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									CASH FLOWS

By: Miss Siti Norhidayah Hamid
       FRS 107
• Cash Flow Statements requires a cash flow
  statement to be presented as integral
  (memenuhi) part of the financial statements
  for each period for which the financial
  statements are presented.
       FRS 107
• FRS defines cash flow as ‘ an increase or
  decrease in an amount of cash’
• It shows the revenue or expense stream that
  changes a cash account over a given period
• It also defined as ‘inflows and outflows of
  cash and cash equivalents (Para 6)
        FRS 107
• ‘Cash’ generally comprises cash on hand and
  cash in bank (including bank overdraft)
• ‘Cash equivalents’ are short-term, highly liquid
  investment, which are readily convertible into
  known amounts of cash and are subject to an
  insignificant risk of changes in value.
Cash equivalents
• Some examples of cash equivalents are short-
  term fixed deposit and investments in short-
  term treasury bills.
• In business as in personal finance, cash flows
  are essential to solvency.
• Cash flow is crucial to an entity's survival.
• Having ample cash on hand will ensure that
  creditors, employees and others can be paid on
• If a business or person does not have enough
  cash to support its operations, it is said to be
  insolvent, and a likely candidate for bankruptcy
  should the insolvency continue.
• The statement of a business's cash flows is often
  used by analysts to measure financial
• Companies with ample cash on hand are able to
  invest the cash back into the business in order to
  generate more cash and profit.
 Cash Flow vs.
          Income distinction between
It is important to note the
 being profitable and having positive cash flow
 transactions: just because a company is
 bringing in cash does not mean it is making a
 profit (and vice versa)
        FRS 107
• Cash inflows usually arise from one of three
- Operating activities
- Investing activities
- Financing activities
• Cash outflows result from expenses
  or investments
Operating activities
• This section measures the cash used or
  provided by a company's normal operations. It
  shows the company's ability to generate
  consistently positive cash flow from operations.
• Think of "normal operations" as the core
  business of the company.
• For example, Microsoft's normal operating
  activity is selling software.
activities (cont.)
• Operating activities are defined as the ‘the
  principle revenue-producing activities of the
  enterprise, and other activities that are not
  investing or financing activities’ (Para 6).
Some examples;
cash receipts from sale of goods
Cash receipts from rendering of services
Cash receipts from loyalties, commission
Cash payments to suppliers of goods
Cash payments to employees
Cash payments to suppliers of other services
Investing activities
• This area lists all the cash used or
  provided by the purchase and sale of
  income-producing assets.
• Are the acquisitions and disposals of
  long term assets and non-cash-
  equivalents investment.
  Some examples:
• Cash payments for the acquisitions and cash
  receipts from the sale of fixed assets
• Cash payments for the acquisition and cash
  receipts from the sale of long term investment
  (stocks and bonds of other companies, real
  estate, stock in a company's subsidiaries, and
  cash that has been set aside for a specific
  purpose or project)
Financing activities
• This section measures the flow of cash
  between a firm and its owners and creditors.
• Are activities which result in changes in the
  size and composition of the equity capital and
  borrowings of the enterprise.
Some examples:
• Cash receipts from the issuance and cash
  payments for the redemption of equity
  (shares) and debt instrument (debentures)
• Cash receipts from other short-term or long
  term borrowings, and cash repayments of
  amount borrowed.

