FIN1161 – Introduction to Finance for Business

Week 7 – Lecture

Introducing key financial statements – Part 3 –

The Cashflow Statement – Part 2

Gowthrope Chapter 6

Some powerpoint materials acknowledgement – Business and Finance 5th edition © Catherine Gowthrope, 2021
 Learning Outcomes
After this session you will be able to:

 Draw up a statement of cash flows for a small business for Stage 2. Investing
activities and Stage 3. Financing activities,
 Understand some of the messages conveyed by the statement of cash flows
related to Stage 2. Investing activities and Stage 3. Financing activities,
 Review of Question 1 for Report 2
 Recap
What was covered last week

Any questions?
 Table 6.1 The impact of transactions on cash and profits
Transaction
Borrowing £10,000 at an annual interest
rate of 10%. Loan to be repaid after five
years
Purchasing a new car for £8,000. The car
is to be depreciated on the straight-line
basis over four years, with the
assumption of no residual value at the
end of four years
Drawings of £3,500
Sale for cash of £1,600
Sale on credit for £1,600
Impact on cash
Cash and long-term liabilities are both increased in the
statement of financial position by £10,000. After five
years, the loan will be repaid; cash and long-term
liabilities will both be reduced by £10,000
Cash is reduced, and non-current assets are increased by
£8,000
Cash and capital are both reduced by £3,500
Cash is increased immediately
Trade receivables are increased immediately. Provided
that the debt-or pays up, cash will be increased at some
point in the near future
Impact on profits
No immediate impact on profits. Each year for
five years there will be an annual interest
payment of £1,000. This will decrease both cash
and profit
No immediate impact on profits. Each year for
four years there will be a depreciation charge of
£2,000 (£8,000/4), but this has no effect on cash
There is no impact on profit. Effectively, the
owner is taking £3,500 of his/her capital out of
the business
The sale is recognized immediately, and sales in
the statement of profit or loss are increased by
£1,600
The sale is recognized immediately, and sales in
the statement of profit or loss are increased by
£1,600
Preparing a Statement of Cash Flows / Indirect Approach (1)
International Financial Reporting Standards (IAS 7 Statements of Cash Flow) prescribe a
statement that is divided into three principal sections:

1. Operating activities: cash flows arising from the business’s trading activities, such as receipts
of cash in respect of sales, payments for costs such as cost of sales, staff and rental. This
section of the statement is concerned with inflows and outflows relating to working capital items:
inventory, trade receivables and trade payables.

2. Investing activities: cash flows in respect of payments for resources that will generate income
for the business in the future. This would include payments for non-current assets and
receipts from the disposal of non-current assets.

3. Financing activities: cash flows in respect of capital, for example, receipt of cash invested
in the business by the owner, or the repayment of loans taken out to finance business
expansion.
Preparing a Statement of Cash Flows / Indirect Approach (2)
Preparing a Statement of Cash Flows / Indirect Approach (3)
Preparing a Statement of Cash Flows / Indirect Approach (8)

Example: Isobel owner of Buchanan International Designs– Step 2

Take into account all the other inflows and outflows that have been
made but which do not relate to working capital items:
– Interest received and paid
– Capital expenditure
– Other items
• In this case only one item – purchase of non-current assets for
£22,630.
Preparing a Statement of Cash Flows / Indirect Approach (9)

Example: Isobel
Step 3 Financing cash flows
£
Cash inflow: capital introduced 10,000
Cash outflow: drawings (7,500)
Cash inflow: loan 40,000
Preparing a Statement of Cash Flows / Indirect Approach (9)
Example: Isobel – Step 2& 3
Preparing a
Statement of
Cash Flows /
Indirect
Approach
(10)

Example:
Isobel –
Step 4
 The High Profit/No Cash Paradox
• Profitability and availability of cash do not necessarily go
together in the short term.
• The dislocation between profits and cash can create problems
even for highly profitable businesses who is expanding rapidly
for some of the following reasons:
 Need to take on more staff quickly
 Insufficient management time
 Loss of control over costs and inventory
 Failure to control receivables
 Chronic shortage of staff
Statements of Cash Flow in Large Businesses
Example: Majestic Wine plc
 Report 2 - Review of Questions
- Review Question 1 scenario and approach
- Do you have any questions?
 Learning Outcomes – at the
end
After this session you will be able to:

 Draw up a statement of cash flows for a small business for Stage 2. Investing
activities and Stage 3. Financing activities,
 Understand some of the messages conveyed by the statement of cash flows
related to Stage 2. Investing activities and Stage 3. Financing activities,
 Review of Question 1 for Report 2
 Additional Resources

- On Moodle look at video under Week 6 which explains the cashflow

statement
- On Moodle answer the questions in the file Week 7 - Cashflow
Statement – Part 2 - Questions
- On Moodle look at the answers to the previous week’s questions in
the file Week 6 – Cashflow Statement - Part 2 - Questions and
Answers