BSc Logistics with Supply Chain Management

Introduction to Accounting – BM1ACC

Lecture 4: Cash flow Statement

Ms Razan Al Riyami
Faculty of Transport & Logistics
Recap – Previous Session
• Income Statement Measures profitability of a business over an
Accounting period by taking away expenses incurred from the
revenues earned
• Revenue recognition (when earned / prudence)
• Expense recognition (Matching convention)
• Preparing a simple income statement
Learning outcomes
At the end of today’s session, you should be able to:
• Explain the nature and purpose of cash flow statement
• Prepare a cash flow statement
• Interpret the information contained within a cash flow statement.
What is cash flow statement?
• Cash flow statement is:
• One of the key financial statements (other
two are SOFP & income statement).
• A statement of cash receipts & payments.
• Shows the movements of cash resources
during a particular accounting period.
Purposes of the Statement of Cash Flows
• Predict future cash flows
• Evaluate management decisions
• Determine the ability to pay dividends
to Shareholders’ and payments to
creditors
• Show the relationship between profit
and cash flows
Cash vs. Profit
Cash
• Actual money, notes and coins in
hand, deposits in the bank or
similar institutions accessible to
the business on demand
Profit
• Flow of wealth
• Profit is a result of excess of
revenues over expenses
• (Recall the previous lecture!!)
Cash vs. Profit. Cont…
Example Transaction
Customer buys goods for £50,000
on 60 days credit
Marketing campaign for the year
costing £10,000 ordered from
marketing agency
New factory machinery bought for
£150,000
Depreciation charge of £100,000 to
reflect use of factory non-current
assets
What happens to Profit?
Sales of £50,000 are
recognised immediately
Cost of £10,000 included in
marketing costs
No effect. (only periodic
depreciation recognized)
Depreciation of £100,000
included as a expense
What happens to Cash Flow
Cash inflow of £50,000 when
the customer actually pays
Cash outflow of 10,000 when
the marketing agency is paid
Cash outflow of £150,000 paid
to supplier of machinery
No effect on cash flow
Cash equivalents
• Should be treated as cash. Examples:
• Short term highly liquid investments
• readily convertible to a known amount of cash
• Insignificant risk of change in value.
Decision chart for identifying cash
equivalents
Are the investments No
short term?
For example, a one-month bank
Yes term-deposit is a cash equivalent
and so governments’ treasury bills
Are they readily
convertible to cash?
No are; but some shares sellable in
stock exchange are not a cash
Yes equivalent
Is there an insignificant No
risk of changes in value?

Yes

Cash Not a cash

equivalent equivalent
Preparing Cash Flows Statement
• Basic Organisation of the
Statement of Cash Flows (IAS7) Financing
activities

Investing
activities

Operating
activities
Standard presentation of the statement of cash
flows
Cash flows
from operating activities
plus or
minus

Cash flows
from investing activities
plus or
minus

Cash flows
from financing activities

equals

Net increase (or decrease) in cash and

cash equivalents over the period
 Company Name
Statement of Cash Flows
For the year ended 31 December 2018
Cash flows from operating activities: £
[List of individual inflows and outflows]
Net cash provided (used) by operating activities
Cash flows from investing activities:
[List of individual inflows and outflows]
Net cash provided (used) by investing activities
Cash flows from financing activities:
[List of individual inflows and outflows]
Net cash provided (used) by financing activities
Net increase (decrease) in Cash
Cash (and equivalents) balance at beginning of period
Cash (and equivalents) balance at end of period
Operating Activities
Inflows
Inflows from:
from:
 Sales to customers.
Sales to customers.
 Interest and dividends
Interest and dividends
received.
received. +
Cash
Cash
Outflows
Outflows to:
to: Flows
Flows
 Suppliers of merchandise
Suppliers of merchandise from
from
and
andservices.
services.
 Employees. Operating
Operating
Employees. _
 Lenders for interest.
Lenders for interest. Activities
Activities
 Governments for taxes.
Governments for taxes.
 Interest* and dividends*
Interest* and dividends*
paid
paid
Operating Activities
• It reflects the day-to-day operations that determine the future of an
organisation

