Module 4 – The Cash Flow statement
Cash flow Statement is used to provide users with a more complete picture of resource flows over an
accounting period.
4.1 Where does cash come from?
 Profit from Operation – Profit is not the same as cash, but is the best starting point for determining cash
from trading or operating activities.
Cash = Net Profits plus depreciation, plus bad debts provision
 Capital Introduction – injection of cash from owners
 Increase in creditors
 Sale of fixed assets – total amount realized less the cost associated with disposal
 Loans
 Decrease in Inventories
 Decrease in debtors
4.2 Where does the cash go to?
 Loss from Operations – opposite to a profit from operations
 Capital repayments – e.g. buy its own shares
 Decrease in Creditors
 Purchase of fixed assets
 Repayment of loans
 Increase in inventories – try to avoid this by ‘just-in-time’ methods
 Increase in debtors
4.5 Eight Categories of Cash Flow
1. Cash flow from operating activities – primary source
2. Cash flow from returns on investments and servicing of finance
3. Taxation
4. Capital investment – receipts from sales or disposals, or payment to acquire fixed assets
5. Acquisitions and disposals – e,g, sale or purchase of subsidiaries
6. Equity dividends paid to shareholders
7. Management of liquid resources – liquidating current asset investments such as government
securities
8. Financing – the receipt and repaying of movements in debts (except overdrafts) and shareholders
funds.
Ortcaelf
4.7 Do it yourself example:
Calculations required for Cash Flow Statement
Proft from operations
Depreciation
Less Profit on sale
Bad debt provision
24183
1635
(855)
180
960
25143
Adjustments to Working Capital
Increase in Inventories
(10282)
Decrease in Debtors
2535
Increase in Creditors
225
Note: this is difference in debtors – 180 (prov. bad debts)
(7522)
Cash Flow from operating activities
17621
Cash Flow Statement for year ended 30 June 1997
Cash flow from Operations
17621
Return on investments
Taxation
Capital
3450
Acquisition of Subsidiaries
Equity payments
(18750)
Management of liquid assets
Financing
(1500)
Increase in Cash
821
How do you get from opening and closing balances of fixed assets from 1996 to ’97:
Original purchase price of sold asset was 16800-10800 = $6000
sold fixed assets for $3450 at a profit of 855 => the actual residual cost was $2595
Original – residual = depreciation = $3405
So depreciation in ’96 was
Minus the depreciation for sold asset
Plus depreciation charged in 97
Total depreciation in balance sheet
6240
3405
2835
1635
4470
Review Questions:
1. d
2. c
3. b
4. 20% of 50,000 = 10,000; so cash flow is profit + depreciation = 22,500 ans: c
5. d
6. d
7. a
8. c
9. b
10. b
11. a
12. b
13. d
14. c
15. Movement in Cash = 18-12-8+28-4+2=24 Ans: c Wrong! don’t understand why its 4+28 = d
16. 27+18-12-8=25 Ans: b
17. 10000 –500 – 700+3000 = 11800 Ans: a
18. Note: the older column is on right! -33-17+52 = increase of 2 , ans: b
19. 65000 –16000 – 3000 = the fixed assets from ’96 left at end of 97 = $46,000. But the balance sheet
shows the actual end og ’97 figure is $80,000 , so assets must have been increased by $34,000
during the year, by a purchase of fixed assets. Ans: d
20. a
21. False
22. False
DIY Example:
ORTCAELF
Operation
Return on Investment
Taxation
Capital
Acquisitions
Equity
Liquid
Finance
Cash flow from operations
Profit
Add back
Depreciation
1635
Increase in provision
180
Less
Profit on sale of P&E
24183
1815
25998
855
Cash flow from Working Capital
Increase in Inventory
(10282)
Decrease in Debtors
2535
Increase in Creditor
225
25143
(7522)
17621
Cash Flow Statement
Cash from Operations
Return on Investments
Taxation
Capital Expenditure
Acquisitions
Equity
Liquid resources
Finance
17621
3450
(18750)
(1500)
821 = Increase in Cash at bank between two balance sheets
Case Study 4.2
Cash Flow from Operations 97
$ (000s)
(136)
Profits
Add back:
Depreciation
Decrease in inventories
Decrease in debtors
Increase in Creditors
10
(126)
54
17
30
101
(25)
Disposal of fixed assets
Fixed Assets end of 96
Depreciation during 97
End of 97 value
Actual 97 value
Value of assets disposed
100
(10)
90
50
40
Cash Flow statement
Cash flow from operations
Return on Investment
Taxation
Capital Expenditure
Acquistions
Equity
Liquid resources
Finance
(25)
40
30
(25)
20
Case Study 4.1
Cash flow from operations
Profit
Add Depreciation
9288
3706
12994
From Working Capital
Increase in Inventories
Increase in Debtors
Decrease in Creditors
(3240)
(3720)
(2594)
Fixed Asset Expenditure
Fixed asset at end of 96
Depreciation during year
Value at end of 97
Increase in fixed assets
Actual Value at end of 97
9606
(3706)
5900
9400
15300
(9554)
3440
Cash Flow Statement
Operations
Purchase of Fixed Assets
Increase in Equity
3440
(9400)
2000
(3960)