• NEED FOR CASH FLOW

Why does profit made during period not equate to an increase in cash and bank balances?

There are three main reasons why this does not occur:

1. Profit is calculated on an accruals basis.

2. Calculation of profit includes some items that do not affect cash at all or affect it differently.
ADJUSTMENTS NEEDED TO NET PROFIT

• DEPRECIATION

• ALLOWANCE FOR DOUBTFUL DEBTS

• PROFIT / LOSS ON SALE OF ASSETS

• INCREASE / DECREASE IN INVENTORY

• INCREASE / DECREASE IN ACCOUNTS RECEIVABLE

• INCREASE / DECREASE IN ACCOUNTS PAYABLE

• The statement of cash flows has three sections:
1. Cash flows from operating activities
• As the name implies, this is the cash flow from operating the business and mainly relates to the
income statement. This is called ‘ cash generated from operations ’ . Cash from operating activities is
then calculated after deducting:
• Interest paid Income tax paid

2. Cash flows from investing activities

• This has four main sections:
• Purchase of non-fixed assets Proceeds on sale of non-fixed assets
• Interest received Dividend received

3. Cash flows from financing activities

• This has four main sections:
• Proceeds from issuing shares Proceeds from loans
• Repayment of loans Payment of dividends
• Cash flows from operating activities – cash generated from operations
Operations are normal, everyday activity of company that earn it profit, and that result in cash
flow.

OPERATING PROFIT (Statement of Comprehensive Income) -------------

• 13.3.5 Cash flows from investing activities

• It shows purchase of non-current fixed assets and their disposal.

• 13.3.6 Cash flows from financing activities

• This section shows proceeds from issuing shares, debentures or loans The payment of
dividends will be found in the statement of changes in equity.