• Generated and used up by revenues, gains/expenses, losses -

respectively
Investing Activities
Inflows
Inflowsfrom:
from:
 Selling investments and plant
Selling investments and plant
assets.
assets.
 Collecting of principal on loans.
Collecting of principal on loans. + Cash
Cash
Flows
Flows
from
from
Outflows
Outflowsto:
to: Investing
 Payments
Investing
Paymentsto toacquire
acquire _
investments
investments andplant
and plantassets.
assets. Activities
Activities
 Purchase
Purchasedebt
debtororequity
equity
investments.
investments.
 Make
Makeloans.
loans.
Financing Activities
Inflows
Inflowsfrom:
from:
 Borrowing.
Borrowing.
 Equity (for example, from issuing
Equity (for example, from issuing
shares).
shares). + Cash
Cash
Flows
Flowsfrom
from
Financing
Financing
Activities
Activities
Outflows
Outflowsto:
 Repayments
to: _
Repaymentsof ofborrowed
borrowed
funds.
funds.
 Owners
Ownersfor
fordividends*.
dividends*.
Operating, Investing, and Financing Cash
Flows and the SOFP elements
Tesco plc Summary group statement of cash flows
for the year ended 25 February 2017
£m
Cash generated from operations 2,558
Interest paid (522)
Corporation tax paid (47)
Net cash generated from operating activities 1,989
Net cash generated from investing activities 279
Net cash used in financing activities (1,387)
Net increase in cash and cash equivalents 881

Source: Adapted from Tesco plc, Annual Report and Financial Statements 2017, p. 90, www.tescoplc.com.
Cash Flow Preparation Methods
1. Direct Method Cash Flow Preparation Methods
2. Indirect Method Direct Method

• Nearly all corporations prepare

the statement of cash flows
using the indirect method.

Indirect Method

Direct Method Indirect Method

Cash Flow Preparation Direct Method
• Example 1: Nadia’s Shop
• Below is the income statement for days 1 - 7

£
Sales 700
Cost of sales -500
Gross profit 200

Less Expenses
Rent -50

Net profit 150

Cash Flow Preparation. Cont…
• Example 1: Ghaida’s Shop
• Below is the SOFP as at day 7
Assets £
Bank 1,150

Total assets 1,150

Equity and Liabilities

Equity introduced 1,000
Profit for the period 150

Total Equity and Liabilities 1,150

Cash Flow Preparation Direct. Cont…
• Example 1: Ghaida’s Shop
• Below is the cash account for days 1 - 7
Opening Balance 0
Receipts: Sales 700
Introducing Equity 1,000
1,700

Payment: Purchases 500

Rent 50
550

Closing Balance 1,150

1,700
Ghaida’s shop [Direct Method]
• Cash flow statement for day 1-7

Sales 700
Purchases (500)
Rent (50)
Cash flow from operating activities 150
Cash flow from financing activities 1000

Increase/(decrease) in cash balance 1150

====
Take a break!
• A key topic ‘Indirect Method’ will
continue
Operating Activities [indirect method]
• Deduce Operating Cash Flows from Net Profit (before tax)
• Three basic adjustments
1. Add back depreciation expense, also add
back/subtract interest expense/interest
revenue

2. Add back losses and subtract gains

associated with the sale of investment or
property, plant, and equipment.

