Slide 5.

Measuring and reporting cash flows

LEARNING OUTCOMES
You should be able to

discuss the crucial importance of cash

to a business;

explain the nature of the cash flow statement and

discuss how it can be helpful in identifying cash
flow problems;

prepare a cash flow statement;

interpret a cash flow statement.

Peter Atrill and Eddie McLaney, Accounting and Finance for Non-Specialists, 6th Edition, © Pearson Education Limited 2008
Slide 5.2

A definition of cash and cash equivalents (IAS 7)

Definitions:

Notes and coins in hand,

and deposits in banks and
Cash similar institutions that are
accessible on demand

Short-term, highly liquid

investments that are
Cash equivalents readily convertible to
known amounts of cash

Peter Atrill and Eddie McLaney, Accounting and Finance for Non-Specialists, 6th Edition, © Pearson Education Limited 2008
Slide 5.3

The relationship between the balance sheet, the

income statement and the cash flow statement

Owner’s Income statement Owner’s

claim claim

Balance sheet Balance sheet

at the start of at the end of
the accounting the accounting
period period

Cash and Cash and

Cash flow
cash cash
statement
equivalents equivalents

Peter Atrill and Eddie McLaney, Accounting and Finance for Non-Specialists, 6th Edition, © Pearson Education Limited 2008
Slide 5.4

Standard layout of the cash flow statement

Cash flow
from operating activities
plus or
minus

Cash flow
from investing activities
plus or
minus

Cash flow
from financing activities
equals

Net increase (or decrease) in

cash and cash equivalents over
the period
Peter Atrill and Eddie McLaney, Accounting and Finance for Non-Specialists, 6th Edition, © Pearson Education Limited 2008
Slide 5.5

Diagrammatical representation of the cash flow

statement

Cash and
Operating cash Investing
activities equivalent activities
balances

Financing
activities

Peter Atrill and Eddie McLaney, Accounting and Finance for Non-Specialists, 6th Edition, © Pearson Education Limited 2008
Slide 5.6

Tesco plc
Summarised cash flow statement for the year ended 24 February 2007
£m
Net cash inflow from operating activities 2,611
Net cash used in investing activities (2,343)
Net cash used in financing activities (533)
Net (decrease)/increase in cash and cash (265)
equivalents
Cash and cash equivalents at beginning of year 1,325
Effects of foreign exchange rate changes* (18)
Cash and cash equivalents at end of period 1,042

*This adjustment is required because transactions are undertaken

by the company in different currencies and movements in
exchange rates can lead to gains or losses arising.
Peter Atrill and Eddie McLaney, Accounting and Finance for Non-Specialists, 6th Edition, © Pearson Education Limited 2008
Slide 5.7

Deducing net cash inflows from operating activities

There are two methods

that can be used such as:

The direct method

The indirect method

Peter Atrill and Eddie McLaney, Accounting and Finance for Non-Specialists, 6th Edition, © Pearson Education Limited 2008
Slide 5.8

The indirect method of deducing the net cash flows from

the operating activities
Net profit before taxation
plus
Depreciation expense
plus
Interest expense
plus or minus
Increase (minus) or decrease (plus) in
inventories
plus or minus
Increase (minus) or decrease (plus) in
receivables
plus or minus
Increase (plus) or decrease (minus) in
payables
less
Interest paid
less
Taxation paid
less
Dividend paid
equals

Net cash flows from operating activities

Peter Atrill and Eddie McLaney, Accounting and Finance for Non-Specialists, 6th Edition, © Pearson Education Limited 2008
Slide 5.9

Example 5.3 Torbryan plc

Cash flow statement for the year ended 31 December 2008
£m
Cash flows from operating activities
Profit before taxation (after interest) 193
Adjustments for:
Depreciation 79
Interest receivable (17)
Interest payable 23
Increase in trade receivables (18)
Decrease in trade payables (1)
Decrease in inventories 3
Cash generated from operations 262
Interest paid (23)
Taxation paid (39)
Dividend paid (50)

Peter Atrill and Eddie McLaney, Accounting and Finance for Non-Specialists, 6th Edition, © Pearson Education Limited 2008
Slide 5.10

Example 5.3 Torbryan plc (Continued)

Cash flow statement for the year ended 31 December 2008
£m

Net cash from operating activities 150

Cash flows from investing activities
Payments to acquire tangible non-current assets (95)
Interest received 17
Net cash used in investing activities (78)
Cash flows from financing activities
Repayments of loan notes (150)
Issue of ordinary shares 90
Net cash used in financing activities (60)
Net increase in cash and cash equivalents 12
Cash and cash equivalents at 1 January 2008 (68)
Cash and cash equivalents at 31 December 2008 (56)

Peter Atrill and Eddie McLaney, Accounting and Finance for Non-Specialists, 6th Edition, © Pearson Education Limited 2008
Slide 5.11

Example 5.3 Torbryan plc (Continued)

Analysis of cash and cash equivalents during the year ended 31 December 2008

£m

Overdraft balance at 1 January 2008 (68)

Net cash inflow 12
Overdraft balance at 31 December 2008 (56)

Peter Atrill and Eddie McLaney, Accounting and Finance for Non-Specialists, 6th Edition, © Pearson Education Limited 2008