• Direct Method
• Indirect Method
       Direct Method
• Direct- requires the disclosure of ‘major classes of
  gross cash receipt and gross cash payments)
• Some examples are:
- Cash collected from customers
- Interest and dividends receives
- Cash paid to other employees and other suppliers
- Interest and dividend paid
- Other operating cash receipts
     Indirect flow from operating activities
• Indirect- the net cash
  is determined by adjusting the net profit of loss for
  the effects of:
- non-cash items (depreciation)
- Items for which the cash effects are investing or
  financing cash flow ( profit on sales of fixed assets)
- Changes in the operating working capital
(changes in stock, debtors and creditors balances)
             (Cont.) sets out the
• The profit and loss account
  revenue and expense rather than the
  cash receipts and cash payments for
  the period.
• When a company makes a sale on
  credit this will be reflected as an
  increase in the wealth in the profit and
  loss account but there is no cash
• Easy to understand
            (Cont.)from the
• It shows the cash coming
• It shows the cash used in the investing
• It shows the cash used in the financing
• A statement in which is easier to
  understand is not necessary more
  relevant or useful
• Cash flow statements focus on the
  financing activities of an enterprise
  rather than the economic or trading
  activities. Therefore, it did not provide
  information on either past or future
  economic performance.
         Uses of cash flow
• To enable management, investors, and creditors
  and others to see how the various activities of the
  company have been financed
(e.g. which activities have net cash outflows and
  which activities have net cash inflows)
• According to FRS, cash flow statement in
  conjunction with profit & loss account and balance
  sheet provides information on financial position and
  performance as well as liquidity, solvency and
  financial adaptability
Uses of cash flow statements (Cont.)

   • The cash flow statements may useful to
     management, investors, creditors &
     others in assessing the enterprise ability
   - Pay its debts (e.g. loan repayment,
     trade creditors)
   - Pay loan interest, dividends
   - Decide whether it will need to raise
     additional external finance (e.g. issue
     shares or debentures)
Uses of cash flow statements(Cont.)

• To explain why an enterprise may have
  a net profit for the year but
  nevertheless has less cash at the end of
  the year.
• To allows users to see directly the
  reasons for the difference between the
  net profit and its associated cash
  receipts and payments (e.g. the net
  cash inflow from operating activities)
Preparing a Cash Flow Statement

           1. Definition
           2. Differences with an Income Statement
           3. How to use it
           4. Structure
           5. How to Handle deficits
           6. Guide to production and marketing plans
           7. Statement of Cash Flows
Preparing a Cash Flow Statement
   Is a summary of all cash Inflows and Outflows affecting a
   business during a given period of time such as a month,
   quarter or a year
   It can be a statement of past performance or a budget for
   future plans
   Past: Cash Flow shows how and when cash was generated
         and used
   Future: Cash Flow is essential for evaluating borrowing
           needs and repayment capacity
Preparing a Cash Flow Statement
   A comprehensive Cash Flow forces the manager to think
   about and make decisions on issues:
      What enterprises and production practices to use next
      How and when to market commodities?
      What capital items to purchase or sell?
      How to finance capital purchases?

      Will I be able to take a vacation?
Preparing a Cash Flow Statement

   Cash Flows
      Are a blueprint for actions and testing of ideas and
       decisions on paper before implementing them
      Are essential for evaluating borrowing needs and
       repayment capacity
Preparing a Cash Flow Statement
Differences with an Income Statement:

 Income Taxes and Non-Farm Income
   Included in a complete Cash Flow Statement
   May not be included in the Income Statement

 Cash Withdrawals as Stock Dividends and Family Living
   Usually included in a Cash Flow Statement
   Not included on the Income Statement
Preparing a Cash Flow Statement
Differences with an Income Statement:

  Debt Transactions
    Cash Flow includes a more complete accounting of
    debt transactions by showing principal payments and
    proceeds from new loans
    An Income Statement only shows interest payments
Preparing a Cash Flow Statement
Differences with an Income Statement:

    Cash Flow reflects cash transactions such as the purchase
     or sale of capital items like breeding livestock, machinery
     and real estate
    These transactions are shown on an Income Statement as
     depreciation, or as a gain or loss from the disposal of
     farm assets
Preparing a Cash Flow Statement
Differences with an Income Statement:

   Inventory Changes
    A Cash Flow includes sales and purchases, no adjustments
     for inventory changes
    An Income Statement prepared using accrual accounting
     includes inventory changes.
Preparing a Cash Flow Statement
How to Use it:
   Cash inflows and outflows in Agriculture are not distributed
    evenly, causing cash deficits and surpluses

