Statements of Cash Flows
Andrew Harrington 28 April 2009
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Statements of Cash Flows
Purpose
Preparation Interpretation
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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.
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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.
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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.
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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
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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)
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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
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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)
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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?
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