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Lecture 1 On Cash Flow Statements

The Cash Flow Statement shows how cash and cash equivalents entered and left a company over a period of time by detailing operating, investing, and financing activities; it was created to provide useful information about a company's liquidity and ability to generate future cash flows that other financial statements do not capture on their own. The Cash Flow Statement calculates net cash flows from operating, investing, and financing activities using either the direct or indirect method and is an important financial statement required by accounting standards.

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ERICK MLINGWA
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59 views

Lecture 1 On Cash Flow Statements

The Cash Flow Statement shows how cash and cash equivalents entered and left a company over a period of time by detailing operating, investing, and financing activities; it was created to provide useful information about a company's liquidity and ability to generate future cash flows that other financial statements do not capture on their own. The Cash Flow Statement calculates net cash flows from operating, investing, and financing activities using either the direct or indirect method and is an important financial statement required by accounting standards.

Uploaded by

ERICK MLINGWA
Copyright
© © All Rights Reserved
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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The Cash Flow Statement

Lecture 1
Why Cash Flow Statements

• Required by Accounting Standards


[IAS No. 7];
• Provides information that other
Financial Statements cannot
separately provide;
• Links the Income Statement with
the Balance Sheet - How profits
can be related to cash balances.
Background to Cash Flow
Statements
• There used to be the Funds Flow
Statement;
• Funds then were taken to mean
Working Capital;
• The definition was ambiguous and
open to abuse;
• No standard format for
presentation of the Funds Flow
Statement.
The Consequence - The Cash Flow
Statement
• Cash is the critical dimension
in measuring liquidity;
• The Cash Flow Statement was
mandated.
What does the Cash Flow Statement
show?

• How cash was generated?


• How cash was used? and
• What is the net change in
cash balances?
Of what use is the Cash Flow
Statement to the User?

• the ability of the business to


generate future cash flows;
• the effect of major events such
as a share issue or investments
on the liquidity of the business;
• the ability of the business to
meet future financial
commitments.
The Definition of Cash
includes cash in hand and cash on deposit with
a bank or other financial institution. However, it
will also include "cash equivalents" which are
short-term liquid investments. Cash equivalents
are investments which are convertible cash
without notice and which are within three
months of maturity when acquired. Short-term
advances from banks, which are repayable
within three months of the date of advance, must
be deducted from the total cash and cash
equivalents in order to derive the net cash
balance.
Contents of the Cash Flow
Statement
• Cash Flows from Operating activities,
that is the net cash flows which have been
generated from trading operations during the
period.
• Interest Received and Paid and Dividends,
MAY be classified as OPERATING
ACTIVITIES; alternatively FINANCING or
INVESTING ACTIVITIES if due from/to
Financing need or Investments.
Contents of the Cash Flow
Statement [continued]
• TAXATION, that is corporation tax
payments and any tax rebates or
refunds of overpayment; Treat as
Operating Activities unless can
identify with Financing or Investing
Activities.
Contents of the Cash Flow
Statement [continued]

• Cash Flows From Investing


activities, that is proceeds from the
sale of fixed assets, and investments
in other entities. Payments to
acquire fixed assets and
investments in other entities will also
be included.
Contents of the Cash Flow
Statement [continued]

• Cash Flows From Financing


activities, that is receipts from the
issue of shares, loans and
debentures. Payments to redeem
shares of the company and
repayments of amounts borrowed will
be shown. Also included are any
expenses incurred in the issue of
shares, loans or debentures.
How does the Cash Flow Statement
look like?
Calculating Cash Flows [1]

Net Cash Flows from Operating


activities
• Two Approaches
– The Direct Method, and
– The Indirect Method.
The Direct Method

• Employs Information and


data directly from the
accounting records.
The Indirect Method

• Employs Information that is


on the Financial Statements
only;
• Starts with the profit figure
and makes adjustments for
non-cash items.
Example on the Indirect Method

• Page 409 - 410, please.


Calculating Cash Flows [2]

Other Operating Cash Flows


• Interest Paid;
• Dividends Paid;
• Interest Received; and
• Dividends Received.
Calculating Cash Flows [3]

Taxation
• An Operating Cash Flow item;
• Tax Paid or Refunded;
• Note that what you see on
the Balance Sheet is not
normally Tax Paid.
Calculating Cash Flows [4]

Investing Activities
• Purchase of Fixed Assets or
Investments;
• Proceeds from Sale of Fixed
Assets or Investments.
Calculating Cash Flows [5]

Financing Activities
• Proceeds from Issue of
Shares, Bonds, or Loans;
• Loan repayments,
redemption of debts, share
repurchases, etc.
– Note: Should include expenses.
The Cash Flow Statement
[Illustration]

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