Statement of Cash Flow
Content
SUBJECT: FINANCIAL ACCOUNTING!
!
F3
Statement of Cash Flow
What is the purpose of a Statement of Cash Flow?
★
A statement of cash flows shows the effect of an entity’s commercial transactions on its cash balance. In simple words, cash flow is: the inflows and outflows of cash and cash equivalents I/S and SOFP can be manipulated by using different accounting policies, so the SOCF will show you what is moving in and out of the company in actual cash. Very useful for potential investors as it gives them the chance to evaluate a business because of investment appraisal methods which use cash flows.
★ ★
★
IAS 7: Statement of Cash Flows
There are three headings that split up the SOCF: Cash flows from operating activities
- Related to the main revenue economic activities of the entity - Not investing or financing - eg cash received from customers or cash paid to supplier - Acquisition and disposal of long term assets and other investments - Not considered to be cash equivalents - eg investments in other companies or non-current assets - Anything related to getting finances into the entity - eg loans, shares, debentures
Cash flows from investing activities
Cash flows from financing activities
A couple of additional key terms: Cash means what you have physically got in your hand or what is sitting in the bank that you are able to get your hands on immediately (in other words the back account is a current [or checking] account). Cash equivalents are short term, highly liquid investments. You can cash them in for a known amount of cash very quickly. The risk that these investments will change in value are quite low.
Cash Flows from Operating Activities
★ ★
There are two ways of doing this first section: the direct method, or the indirect method. The only difference between the two is how we derive the “Cash Generated from Operations”
PAGE 1 OF 4!
!
WWW.ELYSEBURNS-HILL.COM
SUBJECT: FINANCIAL ACCOUNTING!
!
F3
INDIRECT METHOD
Generally much easier to obtain necessary information for, so much more commonly used. $m 3570
DIRECT METHOD
Encouraged when necessary info is not too costly to obtain, IAS 7 does not demand it. $m 30,330 (27,600) 2730
Net profit before taxation Adjustments for: Depreciation Investment Income Interest Expense
450 (500) 400 Operating profit before working capital exchanges: 3920 Increase in trade + other receivables (500) Decrease in inventories 1050 (1740) Decrease in trade payables 2370 Cash Generated from Operations
Cash receipts from customers Cash paid to suppliers and employees Cash Generated from Operations
Preparing an SOCF
★
There are two ways to prepare a Statement of Cash Flow, but both involve learning the layout of the statement. Although you won’t have to recreate an SOCF in the F3 exam, you still need to know the layout to answer questions. Use the IAS 7 pro-forma at the end of this document and sit down and keep writing it out until you can do it without looking!
★
E ST S
P
1 Write out the pro-forma for the Statement of Cash Flow (the one you just learnt the layout of!!) 2 Here is the choice:
Work through the SOFP and I/S line by line and put relevant figures into the SOCF as you get to them; OR Work through the SOCF line by line and look for the relevant figures in the SOCF.
P TE
E ST
P
3 Which ever way you work through them, you will come across a few figures that will need to be worked out. The easiest way is probably just by opening a T-account and putting in the relevant info to get the answer (or do it in your calculator if you can!)
eg In Operating Activities, one line is Tax Paid: Tax Balance b/d! *1 Change for Yr!*3 Tax Paid! *4 Balance c/d ! *2 ! ! Total ! ! ! ! Balance c/d! ! Total *2
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!
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SUBJECT: FINANCIAL ACCOUNTING!
!
F3
*1! *2! *3! *4! OR
Tax payable from SOFP - last year’s figure Tax payable from SOFP - this year’s figure Tax expense from I/S From the totals you can work out what the actual tax paid was...
You could just go: *1 + *3 - *2 = *4 in your calculator - whichever you find more comfortable!
E ST
P
4 Once you have been through and input all the figures, you can check your work. Look at the last two entries in the SOCF: Cash and cash equivalents at beginning of yr and end of yr. These figures are both on your SOFP under Bank (current assets). So you can either put them in at the beginning, or do all your workings and add the 3 sections up to hopefully get the same figures!