3. Adjust for changes in current assets and

current liabilities associated with operations.
Operating Activities [indirect method]

Change in Change in
Current Asset Current Liability

Increase = Increase =
Decrease in Increase in
cash cash

Decrease = Decrease =
Increase in Decrease in
cash cash
The indirect method of deducing the net cash
flows from the operating activities
Progress Check 1
Last year the Buraimi company’s operating profit was £10,000, after
charging depreciation of £8,000. During the year, Inventory increased
by £3,000, Receivables increased by £4,000, and Payables increased by
£5,000. Their net cash inflow from operations was:
A. £12,000.
B. £16,000.
C. £20,000.
D. £18,000.
Progress Check 1: Solution
Net income
£10,000

Adjustments to reconcile net income to

cash provided by operating activities:

Depreciation expense
£ 8,000
Increase in Receivables
(4,000)
Increase in Inventory
(3,000)
Increase in Payables
5,000

6,000

Net cash provided by operating activities

£16,000
 Let’s prepare a
complete
Statement of
Cash Flows
using the
Indirect Method.
Indirect Method - Example
• Joe’s Place has prepared the SOFP as of 31 March 2018 and 31 March
2017. The income for the year ended 31 March 2018 has also been
prepared. Joe needs help preparing the Statement of Cash Flows.

Joe’s Place
Indirect Method - Example
Joe's
Joe's Place
Place
The
The£8,000
£8,000gain
gain was
was the
Statementthe result
result
of of
of and
Profit
Statement of Profit and Loss
Loss
selling land
selling land costing
costing
For the £32,000
£32,000
Year for
for 31
Ended Mar 2018
£40,000 For
during the Year
the Ended
period. 31 Mar 2018
£40,000 during the period.
Revenues
Revenues £727,000
£727,000
Operating
Operating Expenses
Expenses (748,000)
(748,000)
Depreciation
Depreciation Expense
Expense (6,000)
(6,000)
Gain
Gain on
on Sale
Sale of
of Land
Land 8,000
8,000
Net
Net Loss
Loss £19,000
£19,000
Indirect Method - Example
Joe's
Joe'sPlace
Place
Statement
StatementofofFinancial
FinancialPosition
Position
3/31/2017
3/31/2017 3/31/2018
3/31/2018
Assets
Assets
Cash
Cash £90,000
£90,000 £62,000
£62,000
Accounts
AccountsReceivable
Receivable 40,000
40,000 23,000
23,000
Inventory
Inventory 300,000
300,000 350,000
350,000
Land
Land 112,000
112,000 80,000
80,000
Equipment,
Equipment,net
net 45,000
45,000 39,000
39,000
Total
TotalAssets
Assets £587,000
£587,000 £554,000
£554,000
Indirect Method - Example
Joe's
Joe's Place
Place
Joe’s Place
Joe’s Place issued
issued £50,000
Statement
Statement of£50,000
of Financial
FinancialPosition
Position(continued)
(continued)
of
of new
new shares
shares to to settle
settle the
the 31/03/2017
31/03/2017 31/03/2018
31/03/2018
£50,000
£50,000 note payable.
Liabilities
note payable.
Liabilities
Accounts
Accounts Payable
Payable £27,000
£27,000 £38,000
£38,000
Salaries
Salaries Payable
Payable 14,000
14,000 9,000
9,000
Long-Term
Long-TermNote Note Payable
Payable 50,000
50,000 --
Total
TotalLiabilities
Liabilities £91,000
£91,000 £47,000
£47,000
Equity
Equity
Share
Share Capital
Capital £450,000
£450,000 £500,000
£500,000
Retained
RetainedEarnings
Earnings 46,000
46,000 7,000
7,000
Total
TotalOwners'
Owners' Equity
Equity £496,000
£496,000 £507,000
£507,000
Total
TotalLiabilities
Liabilities and
andOEOE £587,000
£587,000 £554,000
£554,000
Indirect Method - Example
Joe's
Joe'sPlace
Place
Ending SOFP (cont.)
Ending Retained
RetainedSOFPEarnings
(cont.)
Earnings
3/31/2017 1/8/2018
at 31 Mar 2018 was 3/31/2017
computed 1/8/2018
at Liabilities
31 Mar 2018 was computed
Liabilities
as follows:
Accounts Payable
Accounts Payable
as follows: £27,000
£27,000 £38,000
£38,000
Salaries
Salaries Payable
Payable
Beginning R/E, 14,000
14,000 9,000
9,000
Beginning R/E, 01/4/2017
01/4/2017 £46,000
£46,000
Long-Term
Long-Term
–– Net Note
Note Payable
Payable 50,000
50,000 --
Net Loss
Loss for
for 2018
2018 (19,000)
(19,000)
Total Liabilities
–– Dividends Paid £91,000 £47,000
Total Liabilities
Dividends Paidin in2018
2018 (20,000)
£91,000
(20,000) £47,000
Owners'
== Ending
Owners' Equity
R/E, 31/3/2018
Equity £7,000
Ending R/E, 31/3/2018 £7,000
Common Stock
Common Stock £450,000
£450,000 £500,000
£500,000
Retained
Retained Earnings
Earnings 46,000
46,000 7,000
7,000
Total
TotalOwners'
Owners'Equity
Equity £496,000
£496,000 £507,000
£507,000
Total
TotalLiabilities
Liabilitiesand
and OE OE £587,000
£587,000 £554,000
£554,000
Indirect Method - Example
Joe's
Joe's Place
Place ££
Cash
Cash Flows
Flows from
fromOperations:
Operations:

