified into
the previous three categories: Operating
 Investing
 Financing
Indirect Method:
Reconciliation of Net Cash Flows
Please note I will only teach you the Direct
Method (Cash Flow Statement format).
You will learn how to do the Indirect Method
(Cash Flow Statement format) when you go to
University.
The Cash Flow Statement
 Cash refers to money that the business has on hand (notes, coins, deposits
in bank accounts), any cash equivalents (investments easily converted to
cash e.g. deposits)
 A statement of cash flows shows all inflows (cash receipts) and outflows
(cash payments) of cash during the reporting period and the cash balance
at the end.
 The purpose of the statement of cash
flows/cash flow statement is to show the
business entity’s ability to pay its debts (i.e. its
liquidity) and to finance future growth.
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The Cash Flow Statement
For transactions or items to be regarded as a cash flow and
be reported in the statement of cash flows:
The transaction must involve a movement of cash –
transactions like buying/selling goods and services on
credit, and purchasing or selling non-current assets on
credit would NOT be reported in the statement.
The Cash Flow Statement: Direct Method
Format of the Cash Flow Statement
All cash inflows/outflows that occurred during the period are listed and classified into the previous three categories.
The result is a clear picture of how management has been generating and using cash.
Greensborough Motorcycles Ltd.
Statement of Cash Flows – Year Ended 30 June 2017
Cash flow from operating activities:
Receipts:
Collections from customers
Payments:
To suppliers of inventory
(70,240)
To employees
(44,110)
For utilities
( 6,430)
For insurance
( 5,760)
For supplies
(11,140)
For interest
( 8,970)
For advertising
( 7,120)
For income taxes
( 6,200)
Total cash payments
Net cash inflow from operating activities
Cash flow from investing activities:
Purchase of plant assets
(53,500)
Sale of plant assets
8,190
Net cash outflow from investing activities
Cash flow from financing activities
Proceeds from share issue
25,000
Proceeds from loans
32,000
Repayment of long-term loans
(20,470)
Payment of dividends
( 5,000)
Net cash inflow from financing activities
Net increase in cash held
Cash balance 1 July 2016
Cash balance 30 June 2017
$177,650
($159,970)
$ 17,680
($ 45,310)
$31,530
$ 3,900
$11,700
$15,600
The most important CF
Cash flow from operating activities is the most important.
This is because it shows the cash provided by the
business’ operations.
The source of cash is generally considered to be the best
measure of a business’ ability to generate sufficient cash
to continue into the future
Check the journal entry!
• Dr Cash
• Cr
Sales revenue
• This one is part of the cashflow and is included
• Dr Accounts receivable
• Cr Sales revenue
• This one is not part of the cashflow and is
removed
Check the journal entry!
• Dr Cash
• Cr Accounts receivable
• This one is part of the cash flow
• Dr Inventory
• Cr Accounts payable
• This one is not part of the cashflow
Check the journal entry
• Dr Cash = part of the cashflow
Cr Cash = part of the cashflow
• Dr Inventory
• Cr Cash
• Dr Accounts payable
• Cr Cash
• Dr Prepayment
• Cr Cash
Check the journal entry
• Dr Any other account
• Cr Cash
• ~ Is an outflow of cash during the period
• Dr Cash
• Cr Any other account
• ~ Is an inflow of cash during the period
• Cash accounting,
not
• Accrual accounting
Class Exercise: Direct Method
Prepare a classified Statement of Cash Flows for The Great Outdoors Ltd for the year
ended 30 June 2018. Cash at 1 July 2017 was $9 245. Assume non-current assets were
bought and sold using cash.
Class Exercise Solution
The Great Outdoors Ltd
Statement of Cash Flows for year ended 30 June 2018
$
Cash flows from operating activities:
Receipts:
Cash Sales
90 000
Collection from customers
32 000
Commission received
1 000
Total cash receipts
Payments:
To suppliers
To employees
For electricity
For interest
For advertising
123 000
(54
(32
(1
(1
(6
040)
060)
150)
660)
450)
Total cash payments
(95 360)
Net cash inflow from operating activities
Cash flows from investing activities
Proceeds from sale of vehicle
Purchase of office equipment
Purchase of vehicle
27 640
5 500
(12 300)
(23 000)
Net cash outflow from investing activities
Cash flows from financing activities
Proceeds from loan
Payment of dividends
Repayment of loan
Net cash outflow from financing activities
Net decrease in cash
Bank Balance 1 July 2017
Bank Balance 30 June 2018
$
(29 800)
13 000
(17 900)
(4 700)
(9 600)
(11 760)
9 245
($ 2 515)