Important Notes
You’ll notice in the Operating Activities section that we have to add, or take away in the right way depending on whether you have an increase or a decrease in trade receivables, trade payables and inventories. If you want to just learn it, here is a table, however, I strongly recommend that you learn how to reason your way to the answer because it will help in the future - it’s not difficult: ! ! ! ! Trade Receivables: ! ! ! ! ! ! Trade Payables:! ! ! ! Inventory ! ! ! ! ! ! ! ! ! ! ! Increase! Decrease! Increase! Decrease ! Increase! Decrease! ! ! Less! ! Add! ! Add! ! Less! ! Less! ! Add! ! $ (X) X X (X) (X) X
Trade receivables:! ! ! ! Trade Payables:! ! ! ! Inventory:! ! ! ! !
! ! ! ! ! !
An increase is treated as a negative because more cash is being used in credit customers. An increase is treated as a positive because cash is remaining with the entity instead of going out to settle accounts. Like TR, an increase is treated as a negative because more cash was spent on the additional inventory.
BASICALLY: If money is leaving the entity or not coming in when it should, it will decrease the amount of cash in the entity, if money comes in, or remains with the company when it should have gone out, it will increase the amount of cash in the entity.
Sources
★ ★
BPP Study Materials for December 2010 exams IASplus.com (Deloitte’s online learning thing!)
! WWW.ELYSEBURNS-HILL.COM
PAGE 3 OF 4!
SUBJECT: FINANCIAL ACCOUNTING!
!
F3
Elyse’s Accounting Notes Co STATEMENT OF CASH FLOWS for year ended 31 December 2009 $m Cash Flows from Operating Activities Profit before taxation Adjustment for: Depreciation Investment income Interest expense Increase in trade receivables Decrease in trade payables Decrease in inventory Cash Generated from Operations Interest paid Income taxes paid Net cash from Operating Activities Cash Flows from Investing Activities Purchase of property, plant and equipment Proceeds from sale of equipment Interest received Dividends received Net cash used in Investing Activities Cash Flows from Financing Activities Proceeds from issue of share capital Proceeds from long-term borrowings Dividends paid Net cash used in Financing Activities Net increase in cash and cash equivalents Cash and cash equivalents at 1 Jan 2009 Cash and cash equivalents at 31 Dec 2009 250 250 (1,290) (900) 20 200 200 3,390 450 (500) 400 3,740 (500) 1,050 (1,740) 2,550 (270) (900) $m
1,380
(480)
(790) 110 120 230
PAGE 4 OF 4!
!
WWW.ELYSEBURNS-HILL.COM
!
F3
Statement of Cash Flow
What is the purpose of a Statement of Cash Flow?
★
A statement of cash flows shows the effect of an entity’s commercial transactions on its cash balance. In simple words, cash flow is: the inflows and outflows of cash and cash equivalents I/S and SOFP can be manipulated by using different accounting policies, so the SOCF will show you what is moving in and out of the company in actual cash. Very useful for potential investors as it gives them the chance to evaluate a business because of investment appraisal methods which use cash flows.
★ ★
★
IAS 7: Statement of Cash Flows
There are three headings that split up the SOCF: Cash flows from operating activities
- Related to the main revenue economic activities of the entity - Not investing or financing - eg cash received from customers or cash paid to supplier - Acquisition and disposal of long term assets and other investments - Not considered to be cash equivalents - eg investments in other companies or non-current assets - Anything related to getting finances into the entity - eg loans, shares, debentures
Cash flows from investing activities
Cash flows from financing activities
A couple of additional key terms: Cash means what you have physically got in your hand or what is sitting in the bank that you are able to get your hands on immediately (in other words the back account is a current [or checking] account). Cash equivalents are short term, highly liquid investments. You can cash them in for a known amount of cash very quickly. The risk that these investments will change in value are quite low.
Cash Flows from Operating Activities
★ ★
There are two ways of doing this first section: the direct method, or the indirect method. The only difference between the two is how we derive the “Cash Generated from Operations”
PAGE 1 OF 4!
!
WWW.ELYSEBURNS-HILL.COM
SUBJECT: FINANCIAL ACCOUNTING!
!
F3
INDIRECT METHOD
Generally much easier to obtain necessary information for, so much more commonly used. $m 3570
DIRECT METHOD
Encouraged when necessary info is not too costly to obtain, IAS 7 does not demand it. $m 30,330 (27,600) 2730
Net profit before taxation Adjustments for: Depreciation Investment Income Interest Expense
450 (500) 400 Operating profit before working capital exchanges: 3920 Increase in trade + other receivables (500) Decrease in inventories 1050 (1740) Decrease in trade payables 2370 Cash Generated from Operations
Cash receipts from customers Cash paid to suppliers and employees Cash Generated from Operations
Preparing an SOCF
★
There are two ways to prepare a Statement of Cash Flow, but both involve learning the layout of the statement. Although you won’t have to recreate an SOCF in the F3 exam, you still need to know the layout to answer questions. Use the IAS 7 pro-forma at the end of this document and sit down and keep writing it out until you can do it without looking!