Net
Net Loss
Loss -19000
-19000

With
Withthe
theindirect
indirect method,
method,
always
alwaysstart
startwith
withthe
thenet
netincome
income
or
or net
net loss
loss for
forthe
theperiod.
period.
Indirect Method - Example
Joe's
Joe'sPlace
Place
Cash
CashFlows
Flowsfrom
fromOperations:
Operations: ££

Net
Net Loss
Loss -19,000.00
-19,000.00
Add/Less:
Add/Less: Changes
Changesin inCurrent
Current Assets
Assets&
& ??
Current
Current Liabilities
Liabilities

Change
Changein inAccount
AccountBalance
BalanceDuring
DuringYear
Year
Increase
Increase Decrease
Decrease
Current
Current Subtract from net
Subtract from net Add
Add tonet
to netincome.
income.
Assets
Assets income.
income.
Current
Current Add
Add tonet
to netincome.
income. Subtract
Subtractfrom
fromnet
net
Liabilities
Liabilities income.
income.
Indirect Method - Example
Joe's
Joe's Place
Place
Cash
Cash Flows
Flows from
fromOperations:
Operations: ££

Net
Net Loss
Loss -19,000.00
-19,000.00
Add:
Add: Decrease
Decrease in
in Accounts
Accounts Receivable
Receivable 17,000.00
17,000.00

Accounts
Accountsreceivable
receivabledecreased.
decreased.
31/3/18
31/3/18 31/3/17
31/3/17
£23,000
£23,000--£40,000
£40,000== £(17,000)
£(17,000)
Indirect Method - Example
Joe's
Joe'sPlace
Place
Cash
CashFlows
Flowsfrom
fromOperations:
Operations: ££

Net
NetLoss
Loss -19,000.00
-19,000.00
Add:
Add: Decrease
DecreaseininAccounts
AccountsReceivable
Receivable 17,000.00
17,000.00
Increase
Increasein
inAccounts
AccountsPayable
Payable 11,000.00
11,000.00

Accounts
Accountspayable
payableincreased.
increased.
31/3/18
31/3/18 31/3/17
31/3/17
£38,000
£38,000--£27,000
£27,000== £11,000
£11,000
Indirect Method - Example
Joe's
Joe's Place
Place
Cash
Cash Flows
Flows from
fromOperations:
Operations: ££

Net
Net Loss
Loss -19,000.00
-19,000.00
Add:
Add: Decrease
Decrease inin Accounts
Accounts Receivable
Receivable 17,000.00
17,000.00
Increase
Increase in
in Accounts
Accounts Payable
Payable 11,000.00
11,000.00
Subtract:
Subtract: Increase
Increase in
in Inventory
Inventory -50,000.00
-50,000.00

Inventory
Inventoryincreased.
increased.
31/3/18
31/3/18 31/3/17
31/3/17
£350,000
£350,000-- £300,000
£300,000== £50,000
£50,000
Indirect Method - Example
Joe's
Joe's Place
Place
Cash
Cash Flows
Flows from
fromOperations:
Operations: ££

