Chapter
9
STATEMENT OF
CASH FLOWS
LEARNING OUTCOME:
TO RECORD INFORMATION TO PREPARE A
STATEMENT OF CASH FLOWS FOR ‘NON-REPORTING’
BUSINESSES ADHERING TO THE REQUIREMENTS OF
ACCOUNTING STANDARD AASB 1026
 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis,
slides prepared by Kaye Watson
1
KEY TERMS
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cash
cash equivalents
cash flows
cash on hand
classification of a cash-flow statement
debentures
financing activities
 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis,
slides prepared by Kaye Watson
2
KEY TERMS

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government bonds
investing activities
non-cash items
operating activities
statement of cash flows
taxation payable
unsecured notes
 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis,
slides prepared by Kaye Watson
3
PURPOSE OF CASH-FLOW
STATEMENTS
 Shows the liquidity of the business and its
ability to meet short-term commitments
 Allows owners and investors to understand
the relationship between cash flows and
profits or losses
 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis,
slides prepared by Kaye Watson
4
PURPOSE OF CASH-FLOW
STATEMENTS
 Analysis of cash-flow information is useful
to ensure:
Liquidity of business is maintained
Business is able to meet commitments
Business is in a position to raise funds
Cash-flow deficiencies come to light
 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis,
slides prepared by Kaye Watson
5
PURPOSE OF CASH-FLOW
STATEMENTS
 Shows cash position at start and end of
period, and the cash movements between
 Management should optimise cash-flow
success by:
frequent monitoring
regular banking and debt collection
investing excess cash
paying accounts on due date and not before
 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis,
slides prepared by Kaye Watson
6
ACCOUNTING STANDARD
AASB 1026
 Requires ‘reporting entities’ to include
general purpose report (statement of cash
flows) with published financial reports
 Features of the standard include:
Cash flow must be classified
Statements must show all flows for accounting
period and disclose inflows and outflows
Notes on reconciliation of cash and net cash
 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis,
slides prepared by Kaye Watson
7
ACCOUNTING STANDARD
AASB 1026
 Standard proposes use of
Direct method
cash items used in main part of cash-flow statement
Indirect method
the reconciliation of operating activities with net-profit
includes non-cash expenses such as depreciation and
doubtful debts
 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis,
slides prepared by Kaye Watson
8
CLASSIFICATION OF
CASH-FLOW STATEMENTS
 OPERATING ACTIVITIES
 Activities relating to provision of goods and services e.g.
receipts for provision of goods and services
payments to suppliers
payments of salaries and wages
payment of business operational expenses
revenue items such as rent received
 Also include any activities that are not investing or
financing
interest received and interest paid
dividends received
taxes paid
 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis,
slides prepared by Kaye Watson
9
CLASSIFICATION OF
CASH-FLOW STATEMENTS
 INVESTING ACTIVITIES
Activities are for acquisition and disposal of
non-current assets e.g.
buying non-current assets
proceeds from sale of non-current assets
 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis,
slides prepared by Kaye Watson
10
CLASSIFICATION OF
CASH-FLOW STATEMENTS
 FINANCING ACTIVITIES
Activities that relate to change in business’s
financial structure or size, including equity and
borrowings e.g.
proceeds from owner contributing more capital
raising capital through loans
repayments of loans
drawings in cash by owner
 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis,
slides prepared by Kaye Watson
11
NOTES AT FOOT OF STATEMENT
OF CASH FLOWS
 Reconciliation with the closing cash at bank
balance
 Reconciliation of operating cash flows with
the net profit
 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis,
slides prepared by Kaye Watson
12
RECONCILIATION WITH
CLOSING CASH AT BANK
BALANCE
Illustration 9D (page 234)
Reconciliation with the cash at bank account
Net increase in cash held
$110 000
Bank overdraft as at 1 July 2008
($20 000)
Cash balance as at 30 June 2009
$90 000
 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis,
slides prepared by Kaye Watson
13
THE EFFECT OF BALANCE DAY
RECONCILIATION OF OPERATING
CASH FLOWS WITH NET PROFIT
Add in the reconciliation
Subtract in the reconciliation
Decrease in current assets
Increase in current liabilities
Increase in current assets
Decrease in current liabilities
 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis,
slides prepared by Kaye Watson
14
RECONCILIATION OF OPERATING
CASH FLOWS WITH NET PROFIT
Illustration 9D (page 234)
Reconciliation of operating cash flows with net profit as at 30 June 2009
Reconciliation item
$
$
NET PROFIT
Depreciation – Plant & equipment
Depreciation – Office equipment
26 000
30 000
4 000
Doubtful debts
Loss on sale of plant
0
3 000
Decrease in accounts receivable
40 000
Increase in accounts payable
20 000
Decrease in inventories
40 000
Net cash from operating activities
 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis,
slides prepared by Kaye Watson
137 000
163 000
15
DIRECT METHOD
PREFERRED METHOD
 Information will need to be adapted from
the accrual system
 Accounts will need to be reconstructed to
provide this information
 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis,
slides prepared by Kaye Watson
16
RECONSTRUCT ACCOUNTS
RECEIPTS FROM CUSTOMERS
Accounts receivable
Opening balance
Cash received
Sales (accrual)
Discount allowed
Bad debts
Closing balance
 FORMULA:
Cash received = sales +/- change in receivables
balance – bad debts written off – discount allowed
 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis,
slides prepared by Kaye Watson
17
RECONSTRUCT ACCOUNTS
PAYMENTS TO SUPPLIERS
Inventory
Accounts payable
Opening
balance
Cost goods
sold
Payments
Opening balance
Discounts
Purchases
Purchases
Closing
balance
Closing
balance
FORMULA:
Cash paid = cost of goods sold +/- changes
inventory balance +/- change in payables
balance – discount received
 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis,
slides prepared by Kaye Watson
18