2023 - Cashflow Statements-9781292208633 - pp25

Slide 25.
Chapter 25
Statements of cash flows
Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved
Slide 25.2
Learning objectives
After you have studied this chapter, you
should be able to:
➢ draw up a statement of cash flows for any
type of organisation
➢ explain how statements of cash flows can
give a different view of a business to that
simply concerned with profits
Slide 25.3
Learning objectives (Continued)

➢ describe the contents of International
Accounting Standard 7 (IAS 7) and the
format to be used when preparing
statements of cash flows using IAS 7
➢ describe some of the uses that can be
made of statements of cash flows
Slide 25.4
The importance of cash

➢ Cash is one of the most important factors
in business, because even a profitable
business can fail if it does not have cash.
➢ It is particularly important to have cash to
pay creditors and employees.
➢ Even large, established, profitable
businesses must have the means to raise
cash if necessary, without resorting to
selling stock and calling in debts.
Slide 25.5
The need for statements of cash

flows
➢ The statement of profit or loss shows the
profits of a business.
➢ The balance sheet shows the assets,
liabilities and capital at a point in time.
➢ The statement of cash flows shows where
cash has come from during the year, and
exactly what we have done with it.
Slide 25.6
Companies and statements of

cash flows
➢ Two methods prescribed in IAS7
⚫ Indirect method (which we have considered)
⚫ Direct method (dealt with in BA2)
➢ Cash flows include cash equivalents
⚫ i.e. highly liquid investments that are readily
convertible into cash
Slide 25.7

cash flows (Continued)
Slide 25.8

cash flows (Continued)
Slide 25.9
Where from and where to
Slide 25.10
Where from and where to (Continued)

1. Profits bring cash flow into the business but
losses take cash out.
2. Sales of non-current assets bring cash into
the business but a purchase takes cash out.
3. Reducing inventory levels brings cash into
the business but increasing levels ties cash
up.
4. Reducing accounts receivable brings cash
into the business but increasing the figure
ties cash up.
Slide 25.11
Where from and where to (Continued)

5. An increase in capital or an issue of shares
brings cash into the company but drawings
and dividends take cash out.
6. Loans received by the business bring cash
into the company but repayments take cash
out.
7. An increase in accounts payable keeps cash
in the business but a decrease in accounts
takes cash out.
Treatment of changes in working
Slide 25.12
capital in the statement of cash flows

using the indirect method (1 of 2)
Slide 25.13
Treatment of changes in working

capital in the statement of cash flows
using the indirect method (2 of 2)
Slide 25.14
Construction of a statement
of cash flows
Slide 25.15
Construction of a statement
of cash flows (Continued)
Slide 25.16
Adjustments needed to net profit

The net profit figure has to be adjusted to take
account of items included which do not involve a
movement of cash in the period covered by the
statement of cash flows, such as:
➢ Depreciation – add back because it is not a cash
flow.
➢ Allowances for doubtful debts – add back because
the cash flow occurs when the debt is paid.
➢ Profits/losses on the disposal of non-current
assets – adjust, because these are merely book
values.
Slide 25.17
Activity
Slide 25.18
Activity (Continued)
Slide 25.19
Exhibit 28.10 : Statement of cash flows

for a sole proprietor: example 2 (1 of 3)
Slide 25.20

Slide 25.21

Slide 25.22
Users of statements of
cash flows
Who will want to use a statement of cash flow?
➢ A businessman, who wants to know why he
has an overdraft.
➢ A businessman, who wants to know why his
bank balance has risen.
➢ The partners in a business who have invested
capital and yet the bank balance has still
fallen.
Slide 25.23
The use of a statement of

cash flow?
A statement of cash flow can be used to assess:
➢ The cash flows which the business may be
able to generate in the future.
➢ How far the business will be able to meet
future commitments.
➢ How far future share issues may be needed.
➢ A valuation of the business.
Slide 25.24
Learning outcomes
You should have now learnt:
1. Why statements of cash flows provide
useful information for decision-making.
2. A range of sources and applications of
cash.
3. How to adjust net profit for non-cash items
to find the net cash flow from operating
activities.
4. How to prepare a statement of cash flows
as defined by IAS 7.
Slide 25.25
Learning outcomes (Continued)

5. How to present the net cash flow from
operating activities using the indirect
method.
6. Some of the uses that can be made of
statements of cash flows.
Slide 25.26
Learning outcomes
You should now be able to:
➢ draw up a statement of cash flows for any
type of organisation
➢ explain how statements of cash flows can
give a different view of a business to that
simply concerned with profits
Slide 25.27
Learning outcomes (Continued)

➢ describe the contents of International
Accounting Standard 7 (IAS 7) and the
format to be used when preparing
statements of cash flows using IAS 7
➢ describe some of the uses that can be
made of statements of cash flows

2023 - Cashflow Statements-9781292208633 - pp25

Uploaded by

Copyright:

Available Formats

You might also like

2023 - Cashflow Statements-9781292208633 - pp25

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

2023 - Cashflow Statements-9781292208633 - pp25

Uploaded by

Copyright:

Available Formats

Slide 25.

Learning objectives (Continued)

The importance of cash

The need for statements of cash

Companies and statements of

Companies and statements of

Companies and statements of

Where from and where to

Where from and where to (Continued)

Where from and where to (Continued)

capital in the statement of cash flows

Treatment of changes in working

Adjustments needed to net profit

Exhibit 28.10 : Statement of cash flows

Exhibit 28.10 : Statement of cash flows

Exhibit 28.10 : Statement of cash flows

The use of a statement of

Learning outcomes (Continued)

Learning outcomes (Continued)

You might also like