PREPARE FINANCIAL STATEMENTS

Week 3
Cash Flow Statements

CASH FLOW STATEMENTS

All businesses prepare an Income Statement and a Balance Sheet to help the owners make decisions.
Another useful report that can be prepared is the Cash Flow Statement

CASH FLOW STATEMENTS

This Statement shows where the businesss cash came from and how it was spent. It is a summary of all cash receipts and all cash payments generated by the business. It is useful for a business owner to know where the cash is used. A profitable business may have cash flow problems. This report can help to explain why.

CASH FLOW STATEMENTS

The Income Statement and the Balance Sheet are prepared using the principles of accrual accounting. That is, transactions are recorded at the time they occur. The Cash Flow Statement is prepared using the principles of Cash Accounting. Transactions are only recorded when a movement of cash occurs. This means that there will be different amounts shown in the Cash Flow Statement compared with the Income Statement.

CASH FLOW STATEMENTS

Definitions Cash
This includes all cash accounts petty cash, cash on hand, cash at bank, deposits on call and bank overdraft. (Note: bank overdraft is a negative cash item).

Non cash transactions

These are transactions that do not involve a cash movement. They often occur from general journal entries prepared by the business. Common examples are depreciation expense, doubtful debts expense and profit or loss on the sale of an asset.

CASH FLOW STATEMENTS

Definitions Internal transactions Cash movements within the business are not included in the Cash Flow Statement For example, if the business transfers $10 000 from its ANZ account to its Westpac account that movement would not be shown in the cash flow statement as it has not changed the overall cash level in the business. Only transactions with organisations outside the business change the cash level.

Format of the Cash Flow Statement

1. 2. 3.

The Cash Flow Statement must be presented in accordance with the Accounting Standards. We have prepared a pro forma for your use. The statement is broken into four main areas. The first three categories explain the movement of cash, broken up into the areas of Operating, Investing and Financing.

Format of the Cash Flow Statement

The final area of the cash flow statement shows the total change in cash, the opening cash balance and then the closing cash balance.
The opening and closing cash balances agree to the amounts in the opening and closing Balance Sheets.

Pro forma Statement

Company Name Cash Flow Statement for the year ended
Cash Flows from Operating Activities
Receipts from customers Interest received Other income received Payments to suppliers and employees Interest paid GST paid/received GST paid on Investing Activities GST collected on Investing Activities

Net Cash from Operating Activities

Cash Flows from Operating Activities.

This area of the cash flow shows cash movements from the businesss operations. It mainly consists of items that are recorded in the Income Statement. Remember however that the amounts in the Income Statement may be different to those in the cash flow statement due to the different basis of accounting (cash versus accrual).

Cash Flows from Operating Activities.

Item
Receipts from customers Interest received Other income received Payments to suppliers & employees

Brief Details
Cash

sales incl GST Receipts from Debtors

Interest

on investments - No GST Interest on bank accounts - No GST

Commission

income Incl GST Rental income Incl GST

Cash

purchases of stock incl GST Payments to creditors Payments for other expenses/GST

Cash Flows from Operating Activities.

Item Interest paid Brief Details

Interest paid on loans Interest on overdraft GST paid/received The actual amount paid for GST or received as a refund from the tax office GST paid on Investing GST paid on the purchase of Activities fixed assets

GST collected on Investing Activities

The GST component of the sale of fixed assets

Pro forma Statement

Cash Flows from Investing Activities

Proceeds from the sale of fixed assets Payment for fixed assets Proceeds from the sale of investments Payments for investments

Net Cash from Investing Activities

Cash Flows from Investing Activities

Item Brief Description

Proceeds from sale of fixed assets

Payments for fixed assets

price of fixed assets sold excluding GST Note: This is not the profit or loss on the sale but the actual selling price net of GST Payment for land/buildings Payment for equipment Payment for motor vehicles Payment for plant Payment for furniture All exclusive of GST

Selling

Cash Flows from Investing Activities

Item Brief Description
Selling

Proceeds from sale of investments

price of investments Repayment of loans made by the business to outsiders

Payments for investments

Payment

of shares Payment of government bonds Payment for loans

Pro forma Statement

Cash Flows from Financing Activities
Additional capital contributed Drawings Proceeds from borrowings Repayment of borrowings

Net Cash used in Financing Activities

Cash Flows from Financing Activities

Item Brief Description

Additional capital contributed

Drawings Proceeds from borrowings Repayment of borrowings

Additional cash contributions of capital by owner sole trader or partners Amounts paid to the business owner sole trader or partners
Borrowings from loans, mortgages etc Repayment of loans, mortgages etc

Pro forma Statement

Net increase/decrease in cash Cash at beginning reporting period Cash at end of reporting period

Pro Forma Statement

Item Brief Description

Net increase/decrease in cash

Cash at Beginning of reporting period

The sum of the three cash flow sections Operating, Investing & Financing Cash Balance as per Balance Sheet at start of year

Cash at end of reporting Cash Balance as per Balance period sheet at end of year

Example 11.1

The following is the Bank account taken from the ledger of Contessotto Clothing Company for the year ended 30th June 2006.

