easy cash flow

8/7/2019 Easy Cash Flow

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Perhaps you need more than 25 mins to read the cash flow statement template and master it.

A cash flow statement is often prepared from the balance sheet and income statement of anenterprise, opening with a reconciliation between reported profit and operating cash flow.

The cash flow statement should be presented using standard headings. The standard headingsare to ensure that cash flows are reported in a form that highlights the significant components ofcash flow and facilitates comparison of the cash flow performance of different businesses.

To determine the net cash flow from operating activities, there are two methods to show cash flowstatement template: indirect and direct methods.

The formula, format and template of cash flow statement: direct method

Cash flow statement template: direct method

The formula, format and template of cash flow statement: indirect method

Cash flow statement template: indirect method

As known, the profit is basic on the accounting concepts of accruals, the cash flow is on cashbasis. Profit represents an increase in net assets, which can be in cash or may be tied up inother assets. For example:

non-current assets may have been purchasedthere may be an increased amount of receivablethere may be increased investment in inventorythe liabilities of the business may have decreased, i.e. more cash has been spent this year in

paying off suppliers more quickly than was the case last year.

We can reconcile profit to cash in an accounting period by taking into account these and otherfactors.

The direct method records the gross trading cash flows, the indirect method starts with profit, notcash, and adjusts profit for the non-cash expense of depreciation and for the movements inworking capital. The information for the direct method could be found in the accounting records orderived from the other financial statements. The information for the indirect method is found in theother financial statements.

Especially, under indirect method, the standard headings shown in the statement are: operatingactivities, investing activities, financing activities. Figures for the cash flow statement will bederived either from the accounting records or from the other financial accounting statements: thebalance sheet for the current year and the previous period, and the income statement for theperiod.

A single example of calculation using the indirect method

The summarised balance sheet of Aspring, a limited company, at 31 December 20X8 and 20X9were as follows:

balance sheet of Aspring, at 31 December 20X8 and 20X9

No non-current assets have been sold during the period under review. Depreciation provided forthe year amounted to $2,000. There is non interest paid, dividends paid or taxation paid.

Now, well prepare the cash flow statement for the year ended 31 December 20X9.


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cash flow statement for the year ended 31 December 20X9: indirect method

The analysis of cash flow statement: indirect method

Operating activities:

Profit before tax: you can calculate it from the account Reserves (21,000 17,000 = 4,000).Depreciation: you can calculate it from the account Depreciation (10,000 8,000 = 2,000).

Depreciation is a book write-off capital expenditure, therefore, it represents an addition toreported profit in deriving cash inflow.

Increase in inventories: you can calculate it from the account Inventory (23,500 20,000 =3,500). Inventory at the balance sheet date represents a purchase which has not actually beencharged against current profit. However, as cash was spent on its purchase or a payableincurred, it does represent an actual or potential cash outflow.

Increase in payables: you can calculate it from the account Payables (6,000 5,000 = 1,000).A purchase represents the incurring of expenditure and a charge or potential charge to theincome statement. It does not represent a cash outflow until paid.

Investing activities:

Payments to acquire non-current assets: you can calculate it from the account Plant andmachinery, at cost (16,500 15,000 = 1,500). Cash paid for property, plant and equipment andother non-current assets represents a cash outflow.

The example shows the important information that can be directly given by a cash flow statement.Despite making a profit of $4,000 in the period, the business has suffered a $3,000 reduction incash. This is largely due to the amount of profit tied up in increased working capital (inventory,receivables less payables).

Here is a comprehensive example shows both the indirect and direct methods of calculatingoperating cash flow. If you spend more than 15 20 mins to read this example , you willunderstand and master the formula, format and template of cash flow statements: indirect and

direct methods.

The draft financial statements of A for the year ended 31 December 20X9 are as follows:

income statement for the year ended 31 December 20X9balance sheet as at 31 December

Note: Cash and cash equivalents are made up as follows:

cash and cash equivalents

The following additional information is also available.

Interest expense was $400 of which $170 was paid during the period. $100 relating to interestexpense of the prior period was also paid during the period. $200 of interest was received duringthe period.

Dividends paid were $1,200.The liability for tax at the beginning and end of the period was $1,000 and $400 repectively.

