the cash flow statement

THE CASH FLOW STATEMENT & C S O S & OTHER REPORTS

LECTURE 5

LEARNING OBJECTIVESLEARNING OBJECTIVES` Understand the difference between cash flow and profit` Revisit the accruals concept` Understand and interpret the cash flow statementp` Get familiar with the structure of and items in cash flow

statements

` Understand how to compare balance sheets to explain changes in cash` Link changes in cash to cash flow statement

` Produce cash flow statements in a form suitable for publication

` Discuss other financial statements and reports

WBS, 2013-14Panagiotis Dontis Charitos2

IN TODAYS LECTUREIN TODAY S LECTURE...` Topics` Cash flow and profit` The accruals concept revisited` The cash flow statement` Understanding and interpretation

R l i hi i h b l h` Relationship with balance sheet` Preparation of

` Other financial statements` Other financial statements` Directors report` Auditors reportp` Notes to the financial statements


CASH FLOW VS PROFITCASH FLOW VS. PROFIT` Profit not determined by cash` Cash inflows cash outflows not profit

` Increasing cash balance` Does not imply success` Sale of assets` Massive borrowing

` Decreasing cash balance` Does not imply failure` Investment in assets

I d d diff b fi d ` Important to understand difference between profit and cash flow


ACCRUALS CONCEPT: REVISITEDACCRUALS CONCEPT: REVISITED` Profit` Revenues earned less costs incurred in earning those revenues` Cash receipts and payments are irrelevant to profit

measurement` Accruals and matching principle


ACCRUALS CONCEPT: REVISITEDACCRUALS CONCEPT: REVISITED` Not all expenses have cash effects` Depreciation` Accruals

` N t ll h h ff t` Not all revenues have cash effects` Credit sales

` Not all cash payments are expenses` Not all cash payments are expenses` Purchase of non-current assets` Investments in other firms` Investments in other firms` Prepayments

` Not all cash receipts are revenuesp` Sale of non-current assets` Borrowing money


EXAMPLE 1EXAMPLE 1` Omega ltd sells a piece of machinery to another company

for 100,000 in March 2010 and receives full amount of cash upon the sale. The cost of purchasing this asset back i 2009 94 000in 2009 was 94,000.` What is the effect of this sale on the income statement for the

year ending 2010 and what is the respective effect on the cash year ending 2010, and what is the respective effect on the cash flow statement for the same period?

` Only the profit from the sale (6,000) is going to be addedon the income statement. The full amount of cashreceived would not count towards profit, but will be shown onthe cash flow statement as a cash inflow.


EXAMPLE 2EXAMPLE 2


CASH FLOW STATEMENTCASH FLOW STATEMENT` Cash Flow` Movement of money into and out of the business` Cash receipts and cash payments during the period

` Cash Flow Statement` Aggregate data on all cash inflows and cash outflows` Cash inflows (outflows) are decreases (increases) in assets and/or

increases (decreases) in liabilities` Shows origin (target) and amount of cash received (paid)` Shows origin (target) and amount of cash received (paid)

` Facilitates reconciliation between` Amount of profit generated during periodou o p o ge e a ed du g pe od` Amount by which cash balances have increased (decreased)

during period


CASH FLOW STATEMENTCASH FLOW STATEMENT` Cash and cash equivalents at the start of year` Add cash inflows` Deduct cash outflows

` = Cash and cash equivalents at the end of year` Cash equivalents are short term investments that can be

turned into cash quickly` Activities that generate cash` Operating` Investing` Financing


ACTIVITIES AFFECTING CASHACTIVITIES AFFECTING CASH

OPERATING

FINANCINGINVESTING


OPERATING ACTIVITIESOPERATING ACTIVITIES` Any transaction that determines net income` Cash inflows` EBIT` Depreciation` Added back as it is not a cash outflow

` Add Interest received` Changes in working capital` Add decrease in inventories and receivables` Add increase in payables

` Add tax rebate` Add tax rebate


OPERATING ACTIVITIESOPERATING ACTIVITIES` Any transaction that determines net income` Cash outflows` EBIT (only if negative)` Deduct interest paid` Changes in working capital` Deduct increase in inventories and receivables` Deduct decrease in payablesD d id` Deduct tax paid

` Deduct dividends paid` Typically under financing activities` Typically under financing activities


OPERATING ACTIVITIES: CHANGES IN WORKINGCAPITAL & CASH FLOWCAPITAL & CASH FLOW` What are the cash effects of changes in working capital

items?