Example 11.1
Bank Debit Opening Balance Debtors Interest revenue Commission inc/GST Capital $ 100 000 1 100 000 3 000 5 500 50 000 Credit Rent/GST Wages Creditors Electricity/GST Furniture/GST Drawings Loan GST Payable Advertising/GST Stationery/GST Closing Balance $ 13 200 300 000 440 000 5 500 16 500 5 000 20 000 52 300 22 000 33 000 351 000 1 258 500

1 258 500

Example 8.1
Calculation of GST Payment Collected from sales 100 000 Commission 500 LESS Paid on rent 1 200 Paid on purchases 40 000 Paid on electricity 500 Paid in furniture 1 500 Paid on advertising 2 000 Paid on stationery 3 000 GST Paid to ATO

100 500

48 200 52 300

Example 11.1

In the Cash Flow Statement the payment for furniture will be shown in the Cash Flows from Investing Activities but it must be shown excluding GST The GST payment for the furniture is shown in the Cash Flows from Operating Activities as GST paid on Investing Activities. All other payments and receipts in the Operating Activities section will include GST where applicable.

Contessotto Clothing Company Cash Flow Statement for the year ended 30 June 2006
Cash Flow from Operating Activities Receipts from Customers Interest received Other Income Received Payments to Suppliers & Employees 1 100 000

3 000 5 500 (813 700)

Interest Paid GST paid/received GST paid on Investing Activities GST collected on Investing Activities Net Cash from Operating Activities

How do we get this figure?

Rent Wages Purchases Electricity Advertising Stationery Total

13 200 300 000 440 000 5 500 22 000 33 000 813 700

Contessotto Clothing Company Cash Flow Statement for the year ended 30 June 2006
Cash Flow from Operating Activities Receipts from Customers Interest received Other Income Received Payments to Suppliers & Employees 1 100 000

3 000 5 500 (813 700)

0 (52 300) (1 500) 241 000

Interest Paid GST paid/received GST paid on Investing Activities GST collected on Investing Activities Net Cash from Operating Activities

Contessotto Clothing Company Cash Flow Statement for the year ended 30 June 2006

Cash Flow from Investing Activities Proceeds from Sale of Fixed Assets Payment for Fixed Assets Proceeds from sale of investments Payments for investments Net Cash used in Investing Activities

(15 000)

(15 000)

Contessotto Clothing Company Cash Flow Statement for the year ended 30 June 2006

Cash Flow from Financing Activities Capital Contributed 50 000 Receipts from borrowings (20 000) Repayment of Borrowings
Drawings (5 000) Net Cash used in Financing Activities 25 000

Contessotto Clothing Company Cash Flow Statement for the year ended 30 June 2006
Net Cash Inflow/(Outflow)

$ 241 000 (15 000) 25 000 251 000 100 000 351 000

Operating Investing Financing

Net increase/decrease in cash

Cash at beginning of the year

Cash at end of the year

Cash Flow Statements

In practice there are too many transactions to enable the cash flow statement to be prepared from the Bank ledger account. The cash movements have to be calculated from a review of many ledger accounts, and from an analysis of the Income Statement and Balance Sheet.

Cash Flow Statements

There are many methods of doing this.

We will determine cash movements by the reconstruction of ledger accounts. This is the same technique used in Club Accounting and single entry we covered earlier.

By reconstructing ledger accounts we can determine the cash movement. We must also look at changes in the Balance Sheet

Example 11.2

Credit sales were Debtors balance 1.7.07 Debtors balance 30.6.08

$370 000 $56 000 $72 000

Debtors
Date Details $ Date Details (receipts from Debtors)
370 000 37 000 463 000 463 000 Closing Balance

1/7/07 Opening Bal

56 000 30/6/08 Bank

391 000

30/6/08 Credit

Sales

72 000

GST Payable

Example 11.2

The bank amount would be recorded in the Cash Flow Statement as follows:

Contessotto Clothing Company Cash Flow Statement for the year ended 30 June 2006 Cash Flow from Operating Activities Receipts from Customers

391 000

Example 11.3

Credit purchases of inventory were $560 000 Creditors balance 1.7.05 $102 000 Creditors balance 30.6.06 $ 98 000

Creditors
Date Details $ Date Details $
30/6/08 Bank

620 000
98 000

1/7/07 Opening Bal

30/6/08 Credit

102 000
560 000

Closing Balance

Purchases GST Input Credits

56 000 718 000

718 000

Example 11.3

The bank amount would be recorded in the Cash Flow Statement as follows:

Contessotto Clothing Company Cash Flow Statement for the year ended 30 June 2006
Cash Flow from Operating Activities Receipts from Customers 391 000 Interest Received Payments to Suppliers & (620 000) Employees

Cash Flow Statements

The expense amounts that are recorded in the Cash Flow Statement will only be the same amount as in the Income Statement if there are no accruals or prepayments at the end or the beginning of the year. If an expense account includes an accrued or prepaid amount the expense account must be reconstructed to determine the actual cash movement.

End of Week 11