During the period, a further $20 tax was provided for.Withholding tax on dividend receivedamounted to $100, thus leading to the total tax expense of $20 + $100 = $120.

During the period, the group acquired property, plant and equipment with an aggregate cost of$1,900 of which $900 was acquired by means of finance leases. Cash payments of $1,000 weremade to purchase property, plant and equipment.


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$90 of capital repayment was paid under the finance leases.Plant with an orginal cost of $80 and accumulated depreciation of $60 was sold for $20.Accounts receivables as at the end of 20X9 include $100 of interest receivable.$250 was raised from the issue of share capital and a further $450 was raised from long-term

borrowings.

Required

Prepare a cash flow statement for the year ended 31 December 20X9 using the indirectmethod and following the illustrative format (starting the cash flow statement with the profit beforetax).

Show the calculation of operating cash flow using the direct method.

Approach to solution

Figures for the cash flow statement are derived from the differences between the opening andclosing balance sheet figures, using information in the notes and in the income statement to makenecessary calculations. One approach to developing the answer is to adopt a standardprocedure. Here is a suggested procedure for the indirect method.

Step1

Set up the statement in outline (main headings only). Leave plenty of space to insert detail. Awhole page will be needed.

Step2

Study the additional information and mark with a cross those items affecting balance sheetamounts.

Step3accounting-exercises

Master this knowledge point! Do some exercises and more details...

Begin the cash flow statement by using the income statement to work down to operating profitbefore working capital changes.

Step4

Proceed line by through the balance sheets. If an item is not marked with a cross, the differencemay be entered direct to the statement, if it is marked, a working is required. Use working ledgeraccounts to calculate missing figure. Insert the opening and closing balances from the balancesheets into the working accounts, then add information from the notes to complete the ledgeraccount. Balancing figures on the working accounts are then transferred to the cash flowstatement.

Solution

Cash flow statement for the year ended 31 December 20X9: indirect method.

cash flow statement for the year ended 31 December 20X9: indirect method

Analysis of cash and equivalents

analysis of cash and equivalents


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Workings:

Net profit before tax: 3,350

You can find it in the income statement.Depreciation: 450

You can find it in the income statement for this period. Added back to profit because its a non-cash expense.

Investment income: (500)

You can find it in the income statement for this period. Deducted because this income is notbelong to operating activities.

Interest expense: 400

You can find it in the income statement for this period. Added back because its not part ofcash generated from operations (the interest actually paid is not belong to operating activities).

Increase in trade receivables: (600)

trade receivables

Deducted because this is part of the profit not yet realised into cash but tied up in receivablesDecrease in inventories: 950

You can calculate it from the account Inventory (1,950 1,000 = 950). Added on because thedecrease in inventories liberates extra cash.

Decrease in trade payables: (1,640)

You can calculate it from the account Trade payables (1,890 250 = 1,640). Deductedbecause the reduction in payables must reduce cash.

Interest paid: (270)

interest paid

These are the amounts actually paid in the year.Income taxes paid: (720)

income taxes

These are the amounts actually paid in the year.Purchases of property, plant and equipment: 1,000

property, plant and equipment - cost

Cash paid for property, plant and equipment and other non-current assets.

Proceeds of sale of equipment: 20

property, plant and equipment - depreciationproperty, plant and equipment - disposal

Cash received on the sale of property, plant and equipment and other non-current assets.Interest reveived: 200Dividends received: 200

interest and dividends receivable


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Additional information: $200 of interest was received during the period. Received oninvestments.

Proceeds from issue of shares: 250

You can calculate it from the account Share capital (1,500 1,250 = 250). Its an inflow ofcash.

Proceeds from long-term borrowings: 450

long-term debt (to reconcile balances)

Its an inflow of cash.Payment of finance lease liabilities: (90)

$90 of capital repayment was paid under the finance leases. Its an outflow of cash.Dividends paid: (1,200)

retained earnings (to reconcile balances)

Its an outflow of cash.

Opening cash flow: direct method.

operating cash flow - direct method

Workings:

Cash receipts from customers

cash receipts from customersCash paid to suppliers and emplyees

cash paid to suppliers and emplyees

Related posts:

The direct and indirect method of cash flowOperating cash flowCash flow from operating activitiesCash flow analysisLimitations of the cash flow statement

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