Lecture 7 Summary

Statement of cash flows have the primary purpose to provide relevant information
about the cash receipts and cash payments of an enterprise during a period and also to
answers the following questions, such as:
1. Where did the cash come from?
2. What was the cash used for?
3. What was the change in the cash balance?

Statement of cash flows are divided into three major activities which are
1. Operating activities, transactions that enter into the determination of net
income.
2. Investing activities, making and collecting loans and acquiring and disposing
of investments and PPE.
3. Financing activities, transactions involving liability and equity items such as
obtaining resources from owners and providing them with a return on their
investment and borrowing money from creditors and repaying the amounts
borrowed.

Information for the preparation of the statement of cash flows are obtained from:
1. Comparative statements of financial position
2. Current income statement
3. Selected transaction data

Statement of cash flows are prepared to determine:

1. Net cash provided by (or used in) operating activities
2. Net cash provided by (or used in) investing and financing activities
3. Determine the change (increase or decrease) in cash during the period
4. Reconcile the change in cash with the beginning and the ending cash balances

Net cash provided by operating activities are:

1. Excess of cash receipts over cash payments from operating activities
2. Determined by converting net income on an accrual basis to cash basis
3. Ad to or deduct from net income those items in the income statement that do
not affect cash
4. Requires an analysis of the current year’s income statement, comparative
statements of financial position and selected transaction data

Significant non-cash activities are reported in a separate note to the financial

statements. examples of significant non-cash activities are:

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1. Issuance of ordinary shares to purchase assets

2. Conversion of bonds into ordinary shares
3. Issuance of debt to purchase assets
4. Exchanges on long-lived assets

If the cash flow from operations are generated within high amount, it means that the
firm are able to generate sufficient cash from operations to pay its bills without further
borrowing. Meanwhile if the cash flow from operations are generated within low or
negative amount, it means that the firm have to borrow or issue equity securities in
order to survive.

Company are required to do a complete set of financial statements to be presented

annually, which are:
1. Statement of financial position
2. Statement of comprehensive income
3. Statement of changes in equity
4. Statement of cash flows
5. Notes to financial statements

Notes to financial statement usually consist of specific disclosure, for example:

1. Items of property, plant, and equipment are disaggregated into classes such as
land, buildings, etc. in the notes with related accumulated depreciation
reported where applicable.
2. Receivables are disaggregated into amounts, such as receivable from trade
customers, receivables from related parties, prepayments, and other amounts.
3. Inventories are disaggregated into classifications such as merchandise,
production supplies, work in process and finished goods.
4. Provisions are disaggregated into provisions for employee benefits and other
items.

Other guidelines for preparing financial statements:

1. Offsetting
- It is important that assets and liabilities and income and expenses are
reported separately
- It is proper to measure assets net of valuation allowances, such as
allowance for doubtful accounts or inventory net of impairment.
2. Consistency
- Companies should follow consistent principles and methods from one

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period to the next

- Accounting policies must be consistently applied for similar transactions
and events unless an IFRS requires a different policy.
3. Fair presentation
- Faithful representation of transactions and events using the definitions and
recognition criteria in the conceptual framework
- Presumed that the use o IFRS with appropriate disclosure results in
financial statements that are fairly presented

Major types of ratios used to analyze performance of a company:

1. Liquidity ratios
Measures of the company’s short-term ability to pay its maturing obligations
2. Activity ratios
Measures of how effectively the company uses its assets
3. Profitability ratios
Measures the degree of success or failure of a given company or division for a
given period of time
4. Coverage ratios
Measures of the degree of protection for long-term creditors and investors.

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