Week 13

Statement of Cash Flows

Learning Objectives
1. Purpose of preparing a Statement of
Cash Flows
2. Distinguish among operating,
investing and financing activities
3. Prepare Statement of Cash Flows

P3
IMPORTANCE OF CASH
• Imagine that you are the owner of a company and you
were asked to choose, which one would you prefer.
First case :
a) Your shop makes a net profit of RM30,000 this year, and
at the year end, you have inventory of RM10,000 and you
owe suppliers RM10,000
b) Your shop makes a net profit of RM8,000 this year, and
at the year end, you have inventory of RM2,000 and
RM5,000 cash, no debtors and no liabilities
Second case :
a)Your shop makes a net profit of RM30,000 this year, and at
the year end, RM10,000 amounts owed by clients, RM10,000
amounts owe to trade creditors
b)Your shop makes a net profit of RM8,000, and at the year
end, RM2,000 amounts owed by clients, have cash of
RM5,000 and having no liabilities

You are in business because you want to make a profit, aren’t

you? So which one would you prefer? Having a lot of profit or
having cash?
SHORTAGE OF CASH
•This is a problem faced by many small businesses and this
is the main cause of failing of business/trading in the first
several years.
•Some of owners were too busy to look after their own
financial position
•A partnership whose products will not be on the market for
quite a long time has invested in some very expensive
machinery. A lot of money has been spent now, but no
income will result in the near future.
•If all your assets is in the form of inventory?
•Selling inventory at cost?
•Selling inventory below cost?
• Some of owners were too busy to check the credit
worthiness of the new customers and some were too
busy to check when existing clients ask for an
increase in the level of their credit
• A company has been over-generous with credit terms
to debtors, and last year, company extended the time
in which debtors could pay from one month to three
months. And the company has taken a few customers
who are not creditworthy and such sales may leads in
bad debts in future
• Getting money from debtors?
 STATEMENT OF CASH FLOWS
 A statement that reports cash receipts (inflows) and
cash payments (outflows) of the company during a
period.
 It shows where cash came from and how it was spent.
 Cash flows are defined to include both cash and cash
equivalents in the statement. Cash consist of cash on
hand and deposits, and cash equivalents are short term,
highly liquid investments that can readily be converted
into cash and will not subjected to significant risk of
changes in value. They have short term maturity of
three months or less from the date of acquisition.
PURPOSE OF STATEMENT OF CASH
FLOWS
 To evaluate management decisions – users of the
statement of cash flows will be able to assess effectiveness
of the company management in generating and utilizing
their cash and cash equivalents during the reporting period.
 To show relationship of net income to changes in business’
cash – since net income is achieved from accrual basis
accounting, there might be some limitations as for its
reliability in providing information on the success or failure
of a business. The statement of cash flows is more easily
understood and more useful in decision making as non-
cash items are excluded.
 To determine the ability to pay existing debts as they
mature – the creditors and shareholders will be able to
assess the ability of the company to pay them.
WHERE FROM : WHERE TO ?
Cash Resources
Cash comes in Cash goes out
Profit Losses

Sales of non-current assets Purchase of non-current assets

Decrease in inventory Increase in inventory

Decrease in accounts Increase in accounts

receivables receivables
Capital injected Drawings

Loans received Loans repaid

Increase in accounts payable Decrease in accounts payable

 COMPONENTS OF THE STATEMENT
OF CASH FLOWS
1. Operating activities
•Transactions that determines net income
•Principal revenue-producing activities of a company such as
sales of goods and services and all operating costs incurred to
earn that revenue.
•Reflect the core of the business to generate sufficient cash to
continue operation
Eg :
1. Cash inflows from operating activities
- Collection of cash from customers for cash sales,
collection of cash from customers from credit sales
2. Cash outflows from operating activities
- Payment made to suppliers for purchases of goods and
services, payment made to employees, payments of taxes
to government
 COMPONENTS OF THE STATEMENT
OF CASH FLOWS

2. Investing activities
•Transactions that affect non-current assets which are
acquisition of non-current assets and disposal of non-current
assets
Eg :
1.Purchase of non-current assets
2.Sales of non-current assets
3.Sales of non-current investment
 COMPONENTS OF THE
STATEMENT OF CASH FLOWS
3. Financing activities
•Transactions that affect the obtaining and repaying of
financial resources from owners and other providers of
funds.
•Generally will affect the long term liabilties and owners’
equity/capital
Eg :
1.Borrowing and repaying the principal amounts relating to
short and long term debts
2.Cash receipts from issuance of shares, loans, short term
borrowings and long term borrowings.
 FORMAT
Statement of cash flows for the year ended 31 December 2015
Cash flows from operating activities :
Net income before taxation xx

Adjustment for :
Depreciation xx
Loss/gain in sales of non-current assets xx/(xx)
Increase/decrease in allowance for doubtful debts xx/(xx)

Increase/decrease in inventory (xx)/xx

Increase/decrease in accounts receivables (xx)/xx
Increase/decrease in accounts payables xx/(xx)

Taxes paid (xx)

Net cash inflows / outflows from operating activities xx

Cash flows from investing activities :
Purchase of non-current asset (xx)
Proceeds from disposal of non-current assets xx
Purchase of investment (xx)

Net cash inflows / outflows from investing activities xx

Cash flows from financing activities :

Proceeds -issuance shares/capital injected xx
Redemption of shares/purchase back shares (xx)
Proceeds from long term borrowings xx
Repayments of long term borrowings (xx)
Payment of dividends (xx)

Net cash inflows / outflows from financing activities xx

Net increase /(decrease) in cash and cash equivalents xx

Cash and cash equivalents at the beginning of period xx
Cash and cash equivalents at the end of period xx