Statement of Cash Flows
--Part 1
Overview
• Purpose of the statements of cash flows
• Classification of cash flows
• Preparation of Statement of Cash Flows
Terminology
• Cash?
Cash on Hand
Demand Deposits
Cash Equivalents: short-term, highly liquid investments.
• Cash Flow?
Cash flows are inflows and outflows of cash and cash equivalents.
The purpose of the Statement of Cash Flows
• The Statement of Cash Flows provides information about cash
receipts, cash payments and the net change in cash
• It helps to answer the following questions:
Where has the entity spent the cash?
Where did it receive cash from during the period?
What has been the change in the cash balances?
What can the entity generate in terms of future cash flow?
Cash
Sources (Inflows)
Uses (Outflows)
1.Receive Revenue
1.Pay Expenses
Operating Activities
2.Sale of long-term assets
2.Purchse of long term assets
Investing Activities
3.Investment by the owners
3.Withdraw by the owners/Dividends
4.Long-term borrowing
4.Repayment of long-term debts
Financing Activities
Classification of Cash Flows
Cash flows from operating activities
Cash flows arising from providing goods and
services and that are not classified as
financing or investing activities (NZ IAS 7.6).
The cash flows generally arise from
transactions affecting the Income Statement.
Examples include:
Cash receipts from the sale of goods and services,
the payment to suppliers for goods and services,
payment to employees (wages).
Classification of Cash Flows
Cash flows from investing activities
Cash flows arising from the purchase and sale
of long-term assets and other investments (not
included in cash equivalents) (NZ IAS 7.6.).
Examples include:
cash receipt (payments) from the sale (purchase) of
property plant and equipment.
Classification of Cash Flows
Cash flows from financing activities
Cash flows arising from the activities relating to
owners contributed equity and borrowings. (NZ
IAS 7.6).
Examples include:
Cash received from obtaining a loan ; Cash paid to repayment of a
loan; Obtaining cash from shareholders; Paying dividends.
Exercise
For each of the following transactions indicate: (a) in the first column if the transaction is a receipt or
payment of cash, and (b) in the second column, classify the cash transaction as operating, investing or
financing.
Transaction
Wages paid
Received interest
Advertising expense paid
Paid dividends
Cash sales
Paid commission
Interest paid on loan
Increased loan
Issued shares for cash
Sold goods on credit
Paid for shop fittings
Owner took goods for own use
Paid creditors
Cash purchases
Credit purchases
Owner invested cash
Sold delivery van
Loss on sale of delivery van
Credit sales
Received payment on account
Bad debts
Depreciation expense
Cash drawings
Receipt / Payment
Operating / Investing / Financing
Classification of interest , dividends paid and received
•
Interest paid can be classified as cash outflow from operating activities because it is
included in the determination of the income statement OR it can be treated as
financing cash flows because interest is a cost of obtaining funds ( NZIAS 7. 33).
•
Interest and dividends received can be classified as cash inflow from operating
activities because they are included in the determination of the income statement OR
they can be treated as cash inflow from investing activities because they are returns
on investments ( NZIAS 7. 33).
•
•
Dividends paid can be treated as cash outflows from financing activities because they
are party of the cost of obtaining funds for the business. However, IAS 7.34 also
allows dividends paid to be classified as operating cash flows as they enable users to
assess the ability of the entity to pay dividends out of cash flows from operations.
Classification of interest , dividends paid and received
• Interest paid and received – operating activities
• Dividends received – operating activities
• Dividend paid – financing activities
Format of Cash Flow Statement
Cash flow from operating activities
– Cash receipts
– Cash payments
Net cash flow from operating activities
Cash flow from investing activities
– Cash receipts
– Cash payments
Net cash flow from investing activities
Cash flow from financing activities
– Cash receipts
– Cash payments
Net cash flow from financing activities
Net increases (decrease) in cash
Cash at beginning of period
Cash at end of period
Preparation of Cash Flow Statement
• Information required
• A balance sheet for two consecutive accounting periods so that
changes in asset, liability and equity accounts can be identified.
• The income statement covered between the two balance sheet
periods
• Additional data relating to particular transactions.
The steps to undertake in preparing the Statement of Cash Flow
Step 1 Determine the net increase /decrease in cash for the period.
Step 2 Determine cash flows from operating activities.
Step 3 Determine cash flows from investing activities
Step 4 Determine cash flows from financial activities
Step 5 Complete the Statement of Cash Flows
Cash flow from operations
Cash flow from operations can be determined using two methods:
1. Direct Method
This method requires reporting the major classes of operating cash receipts –
such as cash from customers; and major classes of operating payments such
as payments to suppliers, to employees and the government for tax. The
direct method is shown above.
