CHAPTER 18Statement of

cash flows

LEARNING OBJECTIVES1. Explain the reasons for preparing a statement of cash flows2. Describe the general format of the statement of cash flows3. Define the concept of cash in accordance with IAS 7/AASB 107

Statement of Cash Flows4. Classify cash inflows and cash outflows into operating, investing

and financing activities5. Prepare a statement of cash flows for a sole trader using the direct

method by analysing cash records and other financial statements

PURPOSE OF THE STATEMENT OF CASH FLOWS

• Evaluate entity’s financial structure• Assess ability to generate cash• Check accuracy of past predictions• Examine relationship between profitability

and net cash flow• Evaluate changes in net assets of the entity• Compare performance with other entities• Evaluate ability to adapt to change

GENERAL FORMAT OF THE STATEMENT OF CASH FLOWS

• Refer AASB 107 Statement of Cash Flows• Required disclosures• Gross cash inflows and outflows– Classified by activity type– Reconciled to movement in cash for the period– Cash from operations reconciled to operating

profit• Explanatory notes

TYPICAL FORMAT FOR STATEMENT OF CASH FLOWS

CONCEPT OF CASH

FORM EXAMPLES CONDITIONS

CASH ON HAND CashDemand deposits

• Notes• Coins• Demand deposits

• None

CASH EQUIVALENTS

Short-term highly liquid investments

• Banks bills• Non-bank bills• Deposits on short-

term money market

• Readily convertible

• Short-term (< 3 months)

• Insignificant risk of change in value

CLASSIFICATION OF CASH FLOW ACTIVITIES

• AASB 107 requires reporting of cash inflows and cash outflows in three broad categories– Cash flows from operating activities– Cash flows from investing activities– Cash flows from financing activities

PREPARING A STATEMENT OF CASH FLOWS – DIRECT METHOD

• Alternative methods to determine cash flows:– Analyse, summarise and classify the cash

transactions and determine the non-cash transactions affecting assets and liabilities

OR– Analyse the other financial reports (income

statement and balance sheet)

ANALYSIS OF CASH AND OTHER RECORDS

Step 1: Ascertain net cash provided from operating activities

Step 2: Ascertain net cash provided from investing activities

Step 3: Ascertain net cash provided from financing activities

Step 4: Ascertain net cash increase (decrease) for the year

Step 5: Reconcile cash at end of year with beginning of year

CASH FLOWS FROM OPERATING ACTIVITIES

CASH INFLOWS CASH OUTFLOWS• From sale of goods or services• From cash advances and loans

made by financial institutions relating to the entity's main revenue-producing activities

• To suppliers for goods• To employees for services• To other persons/entities for

expenses• To lenders for interest and other

borrowing costs• To government for income tax,

GST and other fees and charges• To other persons/entities for

materials and contracts

ANALYSIS OF FINANCIAL STATEMENTS - STEP 1

• Step 1: Cash flows from operating activities• Direct method:– Major classes of operating revenues and expenses

are reported as gross inflows and outflows from operations

– Adjust sales, COS and other operating items for non-cash items (accruals) and non-operating items

– Favoured by AASB 107

Analysis of Financial Reports- Direct method

• Step 1: Ascertain net cash provided from operating activities by calculating:

1. cash receipts from customers2. payments to suppliers & employees (break this into two

entries)3. other revenue items affecting cash flows

To do this we need to look at both the Income statement and Balance Sheet (Financial position) statement

Louise Martin Comparative Statements of Financial Position (Balance Sheet)

Louise Martin Comparative Statements of Financial Position (Balance Sheet)

30 June 30 June 2015 2016

Cash at bank $ ------- $ 540Accounts receivable 4 290 3 150Inventory 6 000 6 600Prepaid insurance 300 360Equipment 19 200 25 500Accumulated dep’n -equipment (6 000) (7 500)Land 20 400 24 000Motor vehicles 14 550 15 600Accumulated dep’n – motor vehicles (5 490) (6 300)TOTAL ASSETS $53 250 $61 950

Bank overdraft $ 300 $ -------Accounts payable 6 150 7 950Long term mortgage 14 100 18 900Louise Martin , Capital 32 700 35 100TOTAL EQUITY $32 700 $35 100