   Cash Flows helps us identify those ups and downs in cash so
    we do not run out of cash. A producer can plan for future
    cash needs rather than reacting with crisis management

   When those cash needs are timely identified, a producer may
    want to cover them with borrowed money. As a result, a
    Bank will demand a projected Cash Flow to determine if the
    producer is able to meet the financial obligations on time
Preparing a Cash Flow Statement
How to Use it:

   A projected Cash Flow helps plan a repayment schedule for
    borrowed funds

   Monitors cash flow variances by comparing actual cash
   flows with projected cash flows

   Variances between the two indicate the need to make
    adjustments and anticipate the problems before they
    become a CRISIS
Preparing a Cash Flow Statement
Preparing a Cash Flow Statement

  Beginning Cash
  • Cash available at the beginning of the period

  Operating Receipts
  • Cash INFLOWS from business operations. They shall be
    recorded in the time period you’ve received or expect to
    receive the cash
     • Net amount (less deductions)
     • Add off-farm income, if appropriate.
Preparing a Cash Flow Statement

  Operating Expenses
  • Cash OUTFLOWS from business operations. They shall
    be recorded in the time period you’ve paid them or
    expect to pay
  • Include family living, non-farm business expenses and

  Cash position
  • Difference between cash available and cash required
Preparing a Cash Flow Statement
How to Handle Deficits:
   6 Ways
    • Raise additional cash
    • Reduce or postpone cash payments
    • Restructure the debt to fit the cash flow
    • Selling of intermediate or long-term assets
    • Withdrawals from savings
    • Borrow additional money
Preparing a Cash Flow Statement
Guide to Production and Marketing Plans:

 In order to develop a Cash Flow projection, you must figure
  out the production and marketing plan for the upcoming
  year and the associated costs
 A Cash Flow plan can be developed to show income from the
  sale of crops in different months. Those crops can come out
  from inventory or from new harvest
 From each estimate of sale, estimates of the number of units
  sold and at what price are developed

                               MARKETING PLAN
Preparing a Cash Flow Statement
Guide to Production and Marketing Plans:

 A Cash Flow projection reflects also a plan for crop or
  livestock production and the expenses associated with such
 A manager must have the production plan in mind to know
  when the crops needs to be planted, when it will be ready to
  harvest or even when to A.I. to determine when that income
  from calf sales is going to be
                               PRODUCTION PLAN
 The production, marketing, and financial planning
  information contained in a Cash Flow can help managers to
  make better, well-informed management decisions
Preparing a Cash Flow Statement
Statement of Cash Flows:
  Is a summary of all cash receipts and cash expenditures
  The primary difference with Cash Flow Statement is that the
   Statement of Cash Flows rearranges information into
   operating, investing, and financing activities
  Its objective:
   o To help producers and Ag lenders to become more
     businesslike in their approach to financial analysis
   o To increase the completeness and accuracy of the data
     used in both management and credit decisions
Preparing a Cash Flow Statement
Statement of Cash Flows:
Operating Activities
Include the cash flows involved in producing goods and services
 • These flows are the cash effects of the transactions that
   determine net income, including family living cash
Investing Activities
Focuses on the cash resulting from the purchases and sales of
capital assets and non-farm investments.
 • Cash from cull sales of breeding livestock would be included in
   cash received from operations. Breeding stock liquidations or
   sales in excess of normal culling are also included
Preparing a Cash Flow Statement
Statement of Cash Flows:

   Financing Activities
   Financial Activities would include the borrowing and
   repaying of loans by a business

   Financial Activities also includes:
     • Obtaining equity funds from owners
     • Disbursing equity funds to owners
     • Repaying the principal portion on capital leases
Preparing a Cash Flow Statement
Statement of Cash Flows:

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