Net
Net Loss
Loss -19,000.00
-19,000.00
Add:
Add: Decrease
Decrease inin Accounts
Accounts Receivable
Receivable 17,000.00
17,000.00
Increase
Increase in
in Accounts
Accounts Payable
Payable 11,000.00
11,000.00
Subtract:
Subtract: Increase
Increase in
in Inventory
Inventory -50,000.00
-50,000.00
Decrease
Decrease inin Salaries
Salaries Payable
Payable -5,000.00
-5,000.00

Salaries
Salariespayable
payabledecreased.
decreased.
31/3/18
31/3/18 31/3/17
31/3/17
£9,000
£9,000--£14,000
£14,000== £(5,000)
£(5,000)
Indirect Method - Example
Joe's
Joe's Place
Place
Cash
Cash Flows
Flows from
fromOperations:
Operations: ££

Net
Net Loss
Loss -19,000.00
-19,000.00
Add:
Add: Decrease
Decrease in in Accounts
Accounts Receivable
Receivable 17,000.00
17,000.00
Increase
Increase in
in Accounts
Accounts Payable
Payable 11,000.00
11,000.00
Subtract:
Subtract: Increase
Increase in
in Inventory
Inventory -50,000.00
-50,000.00
Add
Add back
backnon-cash
Decrease
Decrease in Salariesexpenses.
in Salaries
non-cash Payable
expenses.
Payable -5,000.00
-5,000.00
Add:
Add: Depreciation
Depreciation Expense
Expense 6,000.00
6,000.00
Indirect Method - Example
Joe's
Joe's Place
Place
Cash
CashFlows
Flows from
fromOperations:
Operations: ££