★
E ST S
P
1 Write out the pro-forma for the Statement of Cash Flow (the one you just learnt the layout of!!) 2 Here is the choice:
Work through the SOFP and I/S line by line and put relevant figures into the SOCF as you get to them; OR Work through the SOCF line by line and look for the relevant figures in the SOCF.
P TE
E ST
P
3 Which ever way you work through them, you will come across a few figures that will need to be worked out. The easiest way is probably just by opening a T-account and putting in the relevant info to get the answer (or do it in your calculator if you can!)
eg In Operating Activities, one line is Tax Paid: Tax Balance b/d! *1 Change for Yr!*3 Tax Paid! *4 Balance c/d ! *2 ! ! Total ! ! ! ! Balance c/d! ! Total *2
PAGE 2 OF 4!
!
WWW.ELYSEBURNS-HILL.COM
SUBJECT: FINANCIAL ACCOUNTING!
!
F3
*1! *2! *3! *4! OR
Tax payable from SOFP - last year’s figure Tax payable from SOFP - this year’s figure Tax expense from I/S From the totals you can work out what the actual tax paid was...
You could just go: *1 + *3 - *2 = *4 in your calculator - whichever you find more comfortable!
E ST
P
4 Once you have been through and input all the figures, you can check your work. Look at the last two entries in the SOCF: Cash and cash equivalents at beginning of yr and end of yr. These figures are both on your SOFP under Bank (current assets). So you can either put them in at the beginning, or do all your workings and add the 3 sections up to hopefully get the same figures!
Important Notes
You’ll notice in the Operating Activities section that we have to add, or take away in the right way depending on whether you have an increase or a decrease in trade receivables, trade payables and inventories. If you want to just learn it, here is a table, however, I strongly recommend that you learn how to reason your way to the answer because it will help in the future - it’s not difficult: ! ! ! ! Trade Receivables: ! ! ! ! ! ! Trade Payables:! ! ! ! Inventory ! ! ! ! ! ! ! ! ! ! ! Increase! Decrease! Increase! Decrease ! Increase! Decrease! ! ! Less! ! Add! ! Add! ! Less! ! Less! ! Add! ! $ (X) X X (X) (X) X
Trade receivables:! ! ! ! Trade Payables:! ! ! ! Inventory:! ! ! ! !
! ! ! ! ! !
An increase is treated as a negative because more cash is being used in credit customers. An increase is treated as a positive because cash is remaining with the entity instead of going out to settle accounts. Like TR, an increase is treated as a negative because more cash was spent on the additional inventory.
BASICALLY: If money is leaving the entity or not coming in when it should, it will decrease the amount of cash in the entity, if money comes in, or remains with the company when it should have gone out, it will increase the amount of cash in the entity.
Sources
★ ★
BPP Study Materials for December 2010 exams IASplus.com (Deloitte’s online learning thing!)
! WWW.ELYSEBURNS-HILL.COM
PAGE 3 OF 4!
SUBJECT: FINANCIAL ACCOUNTING!
!
F3
Elyse’s Accounting Notes Co STATEMENT OF CASH FLOWS for year ended 31 December 2009 $m Cash Flows from Operating Activities Profit before taxation Adjustment for: Depreciation Investment income Interest expense Increase in trade receivables Decrease in trade payables Decrease in inventory Cash Generated from Operations Interest paid Income taxes paid Net cash from Operating Activities Cash Flows from Investing Activities Purchase of property, plant and equipment Proceeds from sale of equipment Interest received Dividends received Net cash used in Investing Activities Cash Flows from Financing Activities Proceeds from issue of share capital Proceeds from long-term borrowings Dividends paid Net cash used in Financing Activities Net increase in cash and cash equivalents Cash and cash equivalents at 1 Jan 2009 Cash and cash equivalents at 31 Dec 2009 250 250 (1,290) (900) 20 200 200 3,390 450 (500) 400 3,740 (500) 1,050 (1,740) 2,550 (270) (900) $m
1,380
(480)
(790) 110 120 230
PAGE 4 OF 4!
!
WWW.ELYSEBURNS-HILL.COM
