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EBF1013: ACCOUNTING

LU3: FINAL ACCOUNTS


CASH FLOW STATEMENTS

Previously
Financial Statements:
Adjustments
Trading, Profit & Loss Account
Balance Sheet

Objective

At the end of the lecture, students


will be able to understand the:
Definition of cash flows
Purposes of cash flows statement
Operating activities
Investment activities
Financing activities
Construction of cash flow
statements

Definition
Cash flow statement: a statement
which shows how cash is generated
& used by business entities
throughout a certain accounting
period.
Where the cash has come from &
exactly what we have done with it
during the year.

Purposes
Profit/loss does not give accurate picture
of the economic position of a business
because some item do not involve cash in
Profit & Loss Account.
Final accounts can be manipulated in
terms of estimations figures but not cash.
Cash flows highlight business with
shortage in cash even though they are
making profits.

Operating activities
Transactions that affect the revenues
& expenses & influence the net
profit/loss of the business.
Involve items in Profit & Loss
Account, current assets & current
liability.

Operating activities

Cash in:
Decrease
CA
Increase
CL
Profits

Cash
flows
from
operati
ng
activitie
s

Cash out:
Increase
CA
Decrease
CL
Losses

Operating activities
Cash in:
Decrease in receivables repayment of
debts
Decrease in inventory sale of inventory
Increase in current liabilities borrow
money (short term loans), borrow money
from creditors/accounts payable
Cash out:
Increase in receivables debtors borrow
money
Increase in inventory buy more inventory
Decrease in current liabilities repay

Investing activities
Acquiring & disposing longterm/non-current assets (FA)
Involve fixed assets

Investing activities

Cash in:
Sale of
FA

Cash
flows
from
investin
g
activiti
es

Cash
out:
Purchas
e of FA

Financing activities
Obtaining cash / repayment of longterm loan from external parties (bank
loans, bonds & debentures) &
issuance of shares
Involve long-term liabilities &
shareholders (or owners) equity.

Financing activities

Cash in:

Introd
uce
capital
Sale of
shares

Recei
ve

Cash
flows
from
financi
ng
activiti
es

Cash out:

Drawi
ngs
Dividends
paid

Paym
ent of
longterm

Construction of cash
flow statements
Two methods: Indirect & Direct
methods
Statement
of cash flows for the year ended
Indirect
method:
Cash flows from operating activities
Net profit

xxx

Adjustments on net profit to get net cash


flows from operating activities: Increase or
(decrease)

xxx

Cash flow from investing activities

xxx

Cash flow from financing activities

xxx

Net increase (decrease) in cash

xxx

Cash balance at the beginning of the period

xxx

Construction of cash
flow statements
Direct method:
Statement of cash flows for the year
ended
Cash flows from operating
activities
Total cash receipt from operating
xxx
activities
Cash paid from operating activities
xxx
Cash flow from investing activities
xxx
Cash flow from financing activities
xxx
Net increase (decrease) in cash
xxx
Cash balance at the beginning of the
xxx

Example 1
Balance sheet as at 31.12.10 and 31.12.11
31.12.10
31.12.11
Fixed
RM
RM
RM
RM
assets
Premises
25,000
28,800
Current assets
Inventory
12,500
12,850
Receivable
21,650
23,140
s
Cash &
4,300
5,620
bank
38,450
41,160
Less: Current

Example 1
Balance sheet as at 31.12.10 and 31.12.11
31.12.10
31.12.11
Financed
RM
RM
RM
RM
by:
Capital
Add: Net profit
Less: Drawings

52,600
16,550
69,210
17,110
52,100

52,100
25,440
77,540
18,250
59,290

Required: Draw the Cash Flow Statements using indirect


method.

Example 1: Answer
Cash Flow Statement for the year ended
31.12.11
Cash flows from operating activities
Net profit
25,440
Adjustments on net profit to get
net cash flows from operating
activities:
-Increase in
350
inventories
-Increase in
1,490
debtors
-Decrease in
230
(2,070)
creditors

Example 1: Answer
Net cash flow from operating
activities
Cash flow from investing
activities
-Purchase
premises
Net Cash flow before financing
activities
Cash flow from financing
activities
-Drawings
Net increase (decrease) in cash
Cash balance at the beginning of

23,370

(3,800)
19,570

(18,250)
1,320
4,300

Summary
Cash flow Increase
from

Decrease

Operating

Decrease CA
Increase CL

Increase CA
Decrease CL

Profits
Sale FA
Introduces capital
Sale of shares

Losses
Purchase FA
Drawings
Dividends paid

Received longterm loan

Payment of longterm loan

Investing
Financing