Net
Net Loss
Loss -19,000.00
-19,000.00
Add:
Add: Decrease
Decrease inin Accounts
Accounts Receivable
Receivable 17,000.00
17,000.00
Increase
Increase in
in Accounts
Accounts Payable
Payable 11,000.00
11,000.00
Subtract:
Subtract: Increase
Increase in
in Inventory
Inventory -50,000.00
-50,000.00
Decrease
Decrease inin Salaries
Salaries Payable
Payable -5,000.00
-5,000.00
Add:
Add: Depreciation
Subtract
Depreciation Expense
gains.
Expense 6,000.00
6,000.00
Subtract gains.
Subtract:
Subtract: Gain
Gain on
on Sale
Sale of of Land
Land -8,000.00
-8,000.00
Net
Net cash
cashflow
flowfrom
fromoperations
operations -48,000.00
-48,000.00
Indirect Method - Example
Joe's
Joe'sPlace
Place
Statement
Statement of
of Cash
CashFlows
Flows
For
For the
theYear
Year Ended
Ended3131Mar
Mar 2018
2018
Cash
CashFlows
Flowsfrom
fromOperating
OperatingActivities
Activities £(48000)
£(48000)
Cash
CashFlows
Flowsfrom Investing
The
from Activities
operating
Investing cash
Activities
The operating cash
flows
flowsamount
amount comes
comes
Cash
CashFlows
Flowsfrom Financing
fromfrom the
Financing Activities
schedule
Activities
from the schedule
just
just prepared.
prepared.
Net
Net Change
ChangeininCash
Cashfor
for the
thePeriod
Period
Beginning
BeginningCash
CashBalance
Balance
Ending
EndingCash
CashBalance
Balance
Indirect Method - Example
Joe's
Joe'sPlace
Place
Statement
Statement of
of Cash
CashFlows
Flows
For
For the
theYear
Year Ended
Ended3131Mar
Mar 2018
2018
Cash
CashFlows
Flowsfrom
fromOperating
OperatingActivities
Activities -£48,000
-£48,000
Cash
CashFlows
Flowsfrom
fromInvesting
InvestingActivities
Activities
Proceeds
Proceedsfrom
fromsale
saleof
of land
land 40,000
40,000
Cash
CashFlows
Flowsfrom
fromFinancing
FinancingActivities
Activities
Land
Landoriginally
originallycosting
costing£32,000
£32,000
was
was sold
sold for
for £40,000.
£40,000.
Net Change in Cash for the Period
Net Change in Cash for the Period
Beginning
BeginningCash
CashBalance
Balance
Ending
EndingCash
CashBalance
Balance
Indirect Method - Example
Joe's
Joe'sPlace
Place
Statement
Statement of
of Cash
CashFlows
Flows
For
For the
theYear
Year Ended
Ended3131Mar
Mar 2018
2018 ££
Cash
CashFlows
Flowsfrom
fromOperating
OperatingActivities
Activities -48,000
-48,000
Cash
CashFlows
Flowsfrom
fromInvesting
InvestingActivities
Activities
Proceeds
Proceedsfrom
fromsale
saleof
of land
land 40,000
40,000
Cash
CashFlows
Flowsfrom
fromFinancing
FinancingActivities
Activities
Dividends
Dividendspaid
paidto
toowners
owners (20,000)
(20,000)
Net
Net Change
ChangeininCash
Cashfor
for the
thePeriod
Period
Dividends
Dividends
Beginning of
of £20,000
BeginningCash
Cash£20,000 were
Balance
Balancewerepaid
paidto
to
Endingowners
Ending Cash during
duringthe
CashBalance
owners Balance theyear.
year.
Indirect Method - Example
Joe's
Joe'sPlace
Place
Statement
Statement of
of Cash
CashFlows
Flows
For
For the
theYear
Year Ended
Ended3131Mar
Mar 2018
2018 ££
Cash
CashFlows
Flowsfrom
fromOperating
OperatingActivities
Activities -48,000.00
-48,000.00
Cash
CashFlows
Flowsfrom
fromInvesting
InvestingActivities
Activities
Proceeds
Proceedsfrom
fromsale
saleof
of land
land 40,000.00
40,000.00
Cash
Cash Flows
Compute
Flows from
thefrom Financing
net change
Financing Activities
in cash
Activities
Compute the
Dividends
net
paid
change
to owners
in cash -20,000.00
Dividends paid to owners
for -20,000.00
forthe
theperiod.
period.
Decrease
DecreaseininCash
Cashfor
for the
thePeriod
Period -28,000.00
-28,000.00
Beginning
BeginningCash
CashBalance
Balance
Ending
EndingCash
CashBalance
Balance
Indirect Method - Example
Joe's
Joe'sPlace
Place
Statement
Statement of
of Cash
CashFlows
Flows
For ££
Forthe
theyear
yearended
ended31
31Mar
Mar2018
2018
Cash
CashFlows
Flowsfrom
fromOperating
OperatingActivities
Activities -48,000
-48,000
Cash
CashFlows
Flowsfrom
fromInvesting
InvestingActivities
Activities
Proceeds
Proceedsfrom
fromsale
saleof
of land
land 40,000
40,000
Complete
Complete the
the Statement
Statement of
of Cash
Cash
Cash
Cash Flows
Flows from
from Financing
Financing Activities
Activities
Flows
Flows by
by reconciling
Dividendsreconciling
paid to beginning
beginning
owners -20,000
Dividends paid to owners -20,000
cash
cash to
to ending
ending cash.
cash.
Decrease in Cash for the Period
Decrease in Cash for the Period -28,000
-28,000
Beginning
BeginningCash
CashBalance
Balance 90,000
90,000
Ending
EndingCash
CashBalance
Balance 62,000
62,000
Indirect Method - Example
Joe's
Joe'sPlace
Place
Statement of Cash Note
Note
Flowsthat
that the
the ending
ending
Statement of Cash Flows
For
For the
theYear
Year Ended
Ended3131Mar
cash
cashamount
Mar 2018
2018 amount ££ ties
ties
back to the SOFP at
back to the -48,000
SOFP at
In
Cash addition,
Flows
Flows from
from on the
Operating
In addition, on the face
Cash Operatingface
Activities
Activities -48,000
31/3/2018.
31/3/2018.
of
Cash
Cash the statement
Flows
Flows from
from or
Investing
of the statement or in a
Investing in a
Activities
Activities
Proceeds
Proceedsfromfromsale
saleof
of land 40,000
supplemental
supplemental land 40,000
Cash Flows
Flowsfrom Financing Activities
schedule,
Cash
schedule,
Dividends
disclose
from Financingthe
disclose Activities
the
Dividendspaid
paidto
toowners
owners -20,000
-20,000
£50,000
£50,000 noncash
noncash
Decrease
Decrease in Cashfor
in Cash for the
thePeriod
Period -28,000
-28,000
financing
financing
Beginning
Beginning Cash activity.
activity.
CashBalance
Balance 90,000
90,000
Ending
EndingCash
CashBalance
Balance 62,000
62,000
Cash Flow Preparation – guideline for determining
cash flows from disposals on non-current assets

