Ch 5; p.256
DQ
5.3



Measuring and Reporting Cash Flows
The 3 categories of sources/uses of cash:
Operating activities
Investing activities
Financing activities
5.15 (pp. 236-7) Depreciation does not appear in the main body of the cashflow statement, it is
a non-cash expense. In relation to a cashflow statement dep’n is ‘added back’ to NP after tax
in calculating the reconciliation between net profit and cashflows from operating activities.
5.19 (pp. 250-1) Questions that cashflow statements may provide answers to include:
(a)
What are the trends in cash inflows?
(b)
What are the trends in cash outflows?
(c)
What are the differences between the ‘cash’ and ‘accrual’ profits?
(d)
What are possible sources of future cash flows?
(e)
How well are the working capital accounts being managed?
(f)
Are fixed asset replacements exceeding depreciation charges?
(g)
What are the trends in the level of cash held?
(h)
What is the extent of non-cash transactions?
5.21(a) (p.237) Another name for the ‘indirect approach’ is the reconciliation approach.
(b)
Under the indirect approach the ‘net profit after tax’ is adjusted to eliminate non-cash
transactions and yield the ‘cash flow from operating activities’.
(c)
The Australian Accounting Standard on cash flows requires the use of both methods.
(d)
The method you recommend will depend on your personal preferences.
Obviously, the Australian Accounting Standard setters are of the view that each method has
its own merits.
The direct method reveals the gross cash flows from the major operating activities:
•
Cash received from customers
•
Interest received
•
Dividends received
•
Cash paid to suppliers and employees
•
Interest paid
•
Taxation paid
The indirect method highlights differences between NP after tax & cash flows from
operations:
NPAT
+
Non-cash Expenses (depreciation/amortisation/impairment)
+
Certain Working Capital Changes (decrease in assets; increase in liabilities)
Non-Cash Revenues (gain on sale of plant)
Certain Working Capital changes (increase in assets; decrease in liabilities)
=
Cash flow from operations
The indirect method can identify poor cash management practices in relation to working
capital (increases in inventory and debtors and decreases in creditors).
1
Tute 6 cont’d
Application Exercises (p.256)
Note: solutions to selected application exercises are included at the back of the main text
5.1
eg
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
Cash flow item
Cash received from customers
Dividends received
Taxation paid
Payments to suppliers and employees
Interest paid
Purchase of property, plant and equipment
Bonus issue of shares
Dividends paid
Proceeds on sale of investments
Interest received
L/term borrowings
Write-down of goodwill
Profit on sale of equipment
Category
Operating
Financing
Operating
Operating
Operating
Investing
Non-cash
Financing
Investing
Financing
Financing
Non-cash
Non-cash
Cash flow
Inflow
Inflow
Outflow
Outflow
Outflow
Outflow
n/a
Outflow
Inflow
Inflow
Inflow
n/a
n/a
5.2
Sales
Cost of sales
Depreciation expense
Interest expense
Other expenses
Income tax expense
Prepaid expenses (decrease)
Accounts receivable (decrease)
Inventory (increase)
Accounts payable (decrease)
Accrued interest (decrease)
Income tax payable (increase)
Cash Flow
(1)
(2)
(3)
(4)
(5)
(1)
156 900
(2)
(3)
(4)
(5)
(75 800)
(3 400)
(27 800)
(12 420)
330
770
(4 120)
(1 790)
(220)
157 670
(109 180)
Cash received from customers
Cash paid to suppliers and employees
Interest paid
Income tax paid
Cash Flow from Operating Activities
2
(3 620)
2 620
(9 800)
35 070
Tute 6 cont’d
5.7
Investing activities
Land
Balance at the start of the year
less any disposals
plus non-cash exchanges
plus any revaluations
plus new acquisitions
equals closing balance
Buildings
Balance at the start of the year
less any disposals
less depreciation for the year
plus any revaluations
plus new acquisitions
equals closing balance
Plant and Equipment
Balance at the start of the year
less any disposals
