Statement of

Cash Flows
Lecture 11
Learning Objectives

1) Explain the reasons for preparing a statement of

cash flows.
2) Describe the general format of the statement of
cash flows.
3) Explain the classification of cash flow activities
reflected in the statement of cash flows.
Learning Objectives

4) Identify and explain the issues involved in the

preparation of the statement of cash flows.
5) Prepare a statement of cash flows.

6) Analyse the financial position of an entity using

a statement of cash flows.
Why Statement of
Cash Flows

4
Importance of Cash

1) Cash is one of the most important factors in

business, because even a profitable business can
fail if it doesn’t have cash.
2) It is particularly important to have cash to pay
creditors and employees.
3) Even large, established, profitable businesses
must have the means to raise cash if necessary,
without resorting to selling stock and calling in
debts.
The Need for Statement of
Cash Flows

1) The Income Statement shows the profit or loss

of a business for the year (includes accruals and
non-cash items).
2) The Balance Sheet shows the assets, liabilities
and capital at a point in time.
The Need for Statement of
Cash Flows

3) The Statement of Cash Flows shows where

cash has come from during the year, and exactly
what we have done with it.
A Statement of Cash Flows is
used to assess

1) the cash flows which the business may be able

to generate in the future.
2) whether the business would be able to meet
future commitments or obligations.
3) when would new equity be needed to be issued
or borrowings raised.
4) the valuation of the business.
Who are the users of
Statements of Cash Flows
1) A business owner who wants to know why he has
an overdraft.
2) A businessman who wants to know why his bank
balance has risen.
3) The shareholders/partners in a company who
have invested equity/capital. However, the
bank balance has still fallen.
Where from and where to
Where from and where to

1) A company’s profits bring cash flow into the

business but losses take cash out.
2) A sale of non-current assets brings cash into the
business but a purchase assets takes cash out.
3) The reduction of inventory levels brings cash into
the business but increasing inventory levels ties
cash up.
4) A decrease in accounts receivable brings cash
into the business but an increase receivables ties
cash up.
Where from and where to

5) An increase in capital or an issue of shares

brings cash into the company but dividends (or,
drawings) take cash out.
6) The loans received by the business bring cash
into the company but repayments of loans take
cash out.
7) An increase in accounts payable keeps cash in
the business but a decrease in accounts
payable takes cash out.
In summary …

The statement of cash flows is used to:

1) evaluate company’s financial structure.
2) assess ability to generate positive cash flows.
3) check accuracy of past assessments of future
cash flows.
4) examine relationship between profitability and
net cash flow.
5) evaluate changes in net assets of the entity.
6) evaluate ability to adapt to change in economic
outlook.
Statement
of Cash Flows
General Format
 Preparing a Statement
of Cash Flows
1 Calculate net cash provided from operating activities.

2 Ascertain net cash provided from investing activities.

3 Determine net cash provided from financing activities.

4 Compute net cash increase (decrease) for the year.

5 Reconcile cash at end of year with beginning of year.

Preparing a Statement
of Cash Flows
1. Direct Method
Analyse, summarise and classify the cash transactions and
determine the non-cash transactions affecting assets and
liabilities to determine cash flows.

2. Indirect Method
Analyse the other financial reports (income statement
and balance sheet) to determine cash flows.

The difference:
Calculation of cash flow from OPERATING ACTIVITIES
Statement
of Cash Flows
Direct Method
Preparing a Statement
of Cash Flows

1) Direct method

a) Major classes of operating expenses and

revenues are reported as gross outflows and
inflows from operations.
b) Adjust sales, cost of sales and other
operating items for non-cash items
(accruals) and non-operating items.
 HAWKESBURY LTD
Statement of Cash Flows
for the year ended 30 June 2017
(Direct Method)

$ $
Cash Flows from Operating Activities
Receipts from customers xx
Payments to suppliers & employees (xx)
Cash generated from operations xx
Interest paid (xx)
Income taxes paid (xx)
Net cash from/(used in) operating activities xxx
 HAWKESBURY LTD
Statement of Cash Flows
for the year ended 30 June 2017
(Direct Method)

$ $
Cash Flows from Investing Activities
Purchase of investments (xx)
Payment for plant & equipment (xx)
Proceeds from sale of equipment xx
Dividend received xx
Interest received xx
Net cash from/(used in) investing activities (xxx)
 HAWKESBURY LTD
Statement of Cash Flows
for the year ended 30 June 2017
(Direct Method)

$ $
Cash Flows from Financing Activities
Proceeds from issue of share capital xx
Proceeds from long-term borrowings xx
Repayment of borrowings (xx)
Dividends paid (xx)
Net cash from/(used in) financing activities xxx

Net increase/(decrease) in cash and cash equivalents xxx

Cash and cash equivalents at beginning of year xxx
Cash and cash equivalents at end of year xxx
Statement
of Cash Flows
Indirect Method
Preparing a Statement
of Cash Flows

2) Indirect method

Accrual basis operating profit is reconciled to

net cash flow from operating activities by:
a) adding back deferrals (eg, depreciation).
b) deducting accruals (ie, working capital
changes).
 HAWKESBURY LTD
Statement of Cash Flows
for the year ended 30 June 2017
(Indirect Method)
$ $
Cash Flows from Operating Activities
Operating profit before taxation xx
add/(less):
Depreciation charges xx
Loan interest xx
Operating profit before working capital changes xx
(Increase)/Decrease in trade receivables (xx)
(Increase)/Decrease in inventory (xx)
Increase/(Decrease) in trade payables xx
Cash generated from operations xx
Interest paid (xx)
Income taxes paid (xx)
Net cash from/(used in) operating activities xxx
 HAWKESBURY LTD
Statement of Cash Flows
for the year ended 30 June 2017
(Indirect Method)

$ $
Cash Flows from Investing Activities
Purchase of investments (xx)
Payment for plant & equipment (xx)
Proceeds from sale of equipment xx
Dividend received xx
Interest received xx
Net cash from/(used in) investing activities (xx)
 HAWKESBURY LTD
Statement of Cash Flows
for the year ended 30 June 2017
(Indirect Method)

$ $
Cash Flows from Financing Activities
Proceeds from issue of share capital xx
Proceeds from long-term borrowings xx
Repayment of borrowings (xx)
Dividends paid (xx)
Net cash from/(used in) financing activities xx

Net increase/(decrease) in cash and cash equivalents xxx

Cash and cash equivalents at beginning of year xxx
Cash and cash equivalents at end of year xxx
Classification of
Cash Flow Activities
 Classification of
Cash Flow Activities

1 OPERATING

2 INVESTING

3 FINANCING
ACCD201 30
Cash Flow by Activities

Cash Inflow Operating Cash Outflow

Sale of goods or Payments to
Activities
 
services suppliers for
goods
 Other operating
receipts  Payments to
employees
 Payments of
interest and
taxes
 Other operating
payments
Cash Flow by Activities

Cash Inflow Investing Cash Outflow

 Sale of property, Activities  Purchase of
plant and property, plant
equipment and equipment
 Sale of share and  Purchase of
debentures share and
 Repayment of debentures
loans  Loan of monies
 Sale of land held
 Purchase of
for resale
infrastructure
 Receipts of
interest and
dividends
Cash Flow by Activities

Cash Inflow Financing Cash Outflow

Issue of share Share buy backs
Activities
 
capital
 Dividends paid
 Issue of
 Redemption of
debentures or
debentures
unsecured notes
 Repayment of
 Borrowings
borrowings