CASH FLOW STATEMENTS

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 Learning Objectives
1. Explain the importance of Cash Flow Statements.

2. Describe the meaning and classification of cash flow

activities:
a. Operating activities
b. Investment activities
c. Financing activities

3. Describe two methods of Cash Flow Statements : Direct

and Indirect Method.

4. Prepare Cash Flow Statements.

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 INTRODUCTION
What is a Cash Flow Statement ?

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 CASH FLOW CONCEPT

Cash Flow
Statement

Reports net cash Shows sources of funds

inflows and and uses of cash during
outflows from all the year of operation
business activities for decision making
as a whole purposes

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 CASH FLOW STATEMENT

To prepare cash flow statement we need

information from other financial statements

Owner’s equity
SoPL statement S0FP
(Current Year) (2 years)

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OBJECTIVE & IMPORTANCE OF CASH
FLOW STATEMENT

To predict the ability of the

organisation in projection
the future cash flow

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Receipts and payments from
previous years are a good
indicator for the receipts and
paymets in the future.

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OBJECTIVE & IMPORTANCE OF
CASH FLOW STATEMENT
To evaluate decision
made by management

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Reports long term investment which
can be seen by investors and creditors
thus can evaluate the decision made
by management.

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OBJECTIVE & IMPORTANCE OF
CASH FLOW STATEMENT

To identify ability to pay dividends to

shareholders & ability to pay interest and
repayment of loan to creditors

Can help shareholders and creditors

to predict the ability of company to
pay

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OBJECTIVE & IMPORTANCE OF
CASH FLOW STATEMENT
To identify relationship of the
net profit with the changes in
cash in the business

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Direct relatioship between cash and
profit. High profit will reflect increase
in cash and vice versa.But balance of
cash can be reduced if profit increase
and vice versa.

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 CLASSIFICATION OF
CASH
Operating
Activities

Cash + Cash +
Cash equivalents Cash equivalents
Investing
Opening Activities Closing
Balance balance

Financing
Activities

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 CASH EQUIVALENTS
In Cash Flow Statement, Cash and Cash
Equivalents considered as one item.

Short term investment that can be

changed to cash and has low risk of
reduction in value.

Overdraft also part of cash

equivalents

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Refer to cash movement from operation that will affect
net income.

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 OPERATING ACTIVITY
INFLOW OUTFLOW

Net Profit Profit on disposal of asset

Depreciation
Loss on disposal of asset
/investment
Increase in allowance for
doubtful debts
Reduce in Accounts Receivable
and Inventory
Increase in Accounts Payable
/investment
Reduce in allowance for
doubtful debts
Increase in Accounts
Receivable and Inventory
Decrease in Accounts Payable

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 EXAMPLE

Net Profit during the year was RM 167,900. Provision for

depreciation for Equipment was RM 41,300. Balances of assets and
liabilities beginning of a year and end of year as given below:
End of year Beginning of
year
Cash RM 27,900 RM 30,900
Accounts Receivable(net) 75,100 70,250
Inventory 120,400
110,900
Expenses Prepaid 5,800
6,000
Accounts payable 67,200
65,300
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Salaries Accrued 7,150 7,950
 ANSWER

Cash Flow From Operating Activities

Net Profit RM
167,900
+ Depreciation RM 41,300
- Increase in AR (4,850)
- Increase in Inventory (9,500)
+ Reduce in Exp prepaid 200
+ Increase in AP 1,900
- Reduce in Salaries accrued (800) 28,250
RM
196,150

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Increase or decrease in non current asset including
any investment to other business.

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 INVESTING ACTIVITY
INFLOW OUTFLOW

Sales of non current asset Purchase of non current asset

Sales of any investments Purchase of any investment
Receive from any repayment Lending of cash to other
of loan business

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 Any activity to obtain cash from investor or
borrower to finance the business.

This is related with the increse or decrease in owner’s

equity and non current liability.

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 FINANCING ACTIVITY
INFLOW OUTFLOW

Issue of shares Redemption of shares

Issue of loan notes or Repayment of loan notes or
debentures debentures
Loan Repayment of loan
Issue of bond Payment of dividends
Redemption of bond

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 Classification
Classificationofof
Cash
CashFlow
Flow
Statement
Statement…… ……

Operating Activity Investing Activity Financing Activity

1 2 3

Will give Effect on Effect on

effect to net investment owner’s
income and non equity and
current asset liability

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