FINANCIAL ACCOUNTING

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 Position → certain point in time

Performance i→ is over time

Accounting → the process of identifying, measuring & communicating economic information to permit informed
judgements and decisions by users of the information

Financial accounting = for external users Managerial accounting = for internal users (managers)
Investors Budgets
Creditors Forecasts
Government
The public

Accounting standards = rules (set by standard ! setting bodies ) , In this course we follow IFRS

IFR's → principle based accounting standards Issued by ISAB

Mission = develop reporting
Conceptual framework → describes the basic concepts for standards that bring Transparency
preparing financial statements and it is a guide to resolve Accountability
accounting issues.. Ef ficiency
To financial markets

IFRS prioritize investors and

lenders over other
stakeholders.

Anual report → prepared by managment and informs investors about the company's past performance and future
prospects.

A letter from corporate management

Management discussion & analysis
Financial statements
Footnotes/ disclosures explaining many elements of the financial statements in more detail
The external auditor's report
Etc.. → corporate governance report, sustainability report..
 Conceptual framework
Conceptual framework → describes the basic concepts for preparing financial statements & it is a guide to resolving
accounting issues

Defines =
• the objective of financial reporting
• underlying assumptions & basis
• The qualitative characteristics of useful financial information
• the definition recognition & measurement of the Elements from which financial statements are constructed

Relevant information can make a To be useful , financial information must not

dif ference in the decisions made by only be relevant, but also represent faithful

users. the entity.

Comparability → information about a reporting entity is more useful if it can be compared with similar entities aswell as
with itself overtime to identify trends.

Verifability → independent observers would agree the information represents faithfully the economic phenomena.

Timeliness → must be available to decision makers in time to be capable of influencing their decisions.

Understandability → information must be clear and understandable to users with a reasonable knowledge of business.

Equity
 Why? Objectives Info about: wealth ( b /s); profit (i/s); cash (cfs)
(Why is fr important) Decision making

Who? Internal
Users
(Who are the users) External

2. Fundamental → relevance; faithful representation

What? • Qualitative 4. Enhancing - comparability, verifiability, timeliness, understandability

( What makes it useful) characteristics

Going concern
• assumptions
Accrual basis

How? • Elements Assets, expenses, liabilities, revenue , equity

(How to prepare fs) • recognition

• measurement

Expense = once you use

what you paid for.

PPE = Property , plant, equipment

Assets → resource W /economic value that an individual, corporation for country owns or controls with
the expectation that it will provide a future benefit

Current Non-current
Assets expected to be Long term asses that
used within a year will not be used within
the accounting year

Intangible assets Tangible asset

An asset that is not Asset with exchange
physical in nature value a physical form

Liability → something a person or company owes (usually a sum of money)

Long term
Current Companies financial
Short terms obligations that obligation that are due more
are expected to be paid than one year on the future
within one year

Accrued liability Contingent liability

An expense incurred but A liability that may
not yet paid by a business occur depending on
the out one of a
future event

Capital/Equity→ The amount of money that would be returned to a company’s shareholders if

all of the assets were liquidated and all of the company’s debt was paid off in the case of
liquidation
Income → The money a person or business receives in exchange for their labor or investment

Gross income Net income

Individuals total earnings Total sales minus expenses like
before taxes or other costs of goods sold, taxes, etc..
deductions

Expense → costs a company incurs to generate revenue

 The balance sheet
Reports the value of a company’s assets, liabilities and equity at a specific point in time

Assets:
property,plant & equipment
investment property
intangible assets
financial assets
investments accounted for using equity method
biological assets
inventories
trade and other receivables
cash and cash equivalents
assets held for sale

Liabilities:
trade & other payables
provisions
financial liabilities
current tax liabilities and current tax assets
deferred tax liabilities and deferred tax assets
liabilities included in disposal groups

Capital/Equity
Non-controlling interests, presented within equity
Issued capital and reserves attributable to owners of the parent
Cash on hand: Accessible cash a business has after paying all its costs (usually any assets you can liquidate
into cash in less than 90 days)

Fixed term deposit with banks: You lock away an amount of money for a agreed length of time (can’t
access it). You’ll get a guaranteed rate of interest for the term you select so you’ll know exactly what the
return on your money will be.

