"Statements of Cash Flow"
Statements of Cash Flows Andrew Harrington 28 April 2009 www.TeachMeNow.net Statements of Cash Flows Purpose Preparation Interpretation www.TeachMeNow.net Statements of Cash Flows Purpose of Statements of Cash Flows... Why prepare ANY financial statements? To provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions. (The IASB’s Framework for the Preparation and Presentation of Financial Statements) Accounting profit is not the only indicator of performance. www.TeachMeNow.net Statements of Cash Flows Why cash? Funds statements are too vague about the definition of “funds” People understand what cash is Survival in business depends upon the ability to generate cash Cash is not dependant on accounting concepts and conventions Statements of cash flow should be more comparable It aids understanding of stewardship IAS 7 Statement of Cash Flows requires the presentation of information about the historical changes in cash and cash equivalents of an enterprise by means of a statement of cash flows, which classifies cash flows during the period according to operating, investing and financing activities. www.TeachMeNow.net Statements of Cash Flows Preparation of Statements of Cash Flows... Cash flows must be analysed between: Operating activities Investing activities Financing activities The total of all cash flows is used to reconcile the opening and closing balances of cash and cash equivalents. www.TeachMeNow.net Statements of Cash Flows Operating activities To what extent can the business generate cash from its day-to-day operations? Direct method of calculation disclose the major classes of gross receipts and payments the preferred, but more laborious method Indirect method of calculation start with profit/loss and adjust for non-cash items (and those which represent investing or financing activities) remember to deduct tax PAID rather than CHARGED www.TeachMeNow.net Statements of Cash Flows Investing activities Payments to acquire non-current assets Receipts from the sale of non-current assets Payments to acquire shares/debentures of other entities (or receipts from sale thereof) Cash advances or loans made to other parties (or receipts from repayment thereof) www.TeachMeNow.net Statements of Cash Flows Financing activities Cash proceeds from issuing shares (or payments to redeem/purchase own shares) Cash proceeds from new loans and debentures, etc. (or repayments thereof) Repayments of the capital element of finance leases www.TeachMeNow.net Statements of Cash Flows What about... Interest received or paid should be disclosed separately, under any of the three headings (but be consistent) Dividends paid can be classified as a financing or an operating cash flow (again, be consistent) Consolidated statements of cash flows (acquisitions/disposals of subsidiaries etc. under investing activities, dividends paid to non-controlling interest under financing activities, dividends received from associates under investing activities) www.TeachMeNow.net Statements of Cash Flows Interpretation of Statements of Cash Flows... The statement analyses the changes in cash and cash equivalents during the period. Where has money come from? Where has money gone to? How have these things changed since last year? Why am I overdrawn despite having made a profit? www.TeachMeNow.net