less depreciation for the year
plus any revaluations
plus new acquisitions
equals closing balance
Investing Activities:
Cash Received from Sale of Plant & Equip (gain of $3)
Cash paid for Land
Cash paid for Buildings
Cash paid for Plant & Equipment
Net cash used in investing activities
3
+
+
+
=
Cost
93
0
80
15
43
231
+
+
212
0
(8)
0
33
237
+
+
63
(9)
(13)
28
69
12 (see p.168)
(43)
(33)
(28)
$(92)
Tute 6 cont’d
5.12
Hi View Ltd Cash flow statement for the year ended 30 June 2009
Cash flows from operating activities
$m
$m
Receipts from customers
154
Payments to suppliers and employees
(106)
Interest paid
(4)
Income taxes (2002 liability)
(16)
Net cash provided by operating activities
28
Cash flows from investing activities
Payments for non-current assets
Proceeds from sale of non-current assets
Net cash used in investing activities
(36)
(36)
Cash flows from financing activities
Dividends paid (14 +4)
Net cash used in financing activities
Net decrease in cash for the year
Cash at the beginning of the financial year
Cash at the end of the financial year
(18)
(18)
(26)
27
$1
The reconciliation between operating profit and operating cash flows is as follows:
$
Operating profit
19
Adjusted for:
Depreciation
22
Decrease in debtors
1
Increase in inventory
(1)
Reduction in creditors
(3)
Decrease in tax liability
(10)
Cash flows from operating activities
$28
Workings
Receipts from customers
Opening balance of debtors
+ sales for the period
= the amount we might expect to receive for the year
- closing balance of debtors (the amount not received)
= the cash received from customers
26
+ 153
179
- 25
$154
question cont’d over page …
4
Tute 6 cont’d
5.12 cont’d
The same kind of approach can be use to calculate payments to suppliers and employees,
although the process is generally a little more complicated.
The calculation of payments relating to creditors for inventory purchases, can be derived as
follows:
Opening balance of creditors
plus purchases of inventory for the period
gives the amount of we might expect to pay for the year
less closing balance of creditors (the amount unpaid)
equals the cash paid to creditors
23
x
x
20
x
However, this requires knowledge of the purchases figure. The purchases figure can be
derived as follows:
Opening inventory
+ purchases
= the amount available for sale
- closing inventory (the amount unsold)
= COS
24
+x
24+x x+24-25=76 so x= 77
- 25
$76
This figure can then be inserted in the earlier table relating to creditors.
Opening balance of creditors
+ purchases of inventory for the period
= the amount of we might expect to pay for the year
- closing balance of creditors
= the cash paid to creditors
23
+77
100
- 20
$80
In addition other expenses of 48 were incurred, 22 of which was depreciation. As there were
no prepayments or accruals this means that the $26 must have been paid in cash. The total
paid to suppliers and employees must have been 80 + 26 = 106
Non-current assets
Land & buildings
Balance at the start of the year
+ new acquisitions
- depreciation for the year
= closing balance
110
+ x=30
- 10
$130
Plant & machinery
Balance at the start of the year
+ new acquisitions
- depreciation for the year
= closing balance
62
+ x= 6
- 12
$56
5
Tute 6 cont’d
5.16
The key differences are highlighted in the table below:
Item
NPAT $’m
CFFO $’m
Difference $’m
Non-cash items
- Depreciation / impairment
- Gain / Loss asset sales
Working Capital changes
2005
19
28
9+
2006
22
23
1+
2007
27
36
9+
16+
43-
9+
1+
9-
15+
9+
15 -
From the above table you can see that the difference between the accrual profit and cash flow
from operations is similar in years 1 and 3, with little difference in year 2.
However, the components of that positive difference have changed over the three period. The
negative impact from working capital management has been offset by losses on the sale of
assets.
The three working capital accounts contributing significantly to the adverse cash flows being
inventory, accounts receivable and accounts payable.
6