Inventories totalling: The amount of raw materials, packaging materials, work-in progress and finished
goods of a company

Note payable: long-term liabilities that indicate the money a company owes its financiers (banks, as well as
family and friends if they lent money)

PPE with net value: Property plant and equipment is the value of all buildings, land, furniture and other
physical capital that a business has purchased to run its business.

Provision for employee benefits:

Trade payable: Money owed by a business to its suppliers shown as liability on a company’s balance sheet.

Trade receivables: Amounts owed to a business, regarded as assets.

Equity method: An accounting technique used by a company to record the profits earned through its
investment in another company.

CAPEX → Capital expenditure

Consolidated balance sheet → meaning we are looking at the balance sheet of a

group of companies. If it were for an individual company it would say individual
balance sheet. (In exam if I get both I should use the consolidated one)

PPE → Another term for tangible assets

Income: increase in assets or decreases in liabilities that result in increases in equity, other than those relating to
contributions from holders of equity claims.

Expenses: decrease in assets or increases in liabilities that result in decreases in equity, other than those relating to
distributions to holders of equity claims.

Important concepts:
The accrual basis: revenue us recognised when the company earns it and expenses are recognised as the company incurs
them, instead of when cash is received or paid.

The matching principle: Income & expenses that results directly and jointly from the same transactions or other events should
be recognised simultaneously.

INCOME = REVENUES + GAINS

DIVIDENDS Arises in the course of the ordinary Represents other items that meet the
IS NOT AN activities of an entity and is referred to definition of income and may or may
EXPENSE! !! by a variety of different names not arise in the course of the ordinary
including sales, fees, interest, activities of an entity.
dividends, royalties & rent

According to IAS I, an entity can prepare two alternative income statement presentations:
1. The expenses are classified according to its nature
2. The expenses are classified according to its function within the entity

Exam question: determine whether income statement was

clarified according to its nature or function

Statement of other comprehensive income

Not all expenses are recognised in the income statement! :

Statement of changes in equity
THE RULE OF BOOKKEEPING:

ASSETS: Debit (+) Credit (-)

LIABILITIES: Debit (-) Credit (+)
EQUITY: Debit (-) Credit (+)

In an exam they will ask you to do this by saying solve

Capital
This side is always
using balance …. (Ask for term)
This side is always

debit credit
Cash & cash equivalents: comprise cash on hand and demand deposits, together with short-term, highly liquid investments
that are readily convertible to a known amount of cash, and that are subject to an insignificant risk of changes in value.

You can have profit

Profitability is important but so is the ability to generate positive cash flows =
but be at a bad cash
Cash is needed to pay employees, suppliers, and others to continue as a going concern
position: could be
Cash is needed to fund investments and take advantage of attractive business opportunities
because sales were
Cash is the source of returns to providers of capital
done on credit

When you have When you use

Sales/ services rendered
Asset → expense
• COGS PPPE → amortisation
• Wages Inventory → costs of goods sold

• External services

EBITDA
depreciation & amortisation
EBITDA
E - eborenses
EBITDA
B - before
interest
I - interest
EBITDA
T - tax
taxes
D - depreciation
A - Amortisation
Net income
 The effects of transactions and other events are recognised when they occur (and not as cash and
its equivalent is received or paid) and they are recorded in the accounting records and reported in
the financial statements of the periods to which they relate.

End-of-period adjustments → help assign the financial effects of implicit transaction to the appropriate time periods

Arise from 4 types of implicit transactions =

• prepaid expense / deferred expense
• unearned revenue / deferred revenue
• accured expense
• accused revenue

Represents payment to suppliers in advance for goods or services that the company will receive at a future date
Requires recording both the decrease in cash and an asset for future services.

Represents payment from customers who pay in advance for goods or services that the company promises to deliver at a
future date.

Requires recording both the increase in cash and the liability for future services

"Accrue" → "to accumulate"

To accumulate a receivable (asset ) or payable (liability) during a given period even though no explicit
transaction occurs.

Requires recording both the increase in

expenses and an increase in liabilities
Accrued Revenue :

An adjustment is required to recognise revenues earned but not received in cash

Requires recording both the increase in revenue and an

<
increase in assets
The process of allocating cost to expense for a long-term plant asset.

Decline in usefulness
Spread the cost of the plant asset over its useful life Requires recording both the increase in
EXCEPTION: land - does not decline in usefulness expenses and a decrease in assets

Companies would make an additional adjusting entry to accrue income tax expense and the income tax payable
(current liabilities) as the final adjusting entry of the period.
 Financial statement analysis

• Combine information from all financial statements.