2. Indirect Method
This method takes operating profit after tax which has been determined on an
accrual basis and makes adjustments for non-cash items such as deprecation
and movements in working capital items to determine cash flow form
operations. IAS 7.20.1 requires the Statement of Cash Flows to be prepared
by the direct method. However, the indirect method is used to reconcile net
profit or loss with cash flows from operating activities which is required by IAS
7..
Step 2 cash flows from operating activities
Cash receipts from operations
Cash payments from operations
For sale of goods and services to
customers
For supplies
Interest and dividends from investments
For employees
For operating expenses
For interest
For taxes
Cash from Customers
Accounts Receivable
Date
Particulars
Opening balance (incl
GST)
Credit Sales (incl GST)
Amount
Date
Particulars
Sales returns (incl GST)
Bad Debts (incl GST)
Discount Allowed (incl GST)
Receipts from customers
(incl GST)
Closing balance
Cash Received from Credit Customers
+ Cash Received From Cash Customers
= Total Cash Received From Customers
Amount
 QUESTIONS
For each of the following, calculate the cash receipts from customers.
(a)
Accounts Receivable
Sales (all credit)
Bad debts
Year 2
17,000
325,000
1,500
Year 1
14,500
Accounts Receivable
Sales (cash)
Sales (credit)
Year 2
9,845
108,000
143,000
Year 1
10,770
Accounts Receivable
Sales (cash)
Sales (credit)
Bad debts
Discount allowed
Year 2
11,230
200,450
123,560
3,240
6,480
Year 1
10,900
(b)
(c)
Cash paid to suppliers
Cost of Goods Sold
Plus: Ending Inventory
Less: Opening Inventory
= Purchases from Suppliers
Add: Opening Accounts Payable
Less : Closing Accounts Payable
= Cash payments TO SUPPLIERS
• QUESTIONS
Calculate the payments to suppliers:
Cost of sales - $429,800
Opening inventory - $39,200
Closing inventory - $25,600
Accounts Payable at beginning - $42,600
Accounts Payable at end - $21,000
Cash payments for expenses: adjusting for prepaid expenses
Expense from Income Statement
Less: Opening Prepayments
Plus: Closing Prepayments
= Cash payment for EXPENSE
Cash payments for expenses: adjusting for accrued expenses
Expense from Income Statement
Plus: Opening Accrued Expense
Less: Closing Accrued Expense
QUESTIONS
(a) Total operating expenses as shown in the Income Statement for the
year ended 31 March 2005 were $130,500. Prepaid expenses at the
beginning and at the end of the year were $20,000 and $35,000
respectively. Accrued expenses at the end of the year were $8,350.
Work out the payments for operating expenses for the year ended 31
March 2005.
(b) Calculate the tax payments for the year, based on the information
provided below:
Tax expense
$22,000
Tax Payable:
Beginning balance $16,000
Ending balance
$19,000
Step 3 Determine cash flows from investing activities
• One of the main investing activities is the purchase and
sale of property plant and equipment. The relevant cash
flows are the cash paid to acquire the asset and the cash
proceeds from selling an asset. This will require
reconstructing the PPE asset and Accumulated
Deprecation accounts.
 QUESTIONS
(a) Modern Enterprises had the following balance sheet amounts:
Plant and Equipment
Accumulated Depreciation
31 March
2004
$550,000
64,000
31 March
2005
$640,000
79,000
During the year ended 31 March 2005, the depreciation charge relating to
plant and equipment was $20,000. Plant that cost $60,000 and had been
depreciated by $5,000 was sold for $42,000.
Required:
1. Determine the profit or loss on sale of the plant.
2. Determine the amount paid for new plant.
(b) Calculate the cash received on disposal of plant and machinery, based on
the following information:
Plant and Machinery, at cost
- opening balance $800,000
- closing balance $1,100,000
Accumulated depreciation:
- opening balance $400,000
- closing balance $470,000
Gain on sale of Machinery - $8,000
New machinery purchased during the year - $370,000
Depreciation charge for Plant and Machinery for current year - $120,000
Step 4 Determine cash flows from financial activities
 QUESTIONS
The following balances were taken from the books of Allendale Ltd:
Bank Loan
Capital
Retained Earnings
31 Dec 2004
$50,000
90,000
115,000
31 Dec 2003
$100,000
70,000
82,000
Profit for the year ended 31 December 2004 was $95,000.
Required:
1. Determine the dividend paid during the year.
2. Prepare an extract from the Cash Flow Statement to show cash flows from
financing activities.
Cash flow from financing activities
Cash was provided from:
Issue of shares
$20,000
Cash was applied to:
Repayment of bank loan ($50,000)
Payment of Dividend
(62,000)
112,000
Net cash outflow from financing activities
($92,000)
Step 5 Complete the Statement of Cash Flows
This step requires completing the cash flow statement
ensuring the net increase in cash plus the opening position
equals the closing cash position.