Cash flow statement A cash flow statement presents information about the cashflows associated with the companys

s main operations and those associated with its investing and financing activities of the period A cash flow statement functions in conjunction with both the income statement (performance dimension) and the balance sheet (financial position) IAS 7 Cash Flow Statements provides guidline on standard design n format of a cash flow statement Usefulness of cash flow information Ability to generate adequate cash flows is a significant performance dimension Cash flow information clarifies the dynamics of short-term liquidity and long-term solvency Cash flow information is an essential input for economic decision models Concepts of Cash and Cash Equivalents Cash comprises cash on hand and demand deposits with banks (including Bank Overdraft). Cash equivalents are short term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. Cash Equivalents are Held for meeting short term commitments Readily convertible into known amounts of cash Having a very insignificant risk Short maturity (3 months maximum) Cash flows exclude Movements between cash and cash equivalents

Fruits & leaves = Operating Activities

Trunk & Branches = Investing Activities

Roots = Financing Activities Cash flow versus profit Cash flow and profit are different economic phenomena But linked through the mechanisms of accrual accounting! Cash flows are factual details of incoming and outgoing flows of cash, while the balance sheet and income statement emanate from professional judgement and are not a direct projection of objective economic data Liquidity/solvency and cash flows Liquidity Relates to nearness to cash of the structure of assets Determined by capacity to convert current assets into cash Solvency Relates to future availability of cash in order to settle financial liabilities on due date Determined by timing and uncertainty of expected future cash payments and cash receipts

 Liquidity and solvency ratios are determined on static financial position data, while cash flows reflect changes in financial position Format and structure of the cash flow statement Cash flows from operating activities + Cash flows from investing activities + Cash flows from financing activities Net change in cash during period + Beginning cash balance Ending cash balance Cash flows from operating activities Operating activities are primarily the revenue-generating activities of a company Operating cash flow is conceptually most near to net profit Main differences: 1. Non-cash expenses and non-cash revenues (f.i. depreciation expense) 2. Non-operating items (f.i. gain on disposal of tangible fixed assets) 3. Timing differences between net profit and underlying cash flow (f.i. changes in the level of inventories, receivables, creditors, etc.) Operating cash flows: Examples Receipts from sale of goods and rendering of services (cashing in of receivables included) Receipts from taxes on sales and VAT Receipts from royalties, fees, commissions, Payments to suppliers (payment of creditors including services) Payments to employees Payments of taxes, VAT, fines, Interest Operating cash flows Direct versus indirect method 2 methods for identifying and presenting the operating cash flow: Direct method: engenders the presentation of the most important categories of gross operating cash inflows and cash outflows Indirect method: net operating cash flow is determined by adjusting the (net) profit figure for the 3 types of differences

Direct method Example Cash receipts from customers Cash paid to suppliers and employees Cash generated from main operations Income taxes paid Net cash flow from operating activities 30,150 (27,600) 2,550 (1170) 1,380

Indirect method Example Net profit before tax Adjustments for: Depreciation Investment income 3,350 490 (100) 3,740 Working capital changes: Increase in trade and other receivables Decrease in inventories Decrease in trade payables Cash generated from main operations Income taxes paid Net cash flow from operating activities (500) 1,050 (1,740) 2,550 (1170) 1,380

Cash flows from investing activities Investing activities relate to the acquisition and disposal of long-term tangible and intangible assets and other investments Cash flows from investing activities are an indication of the expansion or downsizing of operating capacity Examples: Payments for newly acquired equipment Receipts from the disposal of a building Payments for new investments Cash flows from financing activities Financing activities relate to changes in the size and composition of contributed capital and financial debt of the company - Capital Employed Examples: Receipts from issuing new shares or bonds Receipts from new bank loan Payments for buy-back of shares Repayments of loans Payments of interest and dividend Constructing a cash flow statement 1. Determine the net change in cash Compare beginning and ending balance 2. Identify all transactions of the period leading to a change in cash Direct: analyze movements in the accounts of cash (equivalents) transaction by transaction Indirect: explain net change of cash by analyzing all other accounts, knowing that each transaction with an impact on cash also affects a non-cash account 3. Use the information (of step 1 and 2) to construct a cash flow statement according to the formal rules Applying step 2 Information for operating cash flow is primarily derived from balances in the IS, while information for the two other principal categories comes from the Balance Sheet (and details in the Notes) Movements in the accounts indicate a change in financial position and further examination is needed to determine if they had a cash impact Check if balances have been impacted by accrual-based adjustments or other non-cash activities

Classifying balance sheet movements as inflows or outflows of cash Assets Increase Decrease Outflow Inflow Equity/liabilities Inflow Outflow

Disposal of fixed assets - Example Disposal of equipment: Acquisition cost 275 - Accum. depreciation - 200 Net carrying value = 115 Sale at 135 Result (gain) on disposal = 135 - 115= 20 Incoming cash flow = 135, composed of a decrease in net carrying value of equipment in the BS (115) and gain on disposal in the IS (20) Presentational choices Interest paid can be classified under either operating or financing activities Interest and dividends received can be included in either operating or investing cash flows Starting from net profit or operating profit under the indirect method (with implications for the adjustments to be made) IAS 7 - Direct Method (Extract)
20X2 Cash flows from operating activities Cash receipts from customers Cash paid to suppliers and employees Cash generated from operations Interest paid Income taxes paid Net cash from operating activities Cash flows from investing activities Acquisition of subsidiary X, net of cash acquired 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 Payment of finance lease liabilities Dividends paid* Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period 30,150
(27,600)

2,550 (270) (900) 1,380

(550) (350)

20 200 200
(480)

250 250 (90) (1,200)

(790)

110 120 230

Cash flows from operating activities Cash receipts from customers Cash paid to suppliers and employees Cash generated from operations Interest paid Income taxes paid Net cash from operating activities Cash flows from investing activities Acquisition of subsidiary X, net of cash acquired Purchase of property, plant and equipment Proceeds from sale of equipment Interest received Dividends received Net cash used in investing activities

30,150
(27,600)

2,550 (270) (900) 1,380

(550) (350)

20 200 200
(480)

Cash flows from financing activities Proceeds from issue of share capital Proceeds from long-term borrowings Payment of finance lease liabilities Dividends paid* Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period * This could also be shown as an operating cash flow.

250 250 (90) (1,200)

(790)

110 120 230

Non-cash transactions These should be excluded from the cash flow statement These transactions should be disclosed in the financial statements. Examples Acquisition of assets by assuming directly related liabilities Acquisition of an enterprise by means of issue of equity shares Conversion of debt to equity

IAS 7 - Indirect Method (Extract)

20X2 Cash flows from operating activities Profit before taxation Adjustments for: Depreciation Foreign exchange loss Investment income Interest expense Increase in trade and other receivables Decrease in inventories Decrease in trade payables Cash generated from operations Interest paid Income taxes paid Net cash from operating activities Cash flows from investing activities Acquisition of subsidiary X net of cash acquired 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 Payment of finance lease liabilities Dividends paid Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Cash flows from operating activities Profit before taxation Adjustments for: Depreciation Foreign exchange loss Investment income Interest expense
Increase in trade and other receivables Decrease in inventories Decrease in trade payables Cash generated from operations Interest paid Income taxes paid Net cash from operating activities

3,350 450 40 (500) 400 3,740 (500) 1,050 (1,740) 2,550 (270) (900) 1,380

(550) (350) 20 200 200 (480) 250 250 (90) (1,200) (790) 110 120 230
3,350 450 40 (500) 400 3,740 (500) 1,050 (1,740) 2,550 (270) (900) 1,380