• Help to understand the economic meaning of the numbers. Identify and highlight areas of good and bad performance.
• Identify areas of significant change. Direct the user’s focus of attention.

Accounting → The process of identifying, measuring and communicating economic information to permit informed judgement
and decisions by users of the information

Zooming from total Value to individual items:

1st dimension: (Horizontal)

• Over time evolution of individual items
• Comparison with peers

2nd dimension (vertical)

• structure, going from the most important to the least important item, and justifying according to the company’s activity.
• Evolution, throughout the period under the analysis
• Comparison with peers

3rd dimension:
• ratio analysis, studying the relation between the different financial statements and market figures.
Classified as:
- efficiency
- financial strength
- profitability
- investment ratios

• evolution throughout the period under analysis

• Comparisons with peers

Common-size analysis:

• Report only percentages, no dollar amounts

• Assists in comparison of different companies using a common
denominator
• Compares a company to some standard set by others
• Goal is improvement
Ratios:
• Efficiency ratios
• Financial strength ratios
Compare ratios to = industry averages, prior year ratios competitors' ratios
• Profitability ratios
• Investment ratios

Liquidity ratios: Measure a company's ability to pay dept obligations

• Measures ability to pay current liabilities with current assets
Current ratio = current assets
• In general, a higher current ratio indicates a stronger financial position
current liabilities
• But very high values might also indicate inefficient use of resources

Quick (acid-test) ratio = cash & cash equivalents + short-term investments + net current receivables
current liabilities

• Tells whether the entity could pay all current liabilities if they came due immediately
• Uses narrower base than current ratio
• Rate of .90 to 1.00 is acceptable in most industries

Cash conversion cycle: DIO + DSO - DPO

• Shows overall liquidity
• Computes total days it takes to convert inventory to receivables and back to cash, less the days to pay off suppliers

Solvency Ratios: Measures how well a company's cash flow can cover it's long term debts

• Expresses the relationship between total liabilities and total assets

Debt ratio = total liabilities • Ratio of I indicates that debt financed all assets − higher ratio = greater pressure to
total assets pay interest and principal

Shareholders' ratio: Equity Solvability Ratio: Equity

Total Assets Non-current Liabilities
Financial strength ratio:

Current debt ratio = Current debt

Total Assets

Non-current Debt Ratio = Non-current Debt

Total Assets

Interest bearing debt ratio: Interest bearing debt

Total assets

Non interest bearing debt ratio: Non-interest bearing debt

Total Assets

Times-Interest-Earned Ratio: Income from operations

Interest expense • Measures number of times operating income can
cover interest expense
Inte rest coverage ratio: EBITDA • Higher ratio indicates ease in paying interest
Interest expense • Low ratio indicates difficulty in paying interest

Profitability ratios: Used to assess a business’s ability to generate earnings relative to its revenue,operating costs, asset, or
shareholders’equity overtime, using data from a specific point in time.

Gross Profit Margin %: Gross Profit • Amount of profit entity makes from merely selling its product, before
Sales other operating costs are subtracted

Operating Profit Margin %: Operating Profit • Measures % of profit earned from sales in company’s core
Sales business operations

EBIT Margin: EBIT EBITDA Margin: EBITA Net Profit Margin %: Net Profit
Sales Sales Net Sales

Return on total Assets (ROA): Net Profit • Measures a company’s success in using assets to earn a
Average total assets profit
• The numerator is the net profit
• The denominator is the average total assets, the sum of
beginning and ending balances divided by 2

• Shows the relationship between net income and ordinary

Return on Equity (ROE): Net Profit shareholders’ investment in a company
Average Equity • Total return figure divided by the average total equity
 Efficiency ratios = A measures now well a company uses it's resources to make a profit

• Measures amount of net sales generated per dollar invested in

Assets turnover ratio: Net sales
assets
Average Total Assets
• Measures how efficiently management is operating the company

Inventory turnover: Cost of goods sold • Measures number of times a company sells its average level of inventory
Average Inventory during a year
• Varies widely by industry

Days' Inventory Outstanding (DIO): 365 • Converts inventory turnover ratio into days <
You want this to

sell ! be low !
Turnover days
INV of have before
x 365 = DIG Number you your inventory you

tow
COGS

↓ If , you have

Inventory turnover lost sales !