Carrying value + Gain – Loss = Sale proceeds

£32,000 + £8,000 – 0 = £40,000

(Sales proceeds)
Progress Check 2 – disposals (Exam Type Q)
The operating profit of Walsall Limited was £540,000 for the period
ended 31st December 2017. It was arrived at after including a profit of
£40,000 which arose on the sale of some machinery which had
originally cost £530,000 and on which depreciation of £500,000 had
been charged. How much sale proceeds should be shown for sale of
machinery in the cash flow statement?
A. 70,000
B. 40,000
C. 30,000
D. 500,000.
Progress Check 2 – disposals
The operating profit of Walsall Limited was £540,000 for the period
ended 31st December 2017. It was arrived at after including a profit of
£40,000 which arose on the sale of some machinery which had
originally cost £530,000 and on which depreciation of £500,000 had
been charged. How much sale proceeds should be shown for sale of
machinery in the cash flow statement?
A. 70,000
B. 40,000
C. 30,000
D. 500,000.
Interpreting cash flow statements
• HOW TO INTERPRET THE INFORMATION CONTAINED WITHIN A CASH
FLOW STATEMENT?
• Does it tell us anything about the future?
• Forecasting cash flow - you can check the timing and amount of cash flows.
• By doing so you can see whether they are in accordance with your business
plans.
• If you foresee a cash deficit that might be short-term you can have a word with
your bank manager and arrange a short-term loan or overdraft facility. Lenders
would like to see your cash flow forecast.
• Ideally, cash flow from operating activities should be at least equal to net
income [Quality of Earnings].
• This will be continued in the management accounting part of this module.
Exam type self assessment questions
• The proceeds from the sale of a non-current asset would appear in which section of the cash flow statement?

A. Cash from operating activities

B. Cash from investing activities
C. Cash from financing activities
D. It would not appear in the cash flow statement– it goes in the income statement

• If inventories have increased by £8,000 during the period, receivables have increased by £2,000 for the period
and payables increased by £4,000 for the period, what is the net effect on the cash flow statement?

A. No effect as these are all credit transactions and therefore there is no effect on cash
B. £6,000 net decrease in cash
C. £2,000 net increase in cash
D. £12,000 net decrease in cash
Self-assessment Example
OMD Equipment, Plc., reported the following data for 2017:

On the Income Statement

• Net profit . . . . . . . . . . . . . . . . . . . . . £44,000
• Depreciation . . . . . . . . . . . . . . . . . . . . 8,000

On the Statement of Financial Position

• Increase in Accounts receivable . . . . . . 7,000
• Decrease in Accounts payable . . . . . . . 4000

• Required
Compute OMD’s net cash provided by operating activities - indirect method.
OMD (Partial) Statement of Cash flows
For the year ended 31 Dec 2017
Interpreting cash flow statement
• Real life example
• Link
Private Study and Reading
• READING – Chapter Five of Atrill and Mclaney (2017) - available in the
library

• Prepare for your seminar