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Unit 4

This unit covers the fundamentals of the Statement of Cash Flows (SoCF), including its purpose, classifications, and the effects of non-cash flow items. It outlines the cash inflows and outflows from operating, investing, and financing activities, and presents formats for preparing the SoCF using both direct and indirect methods. The unit also emphasizes the importance of cash flow information in assessing a business's ability to generate cash and meet its financial obligations.

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0% found this document useful (0 votes)
4 views

Unit 4

This unit covers the fundamentals of the Statement of Cash Flows (SoCF), including its purpose, classifications, and the effects of non-cash flow items. It outlines the cash inflows and outflows from operating, investing, and financing activities, and presents formats for preparing the SoCF using both direct and indirect methods. The unit also emphasizes the importance of cash flow information in assessing a business's ability to generate cash and meet its financial obligations.

Uploaded by

sbongiledanster
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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UNIT 4

CASH FLOW
FUNDAMENTAL ACCOUNTING

School of Education – DSSEEME – Accounting Education.


Prepared by: Ms MV Nakeng
LEARNING OBJECTIVES
By the end of this unit, you should be able to:
 Define terminologies used in SoCF
 Know the advantages and Disadvantages of
SoCF
Know the effect of non-cash flows items in the
SoCF
 Be able to account for dividends, interest, and
taxation in the SoCF
LEARNING OBJECTIVES
By the end of this unit, you should be able to:
The major classification of the SoCF.
Operating activities
Investing activities
Financing activities
Be able to present the SoCF. (FORMAT)
Be able to disclose the notes to SoCF
INTRODUCTION
 SoCF identifies the inflows and outflows of cash of a
company or business during a specific period.
 Cash flow info provides users with a basis to assess the
ability of the entity to generate cash and the needs of
the entity to utilise those cash flows.
 Cash flow info involves the meaningful presentation of
the cash generated and applied by the entity.
 This info is presented in the form of a statement of cash
flows (IAS 7)
STATEMENT OF CASH FLOWS
• Reports the inflows and outflows of cash during the
reporting period.
• It reflects all the cash flows of a business in a
standardised format.
• Allows the user to determine the “quality” of the profit
i.e. the extent to which profit was the result of cash
flows rather than accrual-based entries
• Categorises cash flows according to whether they are
from operating, investing, or financing activities
PURPOSE OF THE STATEMENT OF
CASH FLOWS
Purpose is to supply information to users
Gives users a basis to assess the ability of the entity to
generate cash and the needs of the entity to utilise those
cash flows
Supplies info on whether business generates cash from
operations
Whether the business is able to pay interest & settle
outstanding debts
Whether the business is able to pay short-term debts
STATEMENT OF CASH FLOWS
• Profit of an entity=Income EARNED less expenses
INCURRED, during a period.
• Profit includes non-cash flow items – e.g.: depreciation &
bad debts
• Profit is calculated on an ACCRUAL basis.
• The net cash flow is the cash the business has received
less the cash the business has paid during a period.
• It is the difference between the cash balances at the
beginning and end of the period.
CASH IN AND CASH (OUT)
CASH IN CASH (OUT)
 Cash paid to suppliers and
 Cash from customers (cash sales
employees (operating expenses and
and cash from debtors)
 Interest received inventory)
 Interest paid
 Dividends received THE  Dividends paid
 Tax refunds received BUSINESS 
 Cash on disposal of non-current Tax paid
 Cash paid to purchase non-current
assets
 Cash on disposal of investments assets
 Cash paid to purchase investments
 Long- and short-term loans taken
 Long- and short-term loans repaid
out  Cash dividends paid
 Equity raised
 Share buy-backs
CATEGORIES ON A STATEMENT OF
CASH FLOWS
Operating activities
 Cash flows relating to the day-to-day transactions of the
business, as well as interest, taxation and dividends cash
flows
 The operating activities section has two parts:

 The cash from operations section, which shows how much


cash was generated from (or used by) operations
 Cash flows relating to interest, taxation and dividends
SOME EXAMPLES OF OPERATING
ACTIVITIES
CASH INFLOWS CASH OUTFLOWS

Receipts of cash Payments to agencies


dividends from for fines, and penalties
investments in other
businesses
Receipt of interest Interest payments

Dividends payments
OPERATING ACTIVITIES
The following items must be separately disclosed on the
face of the cash flow statement
Operating Investing Financing