Days since you sold , to collected payment ! -n

Youwanit is
Days’ Sales (Receivables) Outstanding (DSO): 365
A R
• How many days’ sales remain in accounts receivable if com-
x365
Turnover
.

DSO =
have
ReY Petitors
bettter credit
↑ Accounts receivable turnover schemes , customers
will choose them !

Days payable outstanding: 365 • Also known as Days’ Payable Outstanding. How many days it takes a
(DPO) Turnover company to pay off accounts payable
I

Accounts P .

x 365
COGS

↑ Accounts payable turnover

Accounts Receivable Turnover: Net Credit sales

Average Net Accounts Receivable

• Measures ability to collect cash from credit customers

• In general, the higher the better
• Tells how many times during the year average receivables were turned into cash

Accounts Payable Turnover: COGS • Measures number of times per year the entity pays off its
Average accounts Payable accounts payable

(DPO) when
you buy from suppliers then need to pay ( of days) .

LIMITATIONS OF RATIO ANALYSIS

• Retrospective nature (looks at the past)

• Impact of inflation on financial data

• Business-to-business comparisons – different accounting policies may be used

• Is statement of financial position a reflection of the business’s “normal” position?

• Combined operations of large multinational companies

• Place too much reliance on “norms”

WHAT SHOULD I KNOW :

Compute
·

· Analyse
 Mixed measure approach:

• Historical cost

• Current value Revaluation Surplus:

• Fair value captures increases in the fair value of an
asset over its previous carrying amount
• Current cost (book value).
• Value in use/fulfilment value

Historical cost → uses information derived from the transaction or event that created the element (Verifiable, relevant for stewardship)

Current cost → The cost of an asset (liability) that would be paid (received) plus (minus) any transaction costs.

• Reflects prices in the market in which the firm would acquire the asset or incur the liability.

Value in use (assets)/fulfilment value (liabilities) → Present value of the cash flows that an entity expects to derive from the use of an asset or to incur

as it fulfils a liability

• Entity specific values

Fair value → The price that would be received to sell and asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

• Assumes a market exists win which asset/liability can be sold or transferred.

• Assumptions (inputs) are classified in a hierarchy - the higher the level, the less subjective, and the more reliable the data:

Level 1: Quoted prices in active markets of identical assets/liabilities

Level 2: Inputs other than quoted prices that are observable

Level 3: Inputs not based on observable market data, but reflecting market assumptions
The key issue in relation to the accounting for PPE are:

1. When to recognise the asset

2. The determination of carrying amount

A present economic resource controlled by the entity as a result of past events 3. Calculation of depreciation and impairment chargers

If an item is not recognised as an asset, it will not be on the balance sheet.

May not be recognised as an asset if:

• There is uncertainty over existence

• Future inflows/outflows of economics benefits are unlikely

• Measurement is uncertain

• Initial measurement

• Subsequent measurement

• Depreciation methods

• Impairment losses

• Retirement and disposal

Initial Recognition:

Cost of acquisition = Purchase price (includes expenditures necessary to prepare the asset for its intended use)

- Site preparation

- Delivery & Handling

- Installation, etc…

Subsequent measurement: 2 Types! You use these after the initial recognition… If you need to re-recognise and asset

Cost model → The asset is carried at cost less accumulated depreciation and impairment

OR

Revaluation model → The asset is carried at a revalued amount, being its fair value at the date of revaluation less subsequent depreciation, provided that fair value can be

measured reliably.
 Example of Fair value of PPE decreasing: (Downward revaluation)

Debit revaluation loss

Credit asset

Example of Fair value of PPE increasing: (Upward revaluation)

Debit Asset

Credit Revaluation surplus

Upward revaluations:

• Recognised in the OCL (Other comprehensive

income)

• Go to equity

Downward revaluation:

• Recognised in P/L

• Go to profit

If you are reversing a previous revaluation, you:

• Put an upwards revaluation through P/L

• Out a downwards revaluation through the OCL

Example of revaluation reversal:

Usually you would debit loss, credit land, but this is a reversal of a previous revaluation, the first

20,000goes through the other comprehensive income and then the remaining amount can go through

the through and loss by debiting loss and crediting PPE.

Subsequent costs → The cost of an item that can be measured reliably.

