CASH FLOW STATEMENT

 DIRECT METHOD
 INDIRECT METHOD
 CASH FLOW STATEMENT

One of the fin stmt presented by companies

as part of statutory requirement
 
Lists out cash inflow and outflow from
various sources.
 
Provides info to mgt on the co.’s cash flow
and its effect on the liquidity of the co.
 CASH FLOW STATEMENT

• Aid users to assess the effectiveness of mgt to

provide and utilize cash and cash equivalent.

• Indicate the reason why the co. while making

profits is facing a cash flow problem – unable to
pay creditors and cash dividend. Why??
CASH  PROFIT
 CASH FLOW STATEMENT

• When used in conjunction with the P/L and B/S,

it will provide info, which will enable users to
evaluate an enterprise’s changes in net assets,
financial structure and ability to affect the
amounts and timing of cash flow.
•  
• Definition:
• CASH = cash in hand, at the bank and deposits.
• CASH EQ. = Short term, highly liquid investments
 FORMAT OF CFS

• MFRS 107- to show the inflows and outflows of

cash and cash equivalent from three main
activities; operating, investing and financing.

• Classification by activity may indicate the effect

of the three activities on the cash resources and
the inter- dependency of one and another. Ex.
to what extent cash from operations was used
to finance investing activities.
 OPERATING ACTIVITIES

• Not an investing or financing

• Principal revenue-producing activity
 INVESTING ACTIVITIES

Involve acquisition of l/term assets, either

to replace or due to expansion, and the
sale of f.a.
 FINANCING ACTIVITIES

• Involve the obtaining of financial

resources from owners and other
providers of l/term capital – providers
receive a return.
 TAXES

• MFRS 107 – tax paid on income treated as

part of operating activity. If tax is
associated with financing or investing, it
should be appropriately disclosed and not
disclosed as part of the operating act.
 DIVIDENDS & INTEREST

• CF from div. and interests paid and

received should be separately disclosed.

• In P/L, int. paid and received and div.

received may be classified as part of the
income.
 DIVIDENDS & INTEREST

• In CFS, int. paid and recd. and div. recd.

may be categorized as being part of
operating, investing or financing activity.

• Dividends paid may be classified as

financing activity as it is the cost of
obtaining capital by issuing shares.
 DIVIDENDS & INTEREST

• On the other hand, div. paid may be

categorized as part of operating activity
and shown as a cash outflow from
operating to aid users to determine the
ability of the co. to pay div. out of
operating cf.
 CASH FLOW FROM
OPERATING ACTIVITIES
• Main source of cash inflow for any
successful business is from operating
activities.

• If a co. has a negative cash flow (net

outflow from operation), it can be said
that the co. is suffering from liquidity
problems.
• Amount of net cash inflow from operating
indicates the amount of cash that was utilized
to replace and expand the operating capacity –
purchase of FA, repay l/term borrowing, pay
div.

• Comparison can be made with previous years’

or with companies within the same industry to
detect trends.
 Direct Method

• Easy to comprehend - the various cash receipts

and payments are listed by name, one by one;
no adjustments need to be made for non-cash
item.

• Detail information is required to enable the

preparation of the CFS using the direct method
to determine the CF from operations.
• The info can be obtained:
– From the accounting records, or
– By adjusting sales, COS, and other items in
the FS
• The main source of inflow of cash is from:
– Cash sales, and
– Collection from debtors, which can be
determined as follows:
• [ sales + opening debtors – closing debtors] or,
• [ sales + decrease in debtors (or sales – increase
in debtors) ]
• Cash payments from operations are:
– Cash purchases, and
– Cash paid to suppliers, which can be derived as
follows:
• [purchases + opening creditors – closing creditors], or
• [purchases + decrease (or – increase) in creditors], or
• [cos + closing stock – opening stock + opening creditors –
closing creditors]
• Payment to Employees – payments made
to employees can be derived as follows:
[wages and salaries as per P/L + decrease
in accrued wages and salaries].
• Payment for other expenses may include
expenses that do not affect cf and can be
determined as: [other exp. as per P/L –
depreciation and amortization exp. –
losses on disposal of FA + decrease in
accrued exp. + increase in prepaid exp.]
 Indirect method

• The starting point is the PBT. Profit fig. derived

from P/L but bear in mind that the P/L a/c is
prepared on an accrual basis – CFS require
actual cf. from the operating act.

• If the P/L is not available, the NPBT has to be

worked out from the difference in the P/L as
disclosed in the opening and year-ending B/S.
• To the increase in the retained profits,
add any transfers to reserves, the tax
charge and the dividends paid/proposed
for the current year. The resultant figure
will be the PBT.
• In order to arrive at the c.f. from
operating activities two adjustments are
made to the PBT:
– Adjustments for expenses that do not affect
c.f, such as depreciation, amortization, etc.
(non-cash item & non operating item)
– Adjustment to recognize changes in working
capital items, except cash & cash equivalent.
• Taxation
Tax actually paid on the income -
normally tax paid during a year will be
the tax charge of the previous year.
 CASH FLOW FROM
INVESTING ACTIVITIES
• Cash inflow - sale of fixed assets and
l/term investments.

• Cash outflow – fixed assets and l/term

investments are purchased by paying
cash.
 CASH FLOW FROM
FINANCING ACTIVITIES
• Raising or repayment of capital and borrowings.
• Only cash received or payments made on
financing activities will be disclosed.
• Dividends paid – can be classified as financing
activity.
• Div. paid during the year are the previous
year’s proposed dividends and the current
year’s interim dividends.
 SCHEDULES TO THE CFS

• Components of cash and cash equivalents*

• Reconciliation of the amounts in the CFS with
the equivalent amounts reported in the B/S*
• Major non-cash transactions such as finance
lease
• Acquisition and disposal of subsidiary
• Segmental information
• Note: If the DIRECT method were used in
disclosing the CF from Operating
Activities, a schedule reconciling the net
CF to net profit will be useful
(RECONCILIATION OF OPERATING PROFIT
TO NET CASH INFLOW FROM OPERATING
ACTIVITIES)