BUS 103

Accounting for Managers

Workshop 5
Statement of Cash Flows
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 BUS 103 - Accounting for Managers
Subject Learning Outcomes (SLO)
• Apply ethical principles to a workplace situation.
LO1

• Prepare financial statements for decision-making.

LO2

• Interpret financial statements for decision-making.

LO3

• Apply management accounting concepts.

LO4

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 Workshop 5 – Learning Outcomes
• Explain the purpose and usefulness of a statement
1. of cash flows

• Prepare a statement of cash flows distinguishing

2. between cash and accrual accounting

• Demonstrate an understanding of the presentation

3. formats for the statement of cash flows

• Appraise the statement of cash flows for the

4. purpose of evaluating an entity’s performance

• Explain the nature of the relationship between the

statement of cash flows and the other financial
5. statements

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 Workshop 5 References

Chapter • Chapter 7
Reference

• Accounting: Business reporting for

Prescribed
Text
decision making, 6th edition, Birt et al

• Student Handbook and Preparation

Tutorial Guide

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 Student Discussion

• 7.4 What is meant by the term ‘cash’?

• 7.7 Outline the format of a statement of cash

flows, identifying each of the activity
classifications.

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 Introduction to the
statement of cash flows

• Reports information regarding cash inflows and cash

outflows for a particular period of time

• Prepared on a cash basis, not an accrual basis

• The statement of cash flows helps ascertain the cash

generation from the operating cycle and whether or not
the entity is collecting its receipts in a timely manner.

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 Introduction to the statement of cash
flows
• The flow of cash within the business cycle.
• For an entity to survive, the net cash flows from
operating activities should be positive.

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 Difference between cash
and accrual accounting

• The accrual system focuses on when a transaction takes

place

• In contrast, the statement of cash flows is concerned

when cash is received or paid (cash receipts and cash
payments), and not the timing of the underlying
transaction.

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Difference between cash
and accrual accounting

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 Why is a statement of cash flow
needed?
The cash flow statement gives additional
information to assist decision makers in assessing an
entity’s ability to:
• generate cash flows
• meet financial commitments as they fall due
• fund changes in scope and/or nature of
activities
• obtain external finance.

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 Relationship of the statement of cash flows
to other financial statements
• Classified into three main sections reflecting the major
cash flow activities
Income statement
– Operating activities
revenue and
– Investing activities expenses; Current
– Financing activities assets and
liabilities in the
balance sheet

Non-current liabilities and Non-current assets in

equity in the balance sheet the balance sheet

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 Student Exercise 1

7.5 What is the purpose of a statement of cash

flows?

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 Student Exercise 2
7.6 Which of the following are not
disclosed in a statement of cash flows?

• a. Cash outflows from operating activities

• b. The cash on hand at the beginning of the

reporting period

• c. The amount of depreciation for a reporting period

• d. The payment of a long-term debt

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 Student Exercise 3

7.17 In what section of the statement of cash flows (operating,

investing, financing or reconciliation) would each of the
following items appear?
a.
Purchase of property, plant and equipment Proceeds from
b.
a bank loan
c. Collections from customers

d.
Gain/loss from the sale of equipment Cash proceeds from
e.
the sale of equipment Dividends to shareholders
f. Proceeds from an equity raising

g. Retirement of debt

h. Retirement of debt

i. Change in accounts receivable

j. Profit

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 Format of the
statement of cash flows
Classified into 3 main sections reflecting major cash flow activities:

1. Operating activities:
• Day to day activities including receipts and payments.
2. Investing activities:
• Activities which relate to the acquisition and/or disposal of
non-current assets, and investments.
3. Financing activities:
• Activities which relate to changing the size and/or
composition of the financial structure of the entity (e.g.
equity, and borrowings that do not fall within the definition
of cash).

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 Format of the statement of
cash flows
Example – JB Hi-Fi Ltd statement of cash flows and
reconciliation net cash inflow (outflow) from
operating activities to profit (loss):

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 Student Exercise 4

7.18 b Consider the following transactions:

• Credit purchases, $10 000
• Cash paid to suppliers, $12 000
• Credit sales, $16 000
• Cost of sales, $12 000
• Cash payments received on accounts receivable, $16 000
• Salaries accrued, $4000
• Machine purchased, $2000 cash
• Depreciation expense, $500
• Dividends declared, $950
• Rent received, $1000
• Declared dividends paid, $950
• Lease paid, $1500.
Required: State, for the transactions affecting cash, whether they relate to an
operating, investing or financing activity.
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 Preparing the statement
of cash flows
The following are the major steps involved:
Step 1 Step 2 Step 3
• Determine the cash flows • Determine cash flows from • Determine cash flows from
from operating activities investing activities financing activities

Step 4 Step 5 Step 6

• Calculate the net cash flow • Reconcile cash from • Complete notes to
and the ending cash operations with operating statement of cash flows
balance profits (indirect method)
(not covered in this
course)

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 Preparing the statement
of cash flows
Step 1: Determine cash flows from operating activities

A. Receipts from customers

B. Payments to suppliers and employees
C. Other cash payments expenses and receipts for income
I. Dividend received
II. Interest and bill discounts received
III. Income taxes paid

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 Preparing the statement
of cash flows

Step 2: Determine cash flows from investing activities

▪ Proceeds from repayment of related party loans

▪ Payments for plant and equipment
▪ Proceeds from sale of plant and equipment
▪ Payments for businesses

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 Preparing the statement
of cash flows

Step 3: Determine cash flows from financing activities

▪ Proceeds from issue of shares

▪ Proceeds from and repayment of borrowing
▪ Dividends paid

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 Preparing the statement
of cash flows
Step 4: Calculate net cash flows and ending cash balance
for the year

Statement of cash flows can be completed by

• Bringing together sections 1 to 3
• Calculating net cash flow
• Calculating ending cash balance for the year

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 Analysing the
statement of cash flows
• General analysis provides general observations and
identification of early warning signals

Cash received is less than cash paid

Operating outflow.

Cash receipts from customers are less than cash payments to suppliers and employees

Net cash from operating activities is lower than profit after tax.

Proceeds of share capital are used to finance operating activities.

Inflows from investing activities are inconsistent.

Proceeds from borrowing are continually much greater than the repayment of borrowings.

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Statement of Cash Flows Format

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 Student Exercise 5

7.20 The cash flows below were extracted from the

accounts of Ryan Smith, a music shop owner. Prepare a
statement of cash flows.

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Why are we concerned with Cash?
Watch the Video and explain why we need to
manage cash flow

• https://www.macquarie.com/au/business-
banking/loans-asset-finance/expertise/cash-
flow-video

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 Student Exercise 6
7.36 Preparing a statement of cash flows
Presented below is information for the Hale Partnership for the year
ended 31 December 2016. Use the information to prepare a statement of
cash flows.

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 Summary
✓ A statement of cash flows enables decision makers to
evaluate the entity’s ability to generate positive cash
flows in the future, pay dividends and finance growth
✓ It provides a summary of cash and types of cash flows in
and out of an equity
✓ The format is governed by accounting standards – have
to use the format given
✓ Interpretation requires a general evaluation as well as
the use of trend and ratio analysis

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