Debit (Maintenance) expense

Credit cash/payables
Day to day service of a PPE: Recognised as an expense → “repairs & maintenance”

(Can also include the replacement of small parts)

Replacement of important parts and additions that increase the assets capacity or extend its useful life: recognised as an increase in the value for PPE (capitalised)

Debit PPE

Credit cash/payables
 Depreciation → Most long-lived assets wear out or become obsolete (EXPECT LAND)
The cost of these assets are allocated over their useful life throughout depreciation

DEPRECIATION METHODS:

• Straight line → Best for assets that generate revenue evenly

• Units-of-production → Best for assets that wear out because of use

• Double declining-balance → Best for assets that generate revenue early in useful life

Should reflect the pattern in which the asset’s economic benefit

are consumed by the firm .

IMPAIRMENT

Implement expenses → reflect an unanticipated decline in the fair value of an asset (Credit PPE & Debit Expenses) - Usually caused by external factors

Under IFRS, Impairment = carrying amount - recoverable amount where the recoverable amount is the higher of an asset’s fair value less costs to sell and

its value in use.

IFRS: permits impairment losses to be re reversed!!! If the value of an asset increase = the reversal is classified as gain.

If sale value is GREATER then book value GAIN

If sales value is LESS than book value LOSS Difference between depreciation and

impairments is that depreciation is

expected but impairment is not!

 Example:
1. You buy a car for $10,000 This is known as “cost” = $10,000

2. You use the car for 4 years “Useful life” = Yearly rate 1/n (n is the number of years) = 1/4 = 25% (“depreciation rate”

3. Value at the end for the period Residual value (RV) = 0 (RV= market value at the end of the assets life)

4. Annual usage Cost - Rv/n = 10,000-0/4 = $2,500

5. Value The value of the car each year:

Needs to be Equal to residual value

The value you would write in the balance sheet would be the book

value!

You credit PPE accumulated depreciation, not PPE!!!

• PPE accumulated depreciation is a “contra asset” of PPE (It is a

subsection).

Contra asset → An asset because it is on the asset side, however, it works

as a liability (decreases mother asset = PPE)

Initial measurement

(cost) = 10,000
To calculate a gain or a loss:

= Selling price - BV(of the year your selling it in)

Example: BV4
Improving an asset = CAPEX
2,000 - 0 = 2,000 = GAIN!
Maintenance of an asset = OPEX

Ways of calculating depreciation:

Fixing the car:
1. Straight line: We use the same amount of depreciation each year

2. Double declining balance method: We assume

3. Units of production

Improving the car:

 Intangible assets → Identifiable non-monetary assets without physical substance

Examples:

• Goodwill
Intrinsically tied to value of business:
• Computer software
• Resources increase in value from many different activities
• Trademarks
• Difficult to identify costs unique to asset
• Patents
Uniqueness
• Licences
• No liquid secondary markets
• Customer lists/relationship/bases
• Reliable measurement difficult
• Brands
Less defined property rights attached
• Intellectual property rights
• it: difficult to exclude others from enjoying benefits
• Development costs

Recognised → on BALANCE SHEET if it meets the following criteria:

1. Probable flow of economic benefits - Judgement model

2. Reliable measurement When you need to revaluate an asset, the

Additional criteria: identifiable account you use is equity which has an
• separable or arises from contractual rights account called revaluation account

Control → power to obtain future economic benefits and restrict benefits from third parties

Initial measurement of intangible assets depends on the way they were acquired

If they were EXTERNALLY PURCHASED…. They are initially measured as a COST

SUBSEQUENT MEASUREMENT = Very similar to PPE

If the useful life of an intangible asset can be estimated: amortisation (instead of depreciation) is required (Residual value is presumed to be 0)

If the useful life cannot be estimated: annual impairment test are required.

• Many intangible assets are developed within a business as it operates and produces its own good and services THESE ARE NOT RECOGNISED!! (Ex: systems, processes knowledge)

Research/Development

The application of research findings or other knowledge to plan or design

Research: the original and planned investigation undertaken with the
for the production of new or substantially improved materials devices,
prospect of gaining new scientific or technical knowledge and
products, processes,m systems or services before the start of commercial
understanding.
production or use.

No intangible asset arising from research shall be recognised!