Interest received  
Interest paid  
Dividends received  
Dividends paid * 
Taxation paid 

* Note: IAS 7 allows dividends paid to be disclosed


as cash flows from operating activities to assist
users in determining whether the entity can pay
dividends out of cash from operations.
CATEGORIES ON A STATEMENT OF
CASH FLOWS
Investing activities
 Cash flows relating to the purchase &
disposal of non-current assets
 The cash flows represent the extent to
which payments have been made for
resources intended to generate future
receipts and cash flows
SOME EXAMPLES OF INVESTING
ACTIVITIES
CASH INFLOWS CASH OUTFLOWS

Proceeds from sale of Payments to purchase


property, plant and property, plant and
equipment and other non- equipment and other non-
current assets (including current assets
intangible assets)
Proceeds from selling equity Payments to purchase
investments (shares) in equity securities (shares) of
other companies other companies
INVESTING ACTIVITIES
What changes can happen to non-current assets
during the financial period under review?

Non-current Assets can be:


Acquired (cash or credit)
Disposed of (cash or credit)
Revalued (non-cash)
Depreciated (non-cash)
Impaired (non-cash)
CATEGORIES ON A STATEMENT OF
CASH FLOWS
Financing activities
 Cash flows relating to
non-current liabilities &
share issues.
SOME EXAMPLES OF FINANCING
ACTIVITIES
CASH INFLOWS CASH OUTFLOWS
Proceeds from issuing equity Redemption of shares
(e.g ordinary and preference (repurchase of own shares)
shares) Payment of share issue
expenses
Proceeds from issuing Redeeming debentures
debentures
Proceeds from other short or Repayments of short or long
long term borrowing term borrowing
FINANCING ACTIVITIES SECTION

Cash flows relating to a loan

Cash inflows (loans raised) and cash outflows (loans repaid) are
shown separately on the CFS.

Net proceeds from the share issue

Cash inflows (shares issued) and cash outflows (refunds, share


issue costs, underwriters commission) from a share issue are
reported as a single line item on the CFS.
FORMATS

The direct method reports on the


gross cash flows of an entity, it
discloses cash receipts from
customers and cash payments to
suppliers and employees as two
separate cash flows
Format: Direct Method
Cash flows from operating activities
Cash received from customers The direct method
reports on the gross
Cash paid to suppliers and employees cash flow of an entity ( )
Cash generated from operations
Interest paid ( )
Interest received Items that are
Dividends paid disclosed ( )
separately
Dividends received
Tax paid ( )
Net cash from / (used in) / from operating activities
Cash flows from investing activities ( ) = Outflow
Purchases of property, plant and equipment
Additions/Replacements ( )
Proceeds on the sale of property, plant and equipment (classes)
Purchases of investments ( )
Proceeds from sale of investment
Net cash from / (used in) / from investing activities
Format: Direct Method Continued

Cash flows from financing activities


Proceeds from shares issue
Payments of long-term borrowings ( )
Proceeds from (increase in) long-term borrowings
Net cash from / (used in) / from financing activities
Net increase / (decrease) in cash & cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
FORMATS

Indirect method
reports on the net
cash flow of an entity
Format: Indirect Method
Cash flows from operating activities The indirect method
Profit before taxation reports on the net cash
Adjustments for : flow of an entity
+ Interest paid
- Interest received
+ Depreciation ( and other non-cash items) The cash generated from
Operating profit before working capital changes operations section is
Decrease / (Increase) in inventory calculated by converting
Decrease / (Increase) in trade receivables Profit before tax to cash
Increase /(Decrease) in trade payables
Cash generated from operations
Interest received/paid
Dividends received/paid
Tax received/paid
Net cash from /(used in) operating activities
Cash flows from investing activities
The format for both
Cash flows from financing activities
methods is the same from
this point onwards
NON-CASH FLOW ITEMS
Non-cash flow items include:
Depreciation
 Provision for credit losses
Writing off the inventory
Profit on sale of non-current assets
 Loss on sale/ scrapping non current assets
 Revaluation of assets
Writing off of intangible assets and Transfers to and from
reserves
PREPARING THE CASH FLOW STATEMENT

In preparing a real-world CFS you will:


 use the summarised information in the,
• current year’s statement of Profit or Loss
• current & prior years’ statements of financial position
 to “work backwards” to find out what the cash flows
relating to these accounts must have been
 often creating “summary” ledger accounts to do this
(restructuring the ledger accounts!)
THANK YOU

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