` WC = Current Assets Current Liabilities

` Inventory increase means cash spent` Receivables decrease means cash received` Receivables decrease means cash received` Payables decrease means cash spent


INVESTING ACTIVITIESINVESTING ACTIVITIES` Any transaction related to acquisition or sale of non-

current assets` Cash inflows` Sale of property plant or equipment` Collection of loans to other entities` Sale of non-cash equivalent securities` Long-term investments (stocks, bonds)

` Cash outflows` Purchase of property plant or equipment` Lending of money to subsidiary` Purchase of non-cash equivalent securities


FINANCING ACTIVITIESFINANCING ACTIVITIES` Any transaction related to borrowing from creditors or

involving owners` Excludes interest payments

` Cash inflows` Share issues` Additional capital

` Short term borrowingN b d ` Notes, bonds, mortgages etc.

` Cash outflowsP f h di id d` Payment of cash dividends

` Share repurchases


CASH FLOW STATEMENT: AN EXAMPLECASH FLOW STATEMENT: AN EXAMPLE


CASH FLOW STATEMENT: PREPARATIONCASH FLOW STATEMENT: PREPARATION` Important to use balance sheet and income statement` Collect items from income statement` EBIT` Depreciation (if does not appear on IS, find on notes)` Amortisation` Provisions` Profit from sale of assets (deduct from EBIT)` Interest` Tax


CASH FLOW STATEMENT: PREPARATIONCASH FLOW STATEMENT: PREPARATION` Important to use balance sheet and income statement` Collect items from balance sheet` Change in inventory (stock)` Change in receivables (debtors)` Change in payables (creditors)` Change in long-term borrowings

` Problem items` Share issues` Purchase or disposal of non-current assets` Detailed info on notes to the balance sheet


CASH FLOW STATEMENT: PREPARATIONCASH FLOW STATEMENT: PREPARATION

EBIT

AddDepreciation

Deduct(Increase)/Add(decrease)ininventories

Deduct(increase)/Add(decrease)intradereceivables

Add(increase)/Deduct(decrease)intradepayables

DeductInterestpaid

Deducttaxpaid

D d t di id d idDeductdividendspaid

Netcashflowfromoperatingactivities


CASH FLOW STATEMENT: INTERPRETATIONCASH FLOW STATEMENT: INTERPRETATION` Free Cash Flow` Net cash arising from operating activities` Can be used to pay dividends, investments, pay loans` What about essential upgrades investments?

` Cash Flow Ratios` Interest and dividend cover

InterestforFlowCashFlowCashFree

C h l l d

Interestf

Dividend,

` Cash return on capital employed` Cash flow per share


CASH FLOW STATEMENT: INTERPRETATIONCASH FLOW STATEMENT: INTERPRETATION` Important areas` Cash flow from operating activities` Changes in working capital and how they are financed` Investing activities and finance` Financing activities` Dividends coverage by net operating cash flows` Cash balance at beginning of year vs. cash balance at end of

year` Investigate reasons for changes

` Limitations` Limitations` Not to be used in isolation necessary to use balance sheet

and income statement


and income statement

OTHER FINANCIAL STATEMENTS:DIRECTORS REPORTDIRECTORS REPORT` States among other things` Information about directors` Directors remuneration` Principal activities (and any changes)` Business review` Future developments` Research and development` Post balance sheet events` Market value of land and buildings

R d d di id d` Recommended dividend` Creditor payment


OTHER FINANCIAL STATEMENTS:AUDITORS REPORTAUDITOR S REPORT` Scope` Verifies that a corporation's financial statements comply with

accounting standards and that represent the companys fi i l i t d f i financials in a true and fair manner

` OutcomesU lifi d i l ` Unqualified report is a clean report

` Qualified report shows reservationAl i l d` Also includes` Statement of Directors responsibilities to make clear that

financial statements are the responsibilities of the directorsfinancial statements are the responsibilities of the directors


OTHER FINANCIAL STATEMENTS:NOTES TO THE FINANCIAL STATEMENTSNOTES TO THE FINANCIAL STATEMENTS` Also known as footnotes` Additional notes and information` Important information that cannot be presented on balance

sheet and income statementsheet and income statement` Added to the end of the financial statements` Supplement users with more information` Supplement users with more information

` Present` Computation of specific items` Computation of specific items` Accounting methodologies used` Pension plan details` Stock option compensation information` List of subsidiaries controlling interest


READING LISTREADING LIST` Core reading` Perks and Leiwy` Chapter 6` Chapter 7 section 7.6

` Further readingG` Gowthorpe` Chapter 10


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the cash flow statement

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