Louise MartinIncome statement

for the year ended 30 June 2016

Louise MartinIncome statement

for the year ended 30 June 2016

OPERATING REVENUESales revenue $16 800Less: Cost of Goods Sold 5 100 Gross Profit 11 700

OPERATING EXPENSESLess: Expenses (including depreciation) 8 610PROFIT $3 090

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Cash from OperationsFirst line -Receipts from customers

• First construct a T account for Accounts receivable

• Put in the opening and closing figures from the comparative balance sheets

Accounts ReceivableOpening Balance 4,290 Cash 17,940Sales 16,800 Closing Balance 3,150

21090 21090

Credit sales increase the accounts receivable

Cash from OperationsSecond line –Cash paid to suppliers

• You will need to construct 2 T accounts– The first for inventory to determine how much

inventory was purchased, the second for accounts payable to determine how much was paid.

• Put in the opening and closing figures from comparative balance sheets

InventoryOpening Balance 6,000 Cost of Sales 5,100Purchases 5,700 Closing Balance 6,600

11,700 11,700

COGS reduces inventory

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Cash from OperationsSecond line –Cash paid to suppliers

• Next prepare an accounts payable T account– This is to calculate how much of the purchases

were PAID this period (remember purchases can be bought by cash or credit)

Accounts Payable

Cash 3,900 Opening Balance 6,150Ending Balance 7,950 Purchases 5,700

11,850 11,850

Credit Purchases increase accounts payable

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Cash from OperationsThird line –Cash paid for other expenses

• First take the total expenses from the income statement. If there is interest or income tax expense leave that out at this stage.

• Second you need to take out the depreciation expense as this is non cash.– To do this simply deduct the opening and closing

balances from the accumulated depreciation accounts. (provided no NCAs were sold this period)

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Operating expenses from income statement $8,610

Less: Depreciation* (2,310)

If depreciation is not provided as in this case, it can be determined by subtracting beginning and ending accumulated depreciation ie $1,500 +$810.

Cash from OperationsThird line –Cash paid for other expenses

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Cash from OperationsThird line –Cash for other expenses

• Next prepare a prepaid insurance T account– This is to calculate how much of the prepaid

insurance was paid for in cash – First put in what you know the opening balance,

the closing balance and the total

Prepaid Expenses

Opening Balance 300Cash paid 60 Ending Balance 360

360 360

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Operating Expenses from income statement $8,610

Less: depreciation expense (non-cash item) (2,310)

Add: accrued expense paid 60

Cash paid to suppliers and employees for other expenses

$6,360

Cash from OperationsThird line –Cash for other expenses

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Completing the CFSCash from Operations

LOUISE MARTINStatement of Cash Flows

for the year ended 30 June 2014

Cash flows from operating activities:

Cash receipts from customers $17,940

Cash paid to suppliers for stock (3,900)

Cash paid to other suppliers and employees (6,360)

Net cash from operating activities $7 680

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Now try Ex 18.2 p 795

• Complete the T accounts to prepare Cash from Operations

• Receipts from customers= • Payments to suppliers=• Payments for other expenses=• Net cash from operations=

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To confirm the cash from Ops amount

• Indirect method:– Accrual basis

operating profit is reconciled to net cash flow from operating activities by:• adding back

deferrals• deducting accruals

INDIRECTOperating ProfitPlus: Depreciation and Loss on asset disposalsLess: Gain on asset disposalsLess: Increase in current

assets and Decrease in current liabilities

Plus: Increase in current liabilities and Decrease in current assets

= Cash from operations

CASH FLOWS FROM INVESTING ACTIVITIES

CASH INFLOWS CASH OUTFLOWS• From sale of property, plant and

equipment• From sale of shares and

debentures of other entities• From repayment of advances and

loans to other entities• From interest received [or

operating activity]• From dividends received [or

operating activity]

• To purchase property, plant and equipment

• To purchase shares and debentures of other entities

• To lend money to other entities

Cash From Investing

• Step 2: Ascertain net cash provided from investing activities by calculating:

1. Amount paid for purchase of Non Current assets2. Amount received from sale (proceeds of sale) of Non Current

Assets3. Amount paid for purchase of investments4. Amount received from sale (Proceeds of sale) of investments

To do this we need to look at both the Income (Financial performance) statement and Balance Sheet (Financial position) statement

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Cash from Investing- First line• To determine the amount paid for purchase

of Non Current Assets (NCAs)• If NO NCAs have been sold during the year

(as in this example) compare the beginning and ending NCA accounts. This will show purchases.

EquipmentOpening Balance 19,200Cash Payments 6,300 Closing Balance 25,500

25,500 25,500

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Cash from Investing- first lineLand

Opening Balance 20,400

Cash Payments 3,600 Closing Balance 24,000

24,000 24,000

Motor Vehicles

Opening Balance 14,550

Cash Payments 1,050 Closing Balance 15,600

15,600 15,600

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Cash from Investing- first line(if equipment bought & sold in period)

• Purchase of replacement equipment (equipment sold during the period)

• You need to set up 2 T accounts Equipment (or other NCA) and related accumulated depreciation account

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Cash from Investing- first line(if equipment bought & sold in period)

• To work out cash paid for new equipment and value of depreciation expense

EquipmentOpening Balance xxxxx Cost of asset sold xxxxxx

Cash Purchase xxxxx Closing Balance Xxxxxxxxxxx xxxxx

Accum deprec- EquipmentAccum dep of equip sold

xxxxxx Depreciation expense

xxxxx

Closing balance Xxxxxx xxxxxxxxxxxx xxxxxx

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Cash from Investing- second line

• Proceeds of sale from selling NCAs.• This information will be given in the

question.

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Completing the CFSCash from Investing

Cash flows from investing activities

Purchase of property, plant and equipment* (10 950)

Net cash used in investing activities (10 950)

*Add the cash payments for each NCA 6,300 + 3,600 +1,050

CASH FLOWS FROM FINANCING ACTIVITIESCASH INFLOWS CASH OUTFLOWS

• From issue of shares• From issuing debentures, notes• From borrowing (loans,

mortgages)• From grants

• To shareholders for share buy-backs and redemption of preference shares

• To owners for dividends paid [or operating activity] or cash drawings

• To debenture holders for redemption of debt

• To lenders to repay borrowings

Cash from Financing

• Step 3: Ascertain net cash provided from financing activities

1. Amount received from issue of shares (company) or contributions by owner (sole trader)

2. Amount paid for dividends (company) or drawings (sole trader)

3. Amount received from borrowings4. Amount paid to reduce borrowings

To do this we need to look at the Balance Sheet (Financial position) statement

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Cash from Financing- first line

• First item on CFS Financing - Proceeds from share issue

• If the example is a company compare the opening and closing balances to see if shares have increased

Share capitalOpening Balance xxxxxCash received xxxx

Closing Balance xxxxxxxxxx xxxxx

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Cash from Financing- second line

• To determine dividends for a company you need to set up a T account for retained earnings

Retained earningsOpening Balance xxxxx

Dividends Paid xxxxx Profit xxxxClosing Balance xxxxx

xxxxx xxxxx

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Cash from Financing- second line

• If the example is a sole trader as is shown here, we need to compare the opening and closing capital. For a sole trader

• we also must capture the effects of profit and drawings

L. Martin CapitalOpening Balance 32,700

Drawings paid 6,690 Owner contributions

6,000

Closing Balance 35,100 Profit 3,09041,790 41,790

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Cash from Financing – third line & fourth line

• Proceeds from borrowings (if opening is less than closing)

• Repayment of Borrowings (if opening is more than closing)

Mortgage payableOpening Balance 14,100Cash received 4,800

Closing Balance 18900 xxxxxx18900 18900

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Preparing the CFSCash from Financing

Cash flows from financing activities

Proceeds from owner contribution 6 000 Proceeds from long-term borrowings 4 800 Drawings paid (6 690)

Net cash from financing activities 4 110

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LOUISE MARTINStatement of Cash Flows

for the year ended 30 June 2014 Cash flows from operating activities:

Cash receipts from customers $17 940 Cash paid to suppliers and employees (10 260)

Net cash from operating activities $7 680 Cash flows from investing activities:

Purchase of property, plant and equipment (10 950) Net cash used in investing activities (10 950)

Cash flows from financing activities:

Proceeds from owner contribution 6 000 Proceeds from long-term borrowings 4 800 Drawings paid (6 690)

Net cash from financing activities 4 110 Net increase in cash and cash equivalents 840Cash and cash equivalents at beginning of year** (300)Cash and cash equivalents at end of year $540