Cash Flow Statement
In inflationary times, one would expect rising selling prices to generate sufficient cash to
compensate for the rising costs of running a business.
However, this is not always true.
Example: If most of the company’s sales are on credit, this will lead to an increase in debtors.
Cash would not be immediately available to finance the purchase of new stock.
A recession will add to the liquidity, solvency and cash flow problems that a company could
experience.
Example: 2008 worldwide recession
Purpose of a Cash Flow statement:
The objective is to provide users of the financial statements with information of all the financial
resources (Fixed assets, debtors, creditors, interest, sales, shareholders capital etc.)during the
accounting period.
In particular, details of any cash generated or used during operations, investing and financing
activities.
The cash flow statement will:
- Reflect a summary of all cash received and paid during a financial period
- Provide quality information to the users of company financial statements
- Assist in identifying the degree of risk
- Assist in identifying the ability of the company to generate profits and favourable cash flow in
- the future
The cash flow statement is intended to explain the way in which the cash resources of a
company have changed.
, Components of a Cash Flow Statement
3 categories of activity: operating, financing and investing
No brackets - in flow of cash
Brackets - out flow of cash
Information about the three activities can be found in the company’s Income Statement and
Balance Sheet.
Operating
= the main income-earning activities of the company
They are directly related to the main objective of a company.
Examples - buying and selling stock, paying creditors, receiving payments from debtors, paying
Examples - all the expenses, paying tax, paying dividends
Calculation
1. Depreciation and interest on loans need to be removed from the calculation as they are non
1. cash items.
2. Working capital
Compare two consecutive years.
Larger value minus the smaller one.
Last year > This year = decrease
Last year < This year = increase
Inventories:
Increase = ( x )
Decrease = x
Debtors:
Increase = ( x )
Decrease = x
Creditors:
Increase = x
Decrease = ( x )
1 and 2 = Note 1: Reconciliation of cash generated from operating activities
Net profit before tax
Adjustments in regard to:
Depreciation +
Interest income - comes from income statement ( )
Interest expense - comes from income statement +
Operating profit before changes in working capital A
Cash effects of changes in working capital: B
…… in Inventory - comes from balance sheet
…… in Debtors - comes from balance sheet
…… in Creditors - comes from balance sheet
Cash generated from operations A+B
In inflationary times, one would expect rising selling prices to generate sufficient cash to
compensate for the rising costs of running a business.
However, this is not always true.
Example: If most of the company’s sales are on credit, this will lead to an increase in debtors.
Cash would not be immediately available to finance the purchase of new stock.
A recession will add to the liquidity, solvency and cash flow problems that a company could
experience.
Example: 2008 worldwide recession
Purpose of a Cash Flow statement:
The objective is to provide users of the financial statements with information of all the financial
resources (Fixed assets, debtors, creditors, interest, sales, shareholders capital etc.)during the
accounting period.
In particular, details of any cash generated or used during operations, investing and financing
activities.
The cash flow statement will:
- Reflect a summary of all cash received and paid during a financial period
- Provide quality information to the users of company financial statements
- Assist in identifying the degree of risk
- Assist in identifying the ability of the company to generate profits and favourable cash flow in
- the future
The cash flow statement is intended to explain the way in which the cash resources of a
company have changed.
, Components of a Cash Flow Statement
3 categories of activity: operating, financing and investing
No brackets - in flow of cash
Brackets - out flow of cash
Information about the three activities can be found in the company’s Income Statement and
Balance Sheet.
Operating
= the main income-earning activities of the company
They are directly related to the main objective of a company.
Examples - buying and selling stock, paying creditors, receiving payments from debtors, paying
Examples - all the expenses, paying tax, paying dividends
Calculation
1. Depreciation and interest on loans need to be removed from the calculation as they are non
1. cash items.
2. Working capital
Compare two consecutive years.
Larger value minus the smaller one.
Last year > This year = decrease
Last year < This year = increase
Inventories:
Increase = ( x )
Decrease = x
Debtors:
Increase = ( x )
Decrease = x
Creditors:
Increase = x
Decrease = ( x )
1 and 2 = Note 1: Reconciliation of cash generated from operating activities
Net profit before tax
Adjustments in regard to:
Depreciation +
Interest income - comes from income statement ( )
Interest expense - comes from income statement +
Operating profit before changes in working capital A
Cash effects of changes in working capital: B
…… in Inventory - comes from balance sheet
…… in Debtors - comes from balance sheet
…… in Creditors - comes from balance sheet
Cash generated from operations A+B