An intangible asset arises from development expenses!!
Debit expenses & Credit Cash/payables
Debit intangible assets & Credit cash/payables
GOODWILL+ SUBSIDARIES :

Subsidiaries → A company that belongs to another company, which is usually referred to as the parent company, or the
holding company

Consolidated financial statements are designed to extend the reporting entity so as to embrace other entities which are
subject to its control.
• They involve treating the net assets and activities of subsidiaries held by a reporting entity as if they were part of the
holding entity’s own net assets and activities.
• The overall aim is to present the results and state of affairs of reporting entity and its subsidiaries (referred to as a
group) as if they were those of a single entity.

On the acquisition of a subsidiary, investment is compared to share of fair value of assets acquired (minus the liabilities).

The difference (goodwill) represents → The anticipation of future economic benefits from assets that are not capable of
being individually identifies and separately recognised.

Goodwill → The excess of the fair value of the consideration transferred plus any non-controlling interest over the fair
value of the net assets acquired.

Goodwill on acquisition → Recognised as non-current asset in consolidated financial statements.

If goodwill = negative → It’s a “bargain purchase” → G/W recognise immediately in profit and loss statements
*
Increase profit/ retained earning

Goodwill on acquisition is
NEVER amortised!! It is
tested for impairment
annually, any impairment
loss passes through
consolidated statement of
profit or loss.
 At the start, straight line will have higher net profits, since their costs are lower than

in double declining

At the end, double declining will have a higher net

profits.

Taxes → Straight line starts paying taxes earlier whereas double declining will pay

later. Both pay the same amount, they just pay at different times

Which one manager chooses depends:

• If you want to pay less taxes: choose double declining

• If you want to sell the company and present a strong net income: choose straight line

Then only way to manipulate your assets is by choosing how you decline your assets

Bonus will be higher at the start in straight line (double declining will be the opposite)
According to IAS → cash & cash equivalents comprise:
- cash on hand Cash
- demand deposits
- short-term high liquid investments Cash Equivalents
Readily convertible to a known amount of cash, and that are
subject to an insignificant risk of changes in value.

An investment is considered a cash equivalents when:

1. It has a maturity of 3 months or less from the date of acquisition
2. Equity investments are normally excluded, unless they are in substance a cash equivalent
3. Bank overdrafts which are repayable on demand and which form an integral part of an
entity’s cash management are also included in the as a component of cash and cash
equivalents

Cash management may be defines as rare corporate process of :

- Collecting
- Managing
- Short-term investing cash

Successful cash management Includes:

• Avoiding default (and therefore bankruptcy)
• Reducing days in account receivables (AR)
• Increasing collection rates
• Selecting appropriate short-term investment vehicles
• Increasing days cash on hand all in order to improve a company’s overall financial probability

Cash flow statemnt → Give information about the ability to generate cash flows from operations and help predict the firm’s
ability to sustain cash from current operations

It reveals management decisions such as:

• financial policy (leverage)
• Dividend policy
• Investment for growth
 Financing Cash flows → Include the cash effects of transactions that affect long-term
liabilities and stockholders equity.

• Obtaining from stockholders

• returning resources to stockholders and providing them with a return on their investment
• Obtaining resources from créditos
• Repaying amounts borrowed from creditors
• Can include interest paid. Negative → when we give
back to shareholders

Positive → when we ask

shareholders to give money
in order to invest and grow

Operating Cash flows → Measures the amount of cash generated

used on the firms production and sales of goods and services.

It should be POSITIVE in order to sustain long-run survival!

Positive cash flow is essential to:

• Pay dividends or repurchase equity Exceptions → Start up companies!
• Repay loans They invest a lot at the start.
• Replace existing capacity Negative operating cash flows are
• Invest in acquisitions and growth allowed for the first few years but
• Increase cash values then they must become +

Investing cash flows → Include the cash effects of transactions

that affect long-term assets

• Acquiring and selling long-term assets

• Acquiring and selling marketable securities other than trading
securities or cash equivalents
• Making and collecting loans
 Direct → Shows major classes of gross cash receipts and payments
• This method discloses the reconciliation of profit/loss before tax to cash
flows from operating activities

2 methods to calculate operating

activities cash flows:
Indirect → starts with profit or loss before tax and adjusts for non-operating
items, non-cash items and changes in net working capital
• Provides useful information about management or working capital

Net working capital = Current Assets - Cash - (